Stocks Cut Prices on Disappointing Retail Earnings

Charles Schwab: On the Market

Posted: 5/11/2017 4:15 PM ET

Stocks Cut Prices on Disappointing Retail Earnings

U.S. stocks finished the regular trading session well-off the lows, but still in the red as early morning pressure mounted on the heels of some disappointing earnings figures, which weighed on the retail sector, ahead of some key consumer reports expected tomorrow. Treasuries gained ground and the U.S. dollar was flat despite a hotter-than-expected wholesale inflation report, while gold and crude oil prices were higher. In central bank action, the Bank of England kept its monetary stance unchanged as expected.

The Dow Jones Industrial Average (DJIA) declined 24 points (0.1%) to 20,920, the S&P 500 Index ticked 5 points (0.2%) lower to 2,394, and the Nasdaq Composite decreased 13 points (0.2%) to 6,116. In moderately-heavy volume, 863 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.50 to $47.83 per barrel and wholesale gasoline added $0.02 to $1.56 per gallon. Elsewhere, the Bloomberg gold spot price moved $6.64 higher to $1,225.59 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 99.64.

Macy's Inc. (M $24) reported Q1 earnings-per-share (EPS) of $0.23, or $0.24 ex-items, compared to the $0.36 FactSet estimate, as revenues dropped 7.5% year-over-year (y/y) to $5.3 billion, below the projected $5.5 billion. Q1 same-store sales fell 5.2% y/y, versus the expected 2.7% decline. M reaffirmed its full-year guidance. Shares closed sharply lower.

Kohl's Corp. (KSS $37) posted Q1 profits of $0.39 per share, versus the forecasted $0.29, as revenues were 3.2% lower y/y at $3.8 billion, below the projected $3.9 billion. Quarterly same-store sales decreased 2.7% y/y, compared to the estimated 1.2% decline. KSS was solidly lower.

Whole Foods Market Inc. (WFM $37) announced fiscal Q2 EPS of $0.31, or $0.37 ex-items, versus estimates of $0.37, with revenues rising 1.1% y/y to $3.7 billion, roughly in line with expectations. Q2 same-store sales declined 2.8% y/y, compared to the forecasted 3.0% decrease. WFM lowered its full-year EPS and revenue outlooks, while announcing a 29% increase of its quarterly dividend to $0.18 per share, and a new $1.25 billion share repurchase program. WFM also announced changes, including additions, to its Board, as well as the appointment of a new Chief Financial Officer. WFM traded higher.

Symantec Corp. (SYMC $31) reported a fiscal Q4 loss of $0.23 per share, or earnings of $0.28 ex-items, compared to the projected $0.28, as revenues rose 35.0% y/y to $1.2 billion, roughly in line with expectations. The company's Q1 and full-year revenue guidance came in below forecasts, while its EPS outlooks for the periods were mixed. SYMC finished lower.

Verizon Communications Inc. (VZ $46) announced that it signed an agreement to acquire Straight Path Communications Inc. (STRP $178) for $184.00 per share, or a total consideration of approximately $3.1 billion in an all-stock transaction. The agreement terminates STRP's previously announced deal to be acquired by AT&T Inc. (T $38). Shares of STRP were sharply lower, though they have nearly doubled AT&T's initial takeover proposal of $95.63 per share, while VZ and T were little changed.

Producer price inflation tops forecasts, jobless claims surprisingly decline

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in April rose 0.5% month-over-month (m/m), versus Bloomberg's expectation of a 0.2% gain and compared to March's unrevised 0.1% dip. The core rate, which excludes food and energy, was up 0.4%, versus forecasts of a 0.2% advance and March's unrevised flat reading. Y/Y, the headline rate was 2.5% higher, above projections of a 2.2% increase, and the core PPI increased 1.9% last month, above of estimates of a 1.6% gain. In March, producer prices were 2.3% higher and up 1.6% for the headline and core rates, respectively.

Weekly initial jobless claims (chart) declined by 2,000 to 236,000 last week, below forecasts of 245,000, with the prior week’s figure unrevised at 238,000. The four-week moving average rose by 500 to 243,500, while continuing claims fell by 61,000 to 1,918,000, south of estimates of 1,980,000.

Today's disappointing earnings reports and hotter-than-expected inflation reading set the stage for tomorrow's economic calendar, which will bring key reads on consumer spending, sentiment and purchasing power. April retail sales are projected to rise 0.6% m/m, after March's 0.2% decline, and excluding autos, sales are forecasted to grow 0.5% after the prior month's flat reading. Stripping out autos and gas, sales are expected to increase 0.4% on the heels of the 0.1% gain in March.

As noted in our recent article, Is the Retail Sector Really Dying?, the retailing sector will likely face more turmoil as a trimmed down and modernized industry reinvents itself. We don't think investors should totally shun the sector as the gloom hanging over the group may be obscuring some potential bright spots. Read more on the Insights & Ideas page at www.schwab.com and follow Schwab on Twitter: @schwabresearch. For a look at the potential of the sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest look at our Consumer Discretionary Sector Rating: Marketperform, on the Markets & Economy page at www.schwab.com.

Also, this month's preliminary University of Michigan's Consumer Sentiment Index is anticipated to remain at April's 97.0 level and the Consumer Price Index (CPI) and core CPI are both estimated to be up 0.2% m/m in April, after falling 0.3% and 0.1% in March, respectively. The headline figure is expected to dip to a gain of 2.3% y/y from 2.4% and the core rate is projected to remain at a 2.0% increase. Business inventories for March will round out the day and are expected to have ticked 0.1% higher after rising 0.3% in February.

Treasuries finished higher, with the yields on the 2-year and 10-year notes declining 2 basis points (bps) to 1.34% and 2.39%, respectively, while the 30-year bond rate dipped 1 bp to 3.03%.

For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, as well as Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com. Follow Randy and Kathy on Twitter:  @randyafrederick and @kathyjones.

Schwab's Chief Investment Strategist Liz Ann Sonders offers a look at the low volatility market action as of late in her article, Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Follow Liz Ann on Twitter: @lizannsonders.

Finally, with political uncertainty festering, exacerbated by this week's ousting of FBI Director James Comey, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Randy Frederick and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend titled, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at www.schwab.com.

Europe lower on data, Asia mostly higher

European equities finished lower, with the markets digesting a plethora of mixed earnings reports on both sides of the pond, while global political uncertainty continues to fester and the Bank of England (BoE) expectedly kept its monetary policy stance unchanged. The British pound saw some pressure versus the U.S. dollar following the BoE's decision, with Bloomberg pointing out that the pound had gained ground leading up to the decision amid speculation that there could be more than one dissenting vote. In other U.K. economic news, industrial and manufacturing production both unexpectedly declined m/m in March and the nation's trade deficit widened more than expected. The euro was little changed against the greenback and bond yields in the region were mostly higher. For analysis of the political uncertainty amid Brexit negotiations, and ahead of elections in the U.K., Germany and Italy later this year, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. 

Stocks in Asia finished mostly to the upside, with the recent weakness in the yen helping lift Japanese equities, while Japan's trade surplus also narrowed by a smaller amount than had been expected in March. Stocks trading in mainland China and Hong Kong rebounded slightly from recent selling pressure that has come from lingering regulatory crackdown concerns and a patch of softer-than-expected economic data, bolstered by optimism amid reports that Chinese authorities stepped in to support the markets, per Bloomberg. South Korean securities advanced with the markets digesting this week's Presidential election, which delivered a victory for Democratic Party of Korea Moon. Indian listings finished flat and Australian equities ticked higher. For our latest analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's CFA, article, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at www.schwab.com, as well as Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com.

The international economic docket for tomorrow will include wholesale prices, CPI and industrial production from India, credit card balances from Australia, GDP and CPI from Germany, non-farm payrolls from France and industrial production from the Eurozone.

Financial Review

Makes You Want to Holler

Sinclair Noe — March 16, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 15 = 20,934
SPX – 3 = 2381
NAS + 0.71 = 5900
RUT + 3 = 1386
10 Y + .01 = 2.52%
OIL – .07 = 48.79
GOLD + 6.10 = 1226.80

President Trump will ask the Congress for cuts to many federal programs, and more money to bulk up defense spending. Trump’s budget outline is a blueprint covering just “discretionary” spending for the 2018 fiscal year starting on October 1.

It boosts spending for defense, homeland security and veterans’ affairs; the Defense Department budget would increase by $54 billion, which will raise defense spending to $639 billion for fiscal year 2018.

The Environmental Protection Agency faces cuts of 31% and the Department of Agriculture would see funding cuts more than 20; State Department 28%; Health and Human Services would be cut 16%; Education faces cuts of 14%.

Trump’s budget proposes eliminating discretionary funding altogether for at least 19 agencies and 61 other programs. Plans for new NASA missions, climate change research, aid for low-income families, funding for commercial flights to rural airports, public broadcasting, and Meals on Wheels would all be on the chopping block.

The spending cuts that Trump proposes come from those agencies that fund education programs, social services, environmental protection, health research, housing and food assistance, national parks, land management, and countless other endeavors. As it is, spending on non-defense discretionary programs is already historically low.

As a share of the economy it’s at its lowest level since 1998 and is well below where it was 50 years ago, per data from the Congressional Budget Office. The net effect is no change in the national deficit. The budget proposal is the first volley in what is expected to be an intense battle over spending in coming months in Congress.

President Trump’s second travel ban was blocked by a federal court in Hawaii hours before it was to go into effect. A federal judge in Maryland also ruled against the ban on the day it was supposed to take effect. The administration has promised to appeal the rulings.

The speaker of the House, Paul Ryan, the Senate Intelligence Committee chairman and the ranking Democrat on the committee all said that they’ve seen no evidence of President Donald Trump’s accusation that he was wiretapped last year by his predecessor.

Senate Intelligence Committee chair Richard Burr and ranking member Mark Warner issued a statement, saying “based on the information available to us, we see no indications that Trump Tower was the subject of surveillance by any element of the United States government either before or after Election Day 2016.”

House Speaker Paul Ryan said that “no such wiretap existed,” citing intelligence reports to House leaders. “We don’t have any evidence,” says the top Republican on the House Intelligence Committee. “No evidence,” says his Democratic counterpart.

The statement from the leaders of the Senate Intelligence Committee marks the clearest and strongest refutation of Trump’s allegations since the President first made them two weeks ago. The senators statement also addresses Trump’s more recent statement that he was not merely speaking about wiretapping specifically.

The leaders of the House Intelligence Committee have said they have yet to see any evidence of wiretapping, but have yet to flatly rule out all surveillance. House Intelligence Chairman Devin Nunes said Wednesday that it was possible that Trump aides were surveilled via “incidental” collection.

Dutch Prime Minister Mark Rutte defeated far-rightist Geert Wilders in the first of a series of European elections this year in which populist insurgent parties are hoping to rock the establishment. The center-right prime minister had trailed in opinion polls for much of the campaign but emerged the clear victor of Wednesday’s election, albeit with fewer seats than before.

It’s rare for a Dutch election to attract international attention, but the performance of Wilders is being seen as a bellwether for the ascent of populism around Europe, particularly with the National Front’s Marine Le Pen set to reach the run-off in the French presidential election late next month. Germans will vote later in the year.

The Bank of Japan is sticking with its ultra-loose monetary policy even as the Federal Reserve tightens. Japan’s economy is recovering with the help of a weaker yen but growth and inflation remain low. The Bank of Japan to keep its target for 10-year Japanese government bond yields at around zero, a policy it calls “yield-curve control.” It left the short-term interest rate on some yen deposits held by commercial banks at minus 0.1%.

The Bank of England held interest rates at the record low level of 0.25 percent and maintained asset purchases at £435 billion. The UK economy has shown strength since last June’s Brexit referendum and the government revised its forecasts for domestic growth in 2017 sharply higher. That might be wishful thinking.

The UK has not yet felt the full impact of Brexit, but that doesn’t mean they won’t. The big question is whether London’s financial institutions will lose access to the single market of the Euro Union after the UK leaves the EU.

The main argument is as follows: since London plays a key financial role in Europe, any disruption would endanger the financing of the EU economy and would ultimately pose a threat to financial stability in the bloc.

My guess is that argument plays better in London than Brussels. That’s not just speculation. The number of new available jobs listed in the UK’s financial center fell 17% in February year-on-year to 6,945.  Or simply, Brexit is Brexit.

Yesterday, the Federal Open Market Committee voted to raise the range of the federal funds rate to 0.75% and 1.00%, citing progress in labor market growth, business fixed investment and inflation. The Fed indicated they are still looking at 2 more rate hikes in 2017, which matches the guidance they provided in December.

In a press conference yesterday, Fed Chair Janet Yellen said, “The simple message is, the economy is doing well. We have confidence in the robustness of the economy and its resilience to shocks.”

The labor market has been a strong part of the economic recovery. In the last monthly jobs report, the unemployment rate dropped to 4.7%, but one weak spot was wages, which have flatlined. Once again, adjusted for inflation, there has likely been no growth whatsoever in real wages YoY.

For wages to increase, workers need job mobility, the ability to take a new job for more pay. Each month the Labor Department publishes the JOLT survey, or Job Openings and Labor Turnover; and in January, the number of Americans quitting their jobs rose to a seasonally-adjusted total of 3.22 million, the highest number since February 2001. The quits rate rose in January to 2.2%.

People quitting their jobs in droves is a sign of confidence among workers, as folks are unlikely to quit a job unless they are confident they can get another one. Openings totaled 5.63 million in January, above the prior month’s reading of 5.5 million.

The Labor Department said initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 241,000 for the week ended March 11. It was the 106th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970, when the labor market was much smaller.

US home-building jumped in February as unseasonably warm weather helped boost the construction of single-family houses to near a 9-1/2-year high. Housing starts increased 3% to a seasonally adjusted annual rate of 1.29 million units last month.

Home-building was up 6.2 percent compared to February 2016. Single-family home-building, which accounts for the largest share of the residential housing market, surged 6.5%. Starts for the volatile multi-family housing segment fell 3.7%.

The Arizona Supreme Court has upheld the constitutionality of Arizona’s minimum wage increase to $10 an hour. Voters approved the increase in November, and the challenge was brought by the Arizona Chamber of Commerce and Industry and other business groups.

The state Supreme Court unanimously rejected the challenge. Proposition 206 raised the state’s minimum wage to $10 an hour in January 2017. Incremental increases continue until 2020, when it will increase to $12.

Four people have been indicted in a 2014 cyber-attack on Yahoo email accounts. The indictment charges two officers of the FSB, Russia’s Federal Security Service, and two hackers who allegedly worked together with them to crack 500 million Yahoo user accounts.

Cyber security specialists have long said the Kremlin employs criminal hackers for its geostrategic purposes. They say the arrangement offers deniability to Moscow and freedom from legal troubles for the hackers.

3M said it would buy Johnson Controls’ safety gear business, Scott Safety, in deal valued at $2 billion. Scott Safety makes respiratory and protective equipment and other safety products for firefighters, industrial workers, police squads and the US military.

Oracle’s cloud business had a huge quarter. The business-software maker announced better-than-expected adjusted revenue and profit, helped by sales at its cloud business surging 62% to $1.19 billion

Adobe Systems stock jumped after the company delivered earnings and revenue that beat expectations.

Cold weather luxury apparel retailer Canada Goose’s stock rocketed 25 percent in its first day of trading. The stock trades under the ticker GOOS.

Amazon is ready to do to the local liquor store what it did to the local book store. It is rolling out free beer and wine 2-hour delivery and $7.99 1-hour delivery for Prime Now members, starting in Cincinnati and Columbus, Ohio.

Financial Review

Déjà vu

Sinclair Noe — February 2, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 6 = 19,884
SPX + 1 = 2280
NAS – 6 = 5636
RUT – 3 = 1357
10 Y – .01 = 2.47%
OIL – .23 = 53.65
GOLD + 6.40 = 1217.00

In Pennsylvania, today the famed groundhog Punxsutawney Phil emerged from his burrow Thursday and saw his shadow. In Arizona, Agua Fria Freddie slithered from his hole and saw his shadow. Six more weeks of winter per folklore.

Yesterday, Janet Yellen must have seen her shadow, so at least 6 more weeks without a rate hike.

Yesterday afternoon, the Federal Reserve wrapped up its two-day policy meeting and stuck to its mildly upbeat view of the economy but gave no hint on when it will next raise interest rates. The FOMC held its benchmark interest rate between a range of 0.50% and 0.75% while noting that the labor market “remains solid” and inflation was “still below” its 2% target.

Today, the Bank of England, while raising its forecast for British growth this year, also kept policy unchanged and said rates could go either way depending on the economic outlook. The BOE held its key interest rate and asset-purchase program unchanged at 0.25% and 435 billion pounds, respectively, but some members raised concerns about accelerating inflation, with forecast that prices could rise at 2.8% following the sharp drop in the pound sterling.

U.S. worker productivity slowed in the fourth quarter, leading to the smallest annual increase in five years. Productivity, which measures hourly output per worker, rose at a 1.3 percent annual rate in the quarter. Productivity in the third quarter was revised up to show a 3.5 percent pace of increase.  Productivity has increased at an annual rate of less than 1.0 percent in each of the last six years.

The number of Americans who applied for unemployment benefits at the end of January fell by 14,000 to 246,000, an extremely low level that might foreshadow another solid employment report tomorrow. New claims have tallied less than 300,000 for 100 straight weeks, a streak that last occurred in 1970. The economy had created more than 2 million jobs per year for six straight years.

Tomorrow is the nonfarm payroll report for January. Most estimates are running around 175,000 new jobs for the month, but with strong economic reports, some estimates are running as high as 200,000. The December report came in at 156,000 jobs and 4.7% unemployment.

The US Treasury Department said it will allow companies to do some transactions with Russia’s Security Service (FSB), despite cyber-sanctions put in place by former President Barack Obama. US intelligence agencies accused the FSB of involvement in hacking of Democratic organizations during the 2016 presidential election. But the White House insists it is not loosening sanctions.

President Trump said today he’d like to “speed up” talks over renegotiating the North American Free Trade Agreement, which he said has been a “catastrophe” for U.S. workers and jobs. His comments come a day after Mexico kicked off the countdown on trade negotiations. President Enrique Peña Nieto announced Wednesday he would start trade negotiations to reform NAFTA in May, after a 90-day consultation period with Mexican businesses.

Facebook had a blockbuster quarter. The social-media giant earned $1.41 a share as revenue exploded by 51% versus a year ago, to $8.81 billion. Both monthly active users and daily active users outpaced estimates. Ad sales grew 53 percent. But Facebook shares dropped almost 2% today. Go figure.

After the closing bell, Amazon reported weaker-than-expected holiday sales. The company reported net income of $749 million, or $1.54 a share, compared with $482 million, or $1 a share, in the year-earlier period – missing earnings estimates. Sales for the period increased 22% to $43.7 billion from $35.7 billion a year ago, that was also a miss on revenues.

Amazon lowered guidance for the current quarter. Amazon dropped about 4% in after-hours trade, which was easy to figure. And while Amazon is being punished for falling short of expectations, let’s take a moment to recognize that Amazon had $2.4 billion in net income for the full year, up more than 300% from the year before. While it did not manage to match that performance in the fourth quarter, Amazon still increased profit 55% in its biggest period of the year.

Deutsche Bank posted a loss of €1.4 billion-euro for 2016, citing restructuring and “negative news flow” around a fine from the US Department of Justice. Legal costs hurt as well. Its $7.2 billion US penalty, the largest against any bank, was for fines and compensation for its involvement in the toxic debt crisis of 2008. Revenue declined 10% to €30 billion-euro.

Merck reported better-than-expected U.S. quarterly sales for its key cancer drug, Keytruda, but overall fourth quarter sales missed estimates. Earnings of 89 cents per share matched estimates. Merck forecast largely in-line 2017 results.

Ralph Lauren dropped about 10% this morning after its CEO abruptly resigned. The fashion company reported a 12% drop in holiday quarter revenue to $1.71 billion due to weak consumer demand.

 Macy’s is trying to sell Macy’s. The department store chain has slashed jobs and stores, sold off pricey real estate, and announced the retirement of its long-time CEO Terry Lundgren to appease investors. But hedge funds have run out of patience for losses as the entire apparel sector reels from a disappointing Christmas holiday shopping season.

Royal Dutch Shell recorded its worst annual profit in more than a decade. The CEO said he’s pleased with 2016’s $52 billion takeover BG Group, but Shell is close to selling assets totaling $5 billion to cut debt. And although Shell’s fourth-quarter profit was lower than expected at $1.8 billion due to tax impairments and full-year earnings dropped, it still made more money than rival Exxon Mobil in the second half of the year.

Sony cut its full-year profit forecast for a second time after posting quarterly earnings that missed estimates on a major write-down. Net income will be $23 million in the 12 months ending March. Sony said it does not plan to sell its pictures business after suffering a $1 billion write-down, and instead aims to turn it around by adding sales channels and making more use of movie characters.

Reckitt Benckiser Group  is in advanced talks to buy Mead Johnson Nutrition in a $16.7 billion deal that would take the British consumer goods maker into the baby formula market and boost its business outside of Europe.

A South Korean court has decided to end Hanjin Shipping’s court receivership process and expects to declare bankruptcy on Feb. 17 after a two-week period for appeals. It made the decision as the firm’s liquidation value would be worth more than its value as a going concern.

Alphabet’s self-driving car unit is far more comprehensive and mature than its rivals, according to new statistics released by regulators. The data shows that Waymo logged 30 times more miles of testing in autonomous vehicles than all its competitors combined last year in California. Its cars were also the most accurate, with human intervention needed for safety reasons only 0.2 times per thousand miles.

It’s not legal to fly a drone anywhere near an airport — at least not without a special waiver from the Federal Aviation Administration. For the first time under the FAA’s commercial drone rules, the agency granted permission to operate a drone at an airport.

Seven flights were conducted by Berkeley-based 3D Robotics on Jan. 10 at Hartsfield-Jackson Atlanta International, the busiest airport in the world. The 3D Robotics drone was given permission to collect data on two, four-story parking structures at the airport that a construction firm was hired to demolish.

In its broadest deployment, so far, IBM’s Watson will be assisting H&R Block’s 70,000 tax professionals this filing season at 10,000 branch offices across the country, where 11 million people file taxes. The AI partnership will be presented during a 60-second Super Bowl television ad.

Financial Review

8 Straight

Sinclair Noe — November 3, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 28 = 17,930
SPX – 9 = 2088
NAS – 47 = 5058
10 Y + .01 = 1.81%
OIL – 66 = 44.68
GOLD + 6.30 = 1303.80

Yesterday, the S&P 500 index posted its 7^th consecutive loss; that has only happened 4 times in the last 20 years. Today the market made it 8 in a row, matching the longest losing streak – last seen in 2008 following the collapse of Lehman Brothers.

Still, this isn’t something we see often. Before 2008, we go back to 1980 for an 8-day string of losses. The current streak has been fairly tame; the index is down about 3% on low volume; and while the selloff has been persistent it has also been orderly. The next level of support is the 200-day moving average at 2082.

Crude oil has fallen about 14% from the most recent peak reached two weeks ago.

Today the Bank of England kept interest rates on hold and signaled there would be no further easing in 2016, citing stronger-than-expected economic data. The central bank’s policy makers voted unanimously to maintain the benchmark rate at a record low of 0.25% and keep its quantitative easing program at around $550 billion. No surprise.

Here’s the surprise – Dealing a blow to Prime Minister Theresa May’s plans, the U.K. High Court has ruled that the government cannot start negotiations to leave the EU without a vote from Parliament. The government could now be forced to get parliamentary approval to trigger Article 50, the formal mechanism that begins a two-year window for exit negotiations. At the very least, this casts uncertainty over the Brexit process. The government has said it will appeal the verdict. The pound jumped to a one month high against the dollar.

American firms and employees boosted their productivity at an annual 3.1% pace in the third quarter. That’s the first gain since the fall of 2015 and largest advance in two years. The improvement was triggered by a big jump in the number of goods and services produced even though the amount of time workers put in on the job barely rose. Output of goods and services — the stuff workers make or provide — shot up 3.4% in the third quarter.

The amount of time employees worked, however, only edged up 0.3%. Unit-labor costs, meanwhile, grew much more slowly in the third quarter: 0.3% vs. a revised 3.9% advance in the spring.

Last week’s first look at third-quarter GDP indicated an uptick in private fixed investment, bucking a long-running trend of declines in this measure. And so, on this basis it looks like the economic necessity of squeezing more productivity out of the existing pools of workers is playing out.

The increase in productivity is a positive development for corporate profits and as we work our way through earnings reports it looks like earnings for the S&P 500 turned positive year-over-year, the first time in five quarters America’s biggest companies had seen bottom-line growth.

Looking beyond the third quarter jump, productivity is still flat compared to last year. And with wages rising, unit labor costs could again shoot higher and cut off the prospects for a marked improvement in corporate profitability. One good quarter for productivity does not change the trend but it is a step in the right direction.

The Institute for Supply Management said its non-manufacturing index fell to 54.8% last month from 57.1% in September, which marked an 11-month high. Any reading over 50% signals that more businesses are expanding instead of contracting. Companies that offer services, such as health care and entertainment grew less rapidly in October and scaled back hiring plans, but executives described business as steady in a sign that the economy is still expanding at a moderate pace.

Factory orders rose by a seasonally adjusted 0.3%, and August’s orders were revised to show 0.4% growth instead of a previously reported 0.2% gain

The number of people who applied for unemployment benefits at the end of October rose by 7,000 to a three-month high of 265,000.  Initial claims have been below the key 300,000 threshold for 87 straight weeks, a steak last accomplished in 1970.

Of course, tomorrow is the monthly jobs report from the Labor Department. Here’s what to expect: about 175,000 net new jobs in October, unemployment rate dropping from 5% to 4.9%, average hourly earnings up 0.3% month-on-month, average hourly earnings up 2.6% year-on-year, and average weekly hours worked at 34.4. Keep in mind that the jobs report could be influenced by Hurricane Matthew. But if the numbers come in solid, it may strengthen the case for the Federal Reserve to raise interest rates in December.

After the closing bell, Facebook reported profits soared in the third quarter and monthly active users topped 1.8 billion, but a warning about slowing ad-revenue growth pulled the stock down more than 5% today. Ad load will taper off in the second half of 2017 as Facebook gets close to maxing out the number of ads it can cram into news feeds without damaging its user experience.

Fitbit crashed 30% after missing on sales and slashing guidance. The company reported revenue of $504 million ($509 million expected), and guided both fourth quarter earnings per share and full-year revenue below Wall Street estimates.

Casino operator Wynn Resorts reported third quarter earnings that missed expectations, posting earnings per share of 75 cents on revenue of $1.1 billion. Wall Street was expecting earnings per share of 78 cents on revenue of $1.12 billion.

Whole Foods reported an EPS beat in its fiscal fourth quarter and raised its dividend. Whole Foods also announced John Mackey as the single CEO of the company. Walter Robb will remain on the board.

3D Systems reported mixed third quarter earnings, posting revenue of $156.36 million and earnings per share of 14 cents.

Prosecutors are bearing down on generic pharmaceutical companies in a sweeping criminal investigation into suspected price collusion. Bloomberg reports the antitrust investigation by the Justice Department, begun about two years ago, now spans more than a dozen companies and about two dozen drugs, according to people familiar with the matter. The grand jury probe is examining whether some executives agreed with one another to raise prices, and the first charges could emerge by the end of the year.

Though individual companies have made various disclosures about the inquiry, they have identified only a handful of drugs under scrutiny, including a heart treatment and an antibiotic. Among the drug makers to have received subpoenas are industry giants Mylan and Teva Pharmaceutical. Other companies include Actavis, which Teva bought from Allergan in August, Lannett, Impax Laboratories, Covis Pharma, Sun Pharmaceutical, Mayne Pharma, Endo International’s subsidiary Par Pharmaceutical Holdings and Taro Pharmaceutical.

All these drug makers were slammed in trading today; between 4% and 23%. Although it isn’t illegal for companies to raise prices at the same time, it’s against the law for competitors to agree to set prices or coordinate on discounts, production quotas or fees that affect prices.

The federal government can prosecute companies for collusion and seek penalties and potentially send executives to jail. Charges could extend to high-level executives. Time will tell. Generic drugs account for 88 percent of prescriptions dispensed in the US, according to the Generic Pharmaceutical Association. Generics makers brought in about $70 billion in US sales in 2015, after discounts and rebates to payers.

Closing arguments were heard late Wednesday in a trial on whether UPS should be fined $872 million by New York state for allegedly delivering untaxed cigarettes from smoke shops on Native-American reservations. And it looks like UPS knew they were skirting tax laws. Tobacco retailers located on upstate reservations were given price discounts for shipping in volume. Delivery drivers could accept iPads and other gifts from shippers. Account executives, whose compensation was tied to keeping big accounts, ignored signs that some customers signing delivery contracts dealt in cigarettes.

The U.S. Energy Department announced 28 states, working with utilities and vehicle manufactures, including GM, BMW and Nissan, and EV charging firms have agreed to work together to build 48 national electric-vehicle charging networks on nearly 25,000 miles of highways in 35 U.S. states. One hurdle to the mass adoption of EVs has been the difficulty in finding places to recharge vehicles.

We all know about the election Tuesday but beyond presidential politics, 35 states and Washington, D.C., are considering 163 ballot measures this year, with 71 of those initiated by voters rather than legislators—the most since 2006. Voters in Arizona, California, Nevada, Maine, and Massachusetts will decide if they’ll join four states and Washington, D.C., in legalizing recreational marijuana use. If measures in all five states are approved, 75 million people would live in a state where recreational marijuana use is allowed.

Most states have a higher hourly minimum wage than the federal minimum of $7.25, and four states will vote whether to raise theirs again this year. Maine, Arizona, Colorado, and Washington could phase in a minimum hourly wage of $12 or more by 2020. South Dakotans will decide whether to create a second, lower minimum for teenage workers—purportedly to protect starter jobs for young people.

While federal law requires background checks on gun purchases from licensed dealers, eight states and Washington, D.C., require them for all purchases. According to polls, four states voting this year seem to strongly favor further restrictions on firearms. Ballot measures often have impact beyond the borders of the state that approves them—any could be fodder for federal activity or Supreme Court consideration.

Financial Review

Eight Year Anniversary

Sinclair Noe — September 15, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW + 177 =18,212
SPX + 21 = 2147
NAS + 75 = 5349
10 Y + .02 = 1.71%
OIL + .12 = 43.70
GOLD – 8.50 = 1315.10

Wholesale prices were flat in August, mostly because of sharp declines in the cost of food and gasoline; the Producer Price Index was unchanged for the month. In the past 12 months, the producer price index is unchanged. In August, the wholesale cost of food tumbled 1.6%, the biggest drop in almost three-and-a-half years. Gasoline prices slid 2.5%.

If the volatile food, energy and trade margin categories are stripped out, so-called core prices rose a faster 0.3%. Looked at that way, costs have risen 1.2% in the past year, the highest 12-month rate since the end of 2014.

Sales at U.S. retailers fell in August for the first time in five months as traffic dropped off for most stores, a sign that third-quarter growth might not be as strong as previously estimated. Retail sales declined a seasonally adjusted 0.3%. In August, hardly any retail segments did well. Receipts at auto dealers slipped 0.9%. Sales at gas stations fell 0.8% last month, reflecting a decline in prices.

Sales also declined 1.4% at home-improvement centers and 0.6% at department stores. Sales even fell for internet sellers and mail-order companies for the first time since the start of 2015. Only restaurants and apparel stores, helped by back-to-school demand, showed much strength. Restaurant sales increased 0.9% and clothing-store receipts climbed 0.7%.

The U.S. current-account deficit, a measure of the nation’s debt to other countries, sank 9.1% in the second quarter to $119.9 billion. The decline mostly stemmed from an increase in investment in U.S. assets such as stocks and bonds. The current account reveals if a country is a net lender or debtor. The current account deficit was 2.6% of GDP in the second quarter. That’s down from 2.9% in the first quarter and well below a record of 6.3% in 2005.

Industrial production fell 0.4% in August after a revised 0.6% rise in the prior month and a revised 0.5% gain in June. Industrial production fell 1.1% in the 12 months through August. Manufacturing output fell 0.4% over the year, and mining output declined 9.3%. In August, manufacturing, which analysts said accounts for 80% of total industrial output, fell 0.4%.

Reflecting the up and down nature of recent data, the New York Fed and its neighboring Philadelphia Fed reported contrasting conditions in September. The Empire State index, which covers the New York region, showed factory activity contracted in September while the Philadelphia Fed manufacturing index jumped to 12.8 in September from 2 in August, the first back-to-back positive readings in the index in a year.

Rates for home loans jumped. Freddie Mac reports the 30-year fixed-rate mortgage averaged 3.50% in the September 15 week, up from 3.44% in the prior week. The 15-year fixed-rate mortgage averaged 2.77%, up one basis point during the week. Despite the big weekly jumps, rates are much lower than they were a year ago.

The Bank of England opted to hold base interest rates at record lows this morning and to maintain the size of its newly enlarged asset-purchasing program. The bank’s Monetary Policy Committee (MPC) voted unanimously in September to hold the base rate at 0.25 percent, which was cut in August. It also voted unanimously to maintain the size of its corporate bonds purchases at up to £10 billion ($13.2 billion) and government bond purchases at £435 billion.

Switzerland’s central bank has kept its expansive monetary policy intact, holding its deposit rate at -0.75%, stating the Brexit vote has clouded its view of the global economy. “The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing upward pressure on the currency.”

Brazilian prosecutors charged ex-President Lula da Silva with being the “boss” of a vast corruption scheme at state oil company Petrobras, in a major blow to the leftist hero’s hopes of a political comeback. It was the first time that Lula, still Brazil’s most popular politician despite corruption accusations against him and his Workers Party, was charged by federal prosecutors for involvement in the political kickbacks scheme. Lula’s lawyers say the accusations are part of an effort to stop him running in the 2018 election.

On September 15, 2008, eight years ago today, investment banking giant Lehman Brothers filed for Chapter 11 bankruptcy, becoming the largest bankruptcy by asset value. The collapse of Lehman Brothers set off shock waves throughout global markets and economies.

The Dow dropped over 500 points, a 4.4% fall, in one day. The Dow Jones Industrial Average shed 25% over the next 30 days — a quarter of its value in just four weeks. Financial markets froze; not just stock trading, but derivatives tied to every kind of financial transaction from home loans to interest rates on bonds, to foreign currency exchange, to commodities – Lehman was a big player, an out-sized player in derivatives – and everything froze.

Some leading money market funds were unable to maintain their net asset value and began selling for less than $1 per share, a phenomenon known as “breaking the buck.” Liquidity dried up overnight. People were even questioning the future of capitalism.

Three days later, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke went to Congress with the Troubled Asset Relief Program, or TARP, a bailout for the banks. The Fed slashed rates to zero. Within days the contagion had spread around the world with governments having to use taxpayers’ money to bail out over-extended banks.

Despite all the damage, nobody went to jail. The Department of Justice refused to file criminal charges against individuals despite serious indications of violations of federal securities and other laws, uncovered by the Financial Crisis Inquiry Commission (FCIC) probe into the causes of the economic crash. The prosecutors’ cases were laid out for them, yet they refused to prosecute.

The FCIC findings found criminal liability at most of America’s largest banks — Citigroup, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Washington Mutual (now part of JPMorgan) and Merrill Lynch (now part of Bank of America) — along with foreign banking giants UBS, Credit Suisse and Société Generale, auditor PricewaterhouseCoopers, credit rating agency Moody’s, insurance company AIG, and mortgage giants Fannie Mae and Freddie Mac.

The FCIC presented DOJ with evidence that these institutions gave false representations about the loan quality inside mortgage-backed securities; misled credit ratings agencies; overstated assets and earnings in financial disclosures; failed to disclose credit downgrades, subprime exposure and the financial health of their operations to shareholders; and suffered breakdowns in internal company controls. All of these were tied to specific violations of federal law.

And the FCIC named names, specifying nine top-level executives who should be investigated on criminal charges: CEO Daniel Mudd and CFO Stephen Swad of Fannie Mae, CEO Martin Sullivan and CFO Stephen Bensinger of AIG, CEO Stan O’Neal and CFO Jeffrey Edwards of Merrill Lynch and CEO Chuck Prince, CFO Gary Crittenden and Board Chairman Robert Rubin of Citigroup.

And if you think things have changed, just consider the latest scandal: the thousands of Wells Fargo employees who opened millions of fake accounts in the names of real customers, just to meet unrealistic sales goals. It is more evidence that bad incentives are rampant in the financial industry and top executives either look the other way or that they don’t know what’s going on in the companies they run – a sign, if nothing else, that big banks are too big to manage. And that’s just an example from this week.

In the past 8 years we have seen a long, long rap sheet of illegal activity from the banksters; everything from money laundering to market rigging, to tax evasion, to sanctions violations, to robo-signing (that’s the word we invented for blatant, out of control forgery and perjury).

And while it is undoubtedly true that a working financial sector is crucial to the health and growth of an economy, economists increasingly argue that we now have a sector which impairs growth. The Bank of International Settlements published a white paper arguing that periods of rapid growth in finance bring with them slowing growth in productivity in other areas of the economy. In other words, growth is good but uncontrolled growth is a cancer.

The cost of the crisis has been severe. A paper from the Federal Reserve Bank of Dallas estimated that the financial crisis and the recession cost the U.S. economy as much as $14 trillion, or about $120,000 for every household. Since 2008, the global economy has been struggling to recover from the shock. Gross domestic product, or economic growth, is still below the levels seen before the crisis.

While there is growth, it’s been painfully lackluster in recent years. In the US, GDP is forecast to rise 2.4% in 2016, the same as in 2014 and 2015, according to the International Monetary Fund. Unemployment levels have fallen since the crash but there remains a particularly weak area of the labor market: wage growth. Earlier this week we reported that personal incomes picked up last year and millions were lifted out of poverty, but incomes are still at 1998 levels.

Reforms were effectuated, but that doesn’t mean banks are safer. Yes, they have more of a capital cushion but they are bigger and involved in even more risky behavior. In fact, the risks of a big bank failing may actually be greater than they were leading up to the financial crisis. Any attempts at reform were little more than a drop of water in the ocean. Disasters like Lehman Brothers’ collapse can occur at any time, without warning. Those who don’t learn from history are doomed to repeat it.

Stocks Advance Amid Dampened Rate Hike Expectations

On the Market

Posted: 9/15/2016 4:15 PM ET

Stocks Advance Amid Dampened Rate Hike Expectations

U.S. stocks staged a solid advance as a flood of softer-than-expected domestic economic data, notably a miss in August retail sales, dampened imminent Fed rate hike expectations. Treasuries were mixed, gold was lower, the U.S. dollar was flat and crude oil prices were higher. In equity news, Dow member Apple continued to catch a tailwind on upbeat orders for its recently released iPhone 7. Across the pond, the Bank of England indicated another rate cut could be on the horizon.

The Dow Jones Industrial Average (DJIA) advanced 178 points (1.0%) to 18,215, the S&P 500 Index gained 22 points (1.0%) to 2,147, and the Nasdaq Composite advanced 76 points (1.5%) to 5,249. In moderately-heavy volume, 827 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.33 to $43.91 per barrel, wholesale gasoline increased $0.07 to $1.43 per gallon and the Bloomberg gold spot was $9.20 lower at $1,313.74 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.31.

Dow member Apple Inc. (AAPL $116) continued to garner positive attention, extending the rallying seen in the past two sessions on stronger-than-expected iPhone 7 pre-order reports from some major carriers. Also, Apple announced that the initial run of the iPhone 7 Plus has sold out globally.

Goodyear Tire & Rubber Co. (GT $32) rose solidly after outlining its growth plan, including a 2020 target of $3.0 billion in annual operating income, while it reaffirmed its 2016 financial targets and raised its quarterly dividend by 43.0% to $0.10 per share.

Retail sales miss to headline mixed heavy economic docket

Advance retail sales (chart) for August were down 0.3% month-over-month (m/m), versus the Bloomberg forecast of a 0.1% dip and July's upwardly revised 0.1% rise. Also, last month's sales ex-autos were lower by 0.1% m/m, compared to expectations of a 0.2% increase, and following the negatively revised 0.4% decline seen in the previous month. Sales ex-autos and gas dipped 0.1% m/m, versus estimates of a 0.3% rise, and matching July's unrevised decline. Finally, the retail sales control group, a figure used to help calculate GDP, was down 0.1%, compared to the projected 0.4% rise, matching the prior month's unfavorably revised dip.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in August were flat m/m, versus expectations of a 0.1% increase, and compared to July's unrevised 0.4% decrease. The core rate, which excludes food and energy, ticked 0.1% higher m/m, in line with forecasts and versus July's unadjusted 0.3% decline. Y/Y, the headline rate was flat, versus projections of a 0.1% rise, and the core PPI was 1.0% higher last month, matching estimates. In July, producer prices declined 0.2% and were up 0.7% y/y for the headline and core rates, respectively. For analysis of the inflation environment on the bond markets, see Schwab's Fixed Income Director Collin Martin's, CFA, article titled, Do TIPS Make Sense When Inflation is Low? and follow Schwab on Twitter: @schwabresearch.

Industrial production (chart) declined 0.4% m/m in August, versus estimates of a 0.2% decrease, and following July's downwardly revised 0.6% gain. Manufacturing and utilities production both declined, while mining output rose. Capacity utilization declined to 75.5% from July's unrevised 75.9%, and compared to projections for a 75.7% rate. Capacity utilization is 4.5 percentage points below its long-run average.

Weekly initial jobless claims (chart) rose by 1,000 to 260,000 last week, versus estimates of an increase to 265,000, with the prior week's figure unrevised at 259,000. The four-week moving average declined by 500 to 260,750, while continuing claims rose 1,000 to 2,143,000, south of the estimated level of 2,150,000.

The Empire Manufacturing Index showed output from the New York region improved but remained in contraction territory (a reading below zero) for September. The index rose to -2.0 from August's unrevised -4.2 level, with forecasts calling for an improvement to -1.0.

The Philly Fed Manufacturing Index (chart) in in September jumped further into at a level depicting expansion (a reading above zero) after rising to 12.8 from 2.0 in August, compared to estimates of a dip to 1.0.

Business inventories (chart) were flat m/m in July, below forecasts of a 0.1% rise, and versus June's unrevised 0.2% gain. Sales declined 0.2%, and the inventory-to-sales ratio—the time it would take to deplete inventories at the current sales pace—remained at June's 1.39 months pace.

Treasuries were mixed, with the yield on the 2-year note declining 2 basis points (bps) to 0.74%, while the yield on the 10-year note was flat at 1.70% and the 30-year bond rate gained 2 bps 2.47%.

Schwab's Chief Fixed Income Strategist, Kathy Jones offers her latest analysis of the interest rate environment in her article, Negative Interest Rate Policy: What Is It and Could It Happen Here?. Read both fixed income articles at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Today's plethora of mixed data dampened September Fed rate hike expectations, but also preserved the possibility of a December increase, keeping the markets grappling with the "Fed policy loop," a concept constructed by Bank Credit Analyst (BCA), that Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest article, Is That All? Liz Ann points out since the beginning of 2015, we have been in this loop—moving frequently between easy and tight financial conditions, which have triggered the moves between a dovish and hawkish Fed. "As I've been saying for some time, I don't see how we extricate ourselves from this loop; while it's likely to remain a source of more frequent bouts of volatility." For more on this topic, see our latest article, Fed Uncertainty Brings Volatility to Markets. Read both articles at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the U.S. economic calendar will include the Consumer Price Index (CPI), forecasted to have increased 0.1% m/m during August, while excluding food and energy, the core rate is expected to have advanced 0.2% m/m. Also, the September preliminary University of Michigan Consumer Sentiment Index is projected to show consumer confidence improved to 90.6 from August's 89.8 level.

Europe shows late-day resiliency, Asia mixed as central bank focus continues

European equities overcame early weakness to snap a five-session losing streak for the Stoxx Europe 600 Index, courtesy of a late-day rally, as a plethora of mixed U.S. economic data dampened imminent Fed rate hike expectations ahead of next week's monetary policy decision. Moreover, the Swiss National Bank kept its negative interest rate policy intact and the Bank of England (BoE) left its policy stance unchanged but indicated that there is still a chance of another rate cut this year. The BoE raised its economic growth outlook and said inflation is likely to rise to its target in the first half of next year. The decision came as recent U.K. data—including today's better-than-expected August retail sales report—has suggested the late-June vote to leave the European Union, known as a Brexit, is having a limited economic impact thus far and Schwab's Director of International Research, Michelle Gibley, CFA, offers her article, article, Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/oninternational. The British pound and the euro lost modest ground versus the U.S. dollar, while bond yields in the region were mostly higher.

Stocks in Asia finished mixed in lighter-than-usual volume, with markets in mainland China and South Korea closed for holidays. The global markets continue to grapple with monetary policy uncertainty, ahead of next week's meetings from the Bank of Japan (BoJ) and the Fed. Japanese equities fell, with the yen showing some strength, and as uncertainty regarding what the BoJ may announce next week in terms of further stimulus measures continued to drain conviction and foster heightened volatility. Stocks trading in Hong Kong advanced in the final day of trading before tomorrow's holiday break, following yesterday's stronger-than-expected August lending statistics, while casino operators continued to catch a tailwind on reports that have suggested a recovery in the Macau gambling market. Australian securities moved higher on the heels of some relatively upbeat August employment data, while Indian listings ticked higher with some recent cooler-than-expected inflation reports preserving optimism that the Reserve Bank of India may have room to further cut rates, countering the uncertainty regarding the Fed and BoJ.

With global volatility heating up, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

The international economic docket for tomorrow will be light, offering wage data from France, the trade balance from Italy and labor costs from the Eurozone.

The UK Economy Is Slowing Down After The Brexit Vote

Financial Review

Un-Zapped!

Sinclair Noe — August 10, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 37 = 18,495
SPX – 6 = 2175
NAS – 20 = 5204
10 Y – .04 = 1.51%
OIL – 1.28 = 41.49
GOLD + 5.20 = 1346.80

Job openings increased in June, and more people were hired. The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed there were 5.62 million openings, up from 5.51 million in May, but still a bit below the all-time high of 5.84 notched in April.

There were 5.13 million people hired during the month, also an increase from the 5.05 million in May. Slightly fewer people quit voluntarily, but the 2.91 million quits in June is nearly double the levels of the worst of the recession. Quits are tracked as a measure of worker confidence in job prospects.

The federal government’s budget deficit is up 10% so far this fiscal year. The government’s shortfall for the first 10 months of the year was $514 billion, up from $466 billion in the same period a year ago.

Lower-than-expected revenues recently led the Congressional Budget Office to increase its estimate of the 2016 deficit to $590 billion, up from $534 billion. That would be about $150 billion more than last year’s deficit. Spending is up only about 2%. The problem is gross corporate receipts have dropped 12% so far this budget year.

The Bank of England revived its crisis-era bond-buying program last week as part of a package of measures to support the economy in the wake of voters’ decision to exit the European Union. It said it would buy $78 billion of British government bonds, or gilts, over the next six months, a policy known as quantitative easing. The aim is to drive down long-term interest rates and prod investors into riskier assets, making borrowing cheaper and easier for businesses and households. Just one problem – they can’t find enough bonds to buy, as yield-hungry pension funds and insurers refused offers to sell gilts to the central bank. The 10- year gilt dropped to a record low yield of 0.54%.

The UK economy is slowing down after the Brexit vote. That’s according to the latest numbers from the National Institute of Economic and Social Research, which shows growth in the UK was 0.3% in the three months up to the end of July, compared with 0.6% growth in the three months to the end of June.

Oil prices started the session moving higher but it didn’t last. The American Petroleum Institute issued a report showing a build of 2.1 million barrels of crude but it also reported a drop of 3.9 million barrels in gasoline, much larger than analysts had forecast.  Saudi production has reached 10.67 million barrels per day, up 120,000 bpd on the prior month. While it is not unusual to see Saudi production ramping up in the summer given higher demand for crude to be used for power generation, what is unusual is that production is now at a record high, above the peak seen last summer.

Also comes word that next month’s scheduled OPEC meeting in Algeria to discuss a freeze on production may be dead in the water. Oman announced it would not participate in a meeting. Finally, despite draws to both gasoline and distillates from today’s weekly EIA inventory report, builds elsewhere have lifted total U.S. crude and product inventories to a new record at over 1.39 billion barrels. This number has risen by 200 million barrels in the last 17 months. Storage tanks are filled to the brim and summer driving season is coming to a close.

One reason why the Saudis have been pumping so much oil is to try to drive US drillers in the shale fields out of business. It’s working. Chesapeake Energy agreed to give away its Barnett Shale holdings to a private-equity backed operator, exiting the birthplace of the shale revolution to escape almost $2 billion in onerous pipeline contracts. Chesapeake will convey all interests in the Barnett region in North Texas. Quitting the gas fields will slash Chesapeake’s shipping and processing costs by $715 million between now and the end of 2017 and eliminate a total of $1.9 billion in long-term pipeline agreements. Shares jumped more than 6 percent.

Brazil’s Senate voted to move the impeachment trial against suspended President Dilma Rousseff to its final phase, as expected, setting the stage for a final vote that could oust her later in August, after the end of the Olympic Games in Rio de Janeiro.

Rousseff is accused of violating budget laws by delaying payments from the government to state-controlled banks, in effect forcing the lenders to provide short-term loans to her administration. She has denied any wrongdoing. Acting President Michel Temer, who was elected as Rousseff’s vice president, would complete the more than two years remaining in her term if she is convicted.

Shake Shack shares fell more than 8% in after-hours trading as the company reported slower same-restaurant sales growth as compared with a year ago.

Hamburger chain Wendy’s reported profit and revenue figures that beat analyst expectations, but those results were offset by 0.4% same-restaurant-sales growth, which fell below the consensus. Wendy’s management blamed a focus on health and wellness is keeping some would-be customers away from fast-food restaurants. Others might be staying away because of … the presidential election.

Uncertainty surrounding the election was one reason business stumbled during the second quarter, adding to the list of areas that claim the Clinton-Trump face-off has gotten people too nervous to spend their money. Todd Penegor, chief executive officer at Wendy’s said, “[W]hen a consumer is a little uncertain around their future and really trying to figure out what this election cycle really means to them, they’re not as zapped to spend as freely as they might have been a couple of quarters ago.”

Sure that sounds like a lame excuse, but really, be honest, haven’t you felt a little “un-zapped” lately?

SolarCity’s loss widened. The company lost $0.56 a share, more than double the $0.23 loss from a year ago. Taking into account onetime adjustments, non-GAAP, SolarCity’s loss grew to $2.32, but that was ahead of the $2.44 loss that analysts were expecting. Revenue surged 81% to $185 million, easily beating the Wall Street consensus of $146 million.

SunPower, the second-largest US solar panel producer told analysts it expects to lose as much as $175 million this year, a shift from May when it expected to earn as much as $50 million. The shares plunged the most in more than seven years. SunPower said demand for utility-scale solar projects is slowing, while competition in the panel market is dragging down prices. The guidance bombshell is leaving a crater in solar shares in today’s trading.

You remember the scandal involving VW? As part of its penalties for equipping hundreds of thousands of its diesel vehicles sold in the United States with software designed to cheat tailpipe emissions tests, VW is required to invest $2 billion in clean car infrastructure, such as a network of electric car charging stations. Now, 28 Electric vehicle charging companies are calling for independent oversight; they want to make sure VW does not gain an edge in the car charging space. While the companies called the money a potential “game changer,” they worry that if it is misspent, it could hurt competition.

What’s the fastest growing devices when it comes to wireless connectivity? Is it tablets, smartphones, or computers? Wrong. It’s cars and other stuff. Internet-connected cars and other everyday products have become the fastest-growing part of the US wireless industry. AT&T dominated revenue in connected devices, with the company connecting cars to its network at twice the pace of tablets.

AT&T should reach 10 million connected car subscriptions soon. For carriers, the Internet of Things – a world in which everything from garage doors to cars to light bulbs connect to the web – has become a major source of revenue growth at a time when phone-related business has slackened. Verizon has been a distant second to AT&T in connected cars, but is mounting a big entry in a related area – connected trucks. Last week, the company agreed to buy Fleetmatics for $2.2 billion.

You know the company Alphabet?  You certainly know its subsidiary, Google? Alphabet has a market cap of $539 billion; it is one of the biggest companies in the world, bigger than some nations. It is one-year-old-today.  The restructuring was supposed to allow Google to focus on the things it knows how to do well and make money on—search, advertising, Chrome, YouTube, the Android operating system—and shifted more pie-in-the-sky projects, like trying to cure death, build robots, and beam the internet from weather balloons, into a new division called “Other Bets.”

One year later, Google is still growing—its revenue last quarter was $21.3 billion, up 21% from a year earlier—but similar signs of life have not been seen in Other Bets. In the last four quarters, it’s lost over $3.7 billion, and only generated roughly $500 million in revenue, which works out to less than 1% of Alphabet’s quarterly sales. Oh well, it’s still young.

Delta Air Lines tried to return to normal operations after a power outage hit its computer systems, causing the cancellation of more than 1,600 flights over two days. But they still had about 300 cancellations today. Most of Wednesday’s delays and cancellations are the result of flight crews being displaced or running up against maximum allowed work hours. According to Georgia Power, Delta’s problems arose after a switchgear, which helps control and switch power flows like a circuit breaker in a home, malfunctioned for reasons that were not immediately clear. In other words, the backup plan failed, and they still don’t know why.

Financial Review

Dog Days Drag On

Sinclair Noe — August 4, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 2 = 18,352
SPX + 0.46 = 2164
NAS + 6 = 5166
10 Y – .04 = 1.50%
OIL + .89 = 41.72
GOLD + 2.70 = 1361.40

Another day on Wall Street without conviction. The major indices continue to trade in a very, very tight range.

The Bank of England cut interest rates 25 basis points to 0.25 percent.  The bank also announced it would expand its quantitative-easing program by 60 billion pounds and purchase corporate bonds.

The basic argument for the rate cut is to stimulate economic growth by encouraging people to borrow and invest. This, in turn, should help to spur inflation. The rate cut was widely expected. The extension of bond buying was not as widely expected. The introduction of corporate bond buying will be of particular interest to the markets since it has only briefly been experimented with in the past.

The BoE left its forecast for growth this year steady at 2.0 percent, but 2017 brings a sharp downgrade to growth of just 0.8 percent from a previous estimate of 2.3 percent. Businesses in the U.K. are looking beyond the Bank of England and are calling on Chancellor of the Exchequer Philip Hammond to deliver a “bumper” fiscal stimulus.

The number of Americans filing for unemployment benefits rose last week. Initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 269,000 for the week ended July 30. Claims have now been below 300,000, a threshold associated with a strong labor market, for 74 consecutive weeks, the longest streak since 1973.

In separate report, global outplacement consultancy Challenger, Gray & Christmas said employers in the U.S. announced plans to cut 45,346 workers from their payrolls in July, a 19 percent increase from June. Though it was the second straight monthly increase, layoffs were 57 percent lower than in July last year. Job cuts in the energy sector surged 796 percent to 17,725 last month.

Tomorrow is the monthly jobs report from the Department of Labor. The past couple of months have been anything but normal. Employers added a meager 11,000 workers in May, the fewest in almost six years. Payrolls rebounded by 287,000 in June, the most in eight months.

Most estimates are calling for 180,000 or so new jobs in July. Job gains averaged 172,000 a month in the first half of this year. The jobs report is also projected to show the unemployment rate fell to 4.8 percent after climbing to 4.9 percent in June as more people entered the labor force.

As joblessness has reached the Fed’s threshold for full employment, economists are anticipating the pace of payroll growth will slow further. Even if the economy adds just 150,000 new jobs each month, it would push the unemployment rate lower. Wage growth remains flat. A tightening labor market should prompt hiring managers to offer more pay to attract and retain skilled and experienced workers but we really haven’t seen wage pressure.

The US is importing more oil than it’s producing. Domestic production in the U.S. remains under pressure, down 1 million barrels a day in July from a year earlier, while crude imports surged to the highest level since 2012. A large OPEC supply has caused the US to import more oil than it has produced for the first time since January 2014. According to an analyst’s report from Commonwealth Bank, “the increase in US oil imports reflects OPEC’s strategy to target market share instead of price.”

Revenue from tech deals is at its highest level since the dot-com bubble. Tech mergers and acquisitions have brought in $1.9 billion this year, according to Dealogic. That’s up 11.8% from the same period last year and trails only the same period in 2000 ($2.2 billion) for the highest total.

There have been 54 IPOs through July this year, down 54% from 118 deals during the same period in 2015. These IPOs raised $11.5 billion, down 50%. It was the worst year-to-date since 2009. Of the 54 IPOs, 23 were healthcare companies. Their 43% share of all IPOs so far this year is the highest on record, according to Dealogic. Another 11 were in finance. Only 9 were in technology.

Only two IPOs – Twilio and Line – have priced above range, down from 31 last year, the lowest year-to-date number on record. There simply isn’t a whole lot of appetite for overpriced and overhyped IPOs.

The US Chamber of Commerce and the Texas Association of Business filed a lawsuit in Texas federal court that said a regulation from the U.S. Treasury Department in April exceeded what the law allows the department to do. The lawsuit is the first to challenge a rule on inversion, or transactions used by a company whereby it becomes a subsidiary of a new parent company in another country for the purpose of falling under beneficial tax laws.

Typically, they are used by US companies to move to countries with lower tax rates, even though they still maintain much or most of their operations in the US. A wave of inversions largely ended after Treasury moved against the deals. A Treasury spokeswoman said in a statement that its action was based on strong policy interests and clear legal authority. It said the department would continue to defend the regulations to slow the erosion of the US corporate tax base.

JPMorgan Chase said US and British authorities ended probes into its activities involving Libor and other benchmark rates without issuing new fines. JPMorgan paid $89 million to the European Union’s antitrust unit in 2013 as part of a multi-firm settlement in relation to Yen Libor. The bank said at the time this concerned “the conduct of two former traders during a one-month period in early 2007.” Now regulators from both countries say they have closed their investigations without further action.

Toyota slashed its forecast. The world’s largest automaker says full-year operating profit will come in at 1.6 trillion yen ($15.7 billion), down from its previous forecast of 1.7 trillion yen. That would represent a 44% drop in profit, caused mostly by the strength of the Japanese yen. Every Toyota and Lexus model available in the U.S. has posted sales declines in 2016, a trend putting Volkswagen on course to surpass its Japanese rival as the world’s top-selling automaker.

In other earnings news: Shares of the mobile payments company Square rose after it reported strong second-quarter results and raised its projections for the year. The stock rose 8.43 percent.

The hamburger chain Jack in the Box reported better-than-expected results and raised its forecasts for the year. Its stock gained 10.56 percent.

The travel website operator TripAdvisor reported lower revenue growth and profit margins in the second quarter, disappointing analysts. The company also said terrorism was one thing making it harder to predict how its business will perform. Its stock lost 8.49 percent.

LinkedIn reported quarterly earnings that beat analysts’ expectations, as sales popped across the board, with revenue up 31%.

MetLife, the largest U.S. life insurer, reported a quarterly profit that widely missed analysts’ estimates, largely due to weaker underwriting and tax-related adjustment in two of its largest markets. Shares dropped about 4% in after-hours trade.

U.S. government researchers have begun their first clinical trial of a Zika vaccine. Meanwhile, funds to fight the virus are expected to run out in the coming weeks due to congressional inaction. The number of locally spread Zika cases has jumped to 15 in Florida and the number of U.S. states affected has reached 45. As of July 27, 1,658 travel associated cases of Zika were reported across the continental U.S. and Hawaii.

Daily fantasy sports games are resuming in New York after Gov. Andrew Cuomo likened the contests to a “game of skill” rather than “based on chance” and signed a bill that will allow operators like DraftKings and FanDuel to obtain registrations. The law requires them to pay an annual fee of as much as $50,000 with a 15% tax on their revenue. It also bars anyone younger than 18 years old from playing and prohibits college and high school matches.

Just do it! Except for golf – don’t do that. Nike is getting out of the golf equipment business. Nike said it would stop making clubs, golf balls and golf bags, instead devoting its resources to shoes and apparel. And Tiger Woods’ golf bag is going to have a different look whenever he returns. Sales at the Nike Golf division fell 8.2% to $706 million in the fiscal year that ended in May, making it the company’s worst performing major category. Shares of Callaway Golf jumped almost 9% this morning.

Meanwhile, Golfsmith International, the retailer of golf clothing and equipment, is considering filing for bankruptcy. Golfsmith hired the investment bank Jefferies LLC to solicit buyers for the roughly 150-store chain, without success so far.

After six years of effort and about $30 million in investments, space-exploration startup Moon Express has become the first commercial venture to get U.S. regulatory authorization for a mission beyond Earth’s orbit. The company expects to send a small robotic lander to the moon in late 2017, and eventually plans to send people there and may get involved in lunar mining.

Apple spent $850 million last year on a 130-megawatt solar farm near San Francisco, and now Apple can begin selling power into wholesale markets, joining Google parent Alphabet in the energy-trading business. Apple’s subsidiary Apple Energy LLC may sell energy, capacity and other services needed to maintain reliable power, according to an order by the Federal Energy Regulatory Commission.

Apple, together with Google, are among a group of tech companies outside the utility industry ramping up investments in energy projects. In addition to the California solar farm, Apple Energy owns 19.9 megawatts of generation capacity in the Nevada Power Company service area and 50 megawatts in the Salt River Project service area in Arizona. Apple may begin wholesale power sales Saturday.