Financial Review

G19

Sinclair Noe — July 6, 2017

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

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DOW – 158 = 21,320
SPX – 22 = 2409
NAS – 61 = 6089
RUT – 19 = 1400
10 Y + .04 = 2.37
OIL + .16 = 45.29
GOLD – 1.70 = 1226.00
BITCOIN +0.08% = 2621.33 USD
ETHEREUM – 1.30% = 265.59

The G20 Summit is underway in Hamburg Germany.

China’s President Xi Jinping and German Chancellor Angela Merkel pledged to work together more closely on a range of issues. Japan and the European Union agreed a free trade pact to create the world’s biggest open economic area and signal resistance to what they see as President Trump’s protectionist turn.

German chancellor Merkel, who is hosting the summit, wants to unite world leaders on environmental goals, but will be careful not to mention the words “climate change” around the US president. Japanese Prime Minister Shinzo Abe urged the G20 states to continue working together on climate protection, after Trump pulled the United States out of the 2015 Paris agreement on climate change policy.

France announced it will end the sale of gasoline and diesel vehicles by 2040 and become carbon neutral 10 years later. Earlier today, Trump delivered a speech in Warsaw before heading to the summit. Tomorrow, Trump meets with Russian President Putin.

The G20 is the G19 this year. Brazil is absent. Brazilian President Michele Temer faces criminal corruption charges. Meanwhile, protesters are capturing the spotlight. There are 20,000 riot police in Hamburg; six times more protesters. What are they protesting? Well, it’s a mixed bag of issues but it seems to include globalization, a lack of action on climate change, war, inequality, refugees, and authoritarianism in general.

Germany, the host of the G19, saw its bond yields climb to the highest levels in 18 months. The yield on German 10-year bunds rose nine basis points to 0.56 percent; part of a drop in global government bonds that spread to the US and pushed the yield on 10-year Treasury notes to the highest level since May.

Bonds across Europe fell after the results of a French debt auction showed a drop in excess demand for 30-year securities. Trading volumes in bund futures contracts jumped after the auction results were announced, sparking the surge in yields. The Stoxx Europe 600 Index fell 0.7 percent as bond yields rose, bringing its decline since mid-May to about 4 percent. Eurozone stocks were hot a couple of months ago, now, not so much.

Hedge funds that built up bullish long-end Treasury wagers to the highest outright level since 2008 are rushing for the exit. DoubleLine Capital Chief Executive Officer Jeffrey Gundlach says the recent selloff is a sign of more pain to come for Treasury bulls.

With a Federal Reserve seemingly committed to raising interest rates a third time this year and speculation the European Central Bank could announce a tapering of bond purchases by the end of the year, the fundamentals aren’t encouraging. As yields are now approaching key technical marks that could trigger a fresh flush out of long-end bulls, the risk is building that Treasury yields go even higher.

Tomorrow we will receive the Labor Department’s monthly non-farm payroll report. Today we had a sampling of predictive data.

The ADP National Employment Report showed private sector payrolls increased by 158,000 jobs last month, stepping down from the 230,000 positions created in May and below expectations for a gain of 185,000.

While the ADP report has a spotty record predicting non-farm payrolls, June’s modest job gains together with the modest rise in first-time applications for jobless benefits and cooling services sector employment pose a downside risk to the government’s June jobs report.

Last month, for example, ADP recorded 253,000 private-sector job gains while the Labor Department tallied just 147,000 private jobs and 138,000 total additions, after subtracting out government job losses.

Outplacement consultancy firm Challenger, Gray & Christmas reports the number of planned layoffs fell in June to its lowest level of the year as employers opted to hold onto existing jobs in a tight labor market where skilled laborers are harder to find.

Meanwhile, initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 248,000 for the week ended July 1. It was the third straight weekly increase in claims. Still, it was the 122nd straight week that claims remained below 300,000, a threshold associated with a healthy labor market.

A report from the Institute for Supply Management showed its non-manufacturing sector index rose half a point to a reading of 57.4 in June. A reading above 50 indicates expansion in the vast services sector. Industries reported an increase in new orders, but said employment growth had slowed.

A report from the Commerce Department showed the trade deficit fell 2.3 percent to $46.5 billion in May. When adjusted for inflation, the trade deficit narrowed to $62.8 billion from $63.8 billion in April. Real goods exports surged to an all-time high in May, propelled by record high petroleum exports.

Still, the real trade deficit averaged $63.3 billion in April and May, above the first quarter’s average of $62.2 billion. That suggests trade will be a drag on gross domestic product in the second quarter after contributing 0.23 percentage point to the economy’s 1.4 percent annualized growth pace in the first three months of the year.

As the US economy enters its ninth year of expansion this month, many Americans feel the recovery has been incomplete — and the numbers back them up. Five states — Arizona, Connecticut, Mississippi, Nevada and Wyoming — still haven’t regained their levels of gross domestic product from before the financial crisis, more than five years after the country hit that milestone.

Arizona’s GDP is still 0.3% below the pre-recession peak. Home prices in Arizona are still almost 11% lower than 2007 levels. Eight states are below pre-recession levels of employment. And 15 have home prices that have yet to rebound fully.

Eighteen states and the District of Columbia sued the US Education Department and Secretary Betsy DeVos over the recent suspension of rules that would have swiftly canceled student-loan debt of people defrauded by Corinthian Colleges Inc and other for-profit schools.

The suits claim the department broke federal law in announcing the delay with limited public notice and opportunity to comment. They said the department and DeVos were using the pending litigation as “a mere pretext” to repeal the rules and replace them with one that “will remove or dilute student rights and protections.”

DeVos said she wanted to pause the acceleration of the debt cancellation process because it “puts taxpayers on the hook for significant costs.” She also said a delay was needed while current litigation in California over the rules, works its way through the legal system. Consumer groups Public Citizen and Project on Predatory Student Lending sued to remove the delay as well.

The Home Shopping Network is having a sale. The buyer is QVC, the shopping channel owned by Liberty Interactive is buying Home Shopping Network for $2.6 billion. A combined QVC-HSN ranks as the No. 6 U.S. online retailer ($7.5 billion eCommerce sale in 2016), dwarfed by Amazon ($123.8 billion). QVC and HSN will continue to operate as individual brands.

We’re waiting for an announce from Berkshire Hathaway. Berkshire Hathaway’s energy business is close to a deal to acquire Oncor, the electric-utility giant based in Texas. Oncor, one of the largest utility companies in the US, says it serves 10 million customers across Texas. It earned $935 million in operating revenues and $73 million in net income in the quarter ended March 31.

We just had a vote in Illinois. A financial showdown, more than two years in the making, went to a vote this afternoon in the Illinois House as Democrats enacted a $36 billion spending plan fueled by a 32 percent income tax increase over the Republican governor’s objection.

Votes to override Gov. Bruce Rauner’s vetoes of the budget package give Illinois its first annual budget since 2015 and spell the end of the nation’s longest fiscal stalemate since at least the Great Depression. The standoff entered a third fiscal year on July 1. Credit-rating houses had threatened to downgrade the state’s creditworthiness to “junk,” signaling to investors that buying state debt is a highly speculative venture.

Yesterday, Moody’s Investors Service, put Illinois under review for a downgrade even with the new budget. Moody’s said that while lawmakers have made progress, the House budget does not address the state’s massively underfunded pensions or do enough to pay down bills.

The resolution to the fiscal standoff, which emerged from the Democrat-led legislature over the last several days, triggered a rally in Illinois bond prices by signaling that elected leaders are beginning to tackle the government’s long-building financial strains. Without a full-year budget for the past two years, Illinois continued to run up deficits, leaving it with dwindling reserves, a record pile of unpaid bills and increasing obligations to its underfunded employee pension system.

Thirty-three of the 50 U.S. states reported revenues that came in below projections in fiscal year 2017, the highest number of states since the recession decimated budgets in 2010.

Microsoft announced a major reorganization that will include up to 3,000 layoffs, largely in sales. The job cuts amount to less than 10 percent of the company’s total sales force, and about 75 percent of them will be outside the US. Reports from last week suggested this was going to happen and that Microsoft was going to specifically focus on how it sells its cloud-services product, Azure, which has been booming in recent quarters.

Financial Review

Split

Sinclair Noe — February 7, 2017

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

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DOW + 37 = 20,090
SPX + 0.52 = 2293
NAS + 10 = 5674 (record high close)
RUT – 5 = 1361
10 Y – .02 = 2.39%
OIL – .75 = 52.88
GOLD – 1.80 = 1234.40

The dollar, recovering from its worst start to a year in three decades, gained against a basket of other currencies. The euro is on the defensive, with markets nervous about elections in the Netherlands, Germany and possibly Italy, plus more wrangling over Greece’s bailout and an upcoming reduction in the European Central Bank’s monthly bond-buying.

The head of the German Bundesbank responded to accusations from the Trump administration that Germany was manipulating the euro lower. Jens Wiedmann said the dollar strength was “triggered by the political announcement s of the new government.” The pound was among the biggest losers today, falling to a two-week low as Brexit and economic growth concerns return to put pressure on sterling.

Yields on two-year Greek bonds are up 9 basis points and are at their highest level since the middle of last year, as a rare split at the International Monetary Fund puts the country’s bailout at risk. The IMF says that Greece won’t meet targets set by Europe for the country to run a budget surplus. The fund also reiterated its view that Greece’s debt levels are unsustainable.

The fund’s annual review of the Greek economy showed they disagree over the austerity measures imposed on Athens and the need for further economic reforms. The split decision fueled fears the fund might pull out of the rescue plan for the country.

China’s foreign exchange reserves have dropped below the $3-trillion level for the first time since 2011, marking the seventh straight monthly decline as capital continues to flow out of the world’s second-largest economy. Data from the People’s Bank of China showed reserves falling by over $12 billion in January, despite government efforts to tighten capital movement controls and stabilize the yuan’s exchange rate.

The US trade deficit rose slightly in 2016 to $502.3 billion, marking the highest level in four years. The trade gap widened last year because exports fell faster than imports, the result of a weak global economy and a stronger dollar that made American products more expensive to foreign buyers. The gap with China is by far the largest among the major U.S. trading partners.

Although the deficit dropped 5.5% in 2016, it still totaled $347 billion. That’s more than three-fifths of the overall U.S. trade deficit. The deficit with Mexico rose 4.2% to $63.2 billion in 2016 to mark a five-year high. Exports rose 2.7% $190.7 billion, led by higher shipments of passenger planes and parts.

Imports increased a smaller 1.5% to $235 billion as demand for pharmaceutical drugs, cell phones and televisions declined.

The Federal Reserve reports total consumer credit increased $14.2 billion in December to a seasonally adjusted $3.76 trillion, posting an annual growth rate of 4.5%, The increase was below estimates for a $20 billion gain. Revolving credit, which is mostly made up of credit card loans, slowed to a gain of $2.3 billion or an annual rate of 2.9%.

Non-revolving credit, which covers loans for education and cars, increased $11.8 billion in December, or at a 5.1% annual rate. For all of 2016, total consumer credit rose at a 6.4% rate, down from a 7% rate in the prior year.

Data provider CoreLogic said its home price index was up 0.8% during December, and 7.2% compared to a year ago. That’s the fifth straight month in which the yearly price increase was higher, including during months that saw mortgage rates jump nearly a full percentage point.

Low supply is boosting home prices higher and higher, and CoreLogic expects that prices will rise 4.7% during 2017. That would take its national index – now 3.9% below the high last set in 2006 – to a fresh high sometime this year. Arizona prices were up 0.6% for the month and 6.8% for the past year. Home prices in Arizona are still 21.4% below the peak.

The Labor Department’s JOLT survey, or Job Openings and Labor Turnover, shows there were 5.5 million job openings on the last day of December. That was essentially flat compared to November. But 5.3 million people were hired during the month, up from 5.2 million in November. Fewer people quit jobs voluntarily in December: 3 million compared to 3.1 million in November. “Quits” are tracked as a signal of how confident workers are in their ability to secure another job elsewhere.

Philadelphia Fed President Patrick Harker said he could support raising interest rates at the central bank’s March meeting if job market momentum holds up, growth continues and wages rise. John Williams, President of the San Francisco Fed, said last week that he sees the March policy meeting as a possible rate-hike candidate.

And on the flip side, Minneapolis Fed President Neel Kashkari published a blog post today stating the economy has not reached the point in terms of inflation and employment that would necessitate aggressive monetary policy. Kashkari wrote: “From a risk management perspective, we have stronger tools to deal with high inflation than low inflation.” Investors give roughly a one in four chance of a quarter-point increase in March, per federal fund futures.

Betsy DeVos was confirmed by the U.S. Senate to be education secretary, but only after Vice President Mike Pence was called in to break a tie that threatened to defeat her. It’s the first time in US history that a vice president has needed to intervene in a cabinet nominee’s confirmation.

The Department of the Army announced today that it has completed a presidential-directed review of the remaining easement request for the Dakota Access pipeline, and has notified Congress that it intends to grant an easement. Thousands of predominately Native Americans protesters boycotted the $3.8 billion pipeline’s construction in the state of North Dakota last year. The Standing Rock Tribe have said that they will fight the decision in court.

Last week President Trump signed an executive order to roll back the Dodd-Frank Act – the 2010 legislation meant to help protect taxpayers from another financial crisis. And Congress has acted, by getting rid of the Dodd-Frank rule that forces huge oil and gas companies to disclose how much they pay foreign governments while they’re doing business abroad.

Three federal judges on the Ninth Circuit Court of Appeals are set to hear oral arguments this evening on whether Trump’s travel ban will remain suspended for now; the court is not expected to decide on the constitutionality of the ban. The central question for the appellate court is whether US District Judge Robart abused his discretion by putting a temporary hold on the travel ban.

Oil prices slipped as lower production by OPEC and other exporters was undermined by growing evidence of a revival in U.S. shale production and sluggish demand. Prices have been supported over the last two months by efforts by the Organization of the Petroleum Exporting Countries and other exporters to cut output by almost 1.8 million barrels per day in the first half of 2017.

But while OPEC and Russia have together cut at least 1.1 million barrels per day so far, rising U.S. production is compensating for the shortfall. After the close, the American Petroleum Institute estimated that U.S. crude stockpiles had surged 14.2 million barrels last week.

BP’s fourth quarter earnings came in below analyst expectations, with the company saying that its cash flow won’t cover spending and dividends until Brent crude rises above $60 a barrel.

Statoil, Norway’s biggest oil company, said that it is targeting another $1 billion in cost savings after reporting an unexpected loss in the fourth quarter.

General Motors said fourth-quarter net income fell partly because of $500 million in foreign exchange losses, while the automaker forecast 2017 profit per share would be flat to slightly up from 2016. Excluding one-time items, GM earned $2.4 billion, or $1.28 a share, in the latest quarter, down 14 percent from a year earlier. The adjusted result beat analysts’ expectations of $1.17 per share.

Hourly workers for General Motors will get record bonus checks of up to $12,000 after the company reported booming sales in North America. The profit-sharing checks owed to GM’s 52,000 United Auto Workers-represented workers are based on a simple formula. They get about $1,000 for every $1 billion in annual pre-tax North American profit, according to a formula adopted as part of contract negotiations in 2011. Record U.S. industry vehicle sales powered GM to a $12 billion North American profit in 2016, up from $11 billion a year earlier.

After the closing bell, Disney reported quarterly earnings that beat expectations, but revenue fell short of estimates. The company posted first-quarter earnings per share of $1.55 on $14.78 billion in revenue.

Michael Kors Holdings reported a bigger-than-expected drop in comparable sales for the holiday quarter and forecast current-quarter profit well below estimates. Sales at stores open for more than a year fell 6.9 percent in the quarter ended Dec. 31, falling for the seventh time in eight quarters. Kors is trying to regain its brand value by reducing supplies to department stores, which have been heavily discounting its products to drive traffic.

Gap raised its profit outlook for the fourth quarter after reporting better-than-expected sales for the holiday shopping period; sales improved at its Gap and Old Navy stores.

21st Century Fox reported adjusted quarterly profit of 53 cents per share, 4 cents a share above estimates. Revenue was just slightly below estimates. Profit was up 27 percent over a year earlier, as ad sales and affiliate fees increased.

Apple pulled ahead of Samsung in smartphone shipments. Apple shipped 78.3 million units in the fourth quarter, surpassing Samsung for the first time in five years. Samsung shipped 77.5 million units, a number that was affected by its exploding-battery problem, which cost it $3 billion in lost sales.