Financial Review

7 Straight

Sinclair Noe — August 2, 2016

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DOW – 90 = 18,313
SPX – 13 = 2157
NAS – 46 = 5137
10 Y + .03 = 1.53%
OIL – .43 = 39.67
GOLD + 10.40 = 1363.80

The Dow logged its seventh straight drop, while the Nasdaq snapped its five sessions winning streak. The S&P 500 broke out of a very tight consolidation pattern, but still managed to close with a loss of less than 1%.  WTI crude oil erased an early gain and closed down 1.1% at a four-month low.

Consumers boosted spending by 0.4% in June — the third straight strong increase — but they’ve also been saving less to fund their purchases.  Income growth has not been keeping pace with spending. Incomes rose 0.2% in June for the second straight month.

As a result, the personal-savings rate dropped to 5.3% and matched a 15-month low. Savings had hit a four-year high earlier in the year. Inflation as measured by the PCE index edged up 0.1% in June. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 0.9% in the 12 months ended in June. That’s unchanged from in the prior month.

The annual rate of core inflation was also flat at 1.6%.  Although inflation has been creeping higher lately, there still are no signs of widespread price pressures in the U.S. economy.

CoreLogic reports home prices were 5.7% higher in June compared to a year ago, and prices were up 1.1% from May to June. They forecast a 5.3% increase in home prices over the next year. Including distressed sales, national single family home prices remain 6.7% below peak values recorded in April 2006. Mortgage rates dipped in June to their lowest level in more than 3 years. Among major metro areas, Denver had the lowest unemployment rate and the strongest home price appreciation. Arizona saw a 5.5% increase in home prices over the past 12 months.

Japanese Prime Minister Shinzo Abe’s cabinet approved a $274 billion stimulus package. The Bank of Japan last week only tweaked its monetary stimulus. By total size, the stimulus package ranks among Japan’s biggest since the global financial crisis, but three quarters of the stated value comprises targeted low-interest loans from the government and state-owned companies. The program will include money for infrastructure projects, including a magnetic-levitation train line connecting Tokyo and Osaka, as well as reconstruction projects in the southern region hit by earthquakes in April.  It also will pay for cash handouts to 22 million low-income people.

The Federal Reserve reports loan standards to commercial and industrial firms and commercial real estate tightened for the fourth straight quarter in the three months ended in June. The survey also found standards on all categories of residential real estate mortgage loans were little changed, except some easing for loans that can be bought or guaranteed by Fannie Mae and Freddie Mac. The report also showed that demand for most types of residential real estate loans strengthened over the second quarter.

Major automakers in the U.S. market reported July vehicle sales slightly below expectations as the pent-up demand that has helped drive sales since 2009 plays itself out. In a continuing trend, consumers shunned passenger cars in favor of SUVs and pickup trucks. GM sales dropped 2%. Ford sales slipped 3%. Fiat Chrysler sales rose 0.3%. Nissan reported a 1.2% increase. Honda surprised with a 4.4% increase. Ford shares dropped 4.3% today and are down 14% in the last 4 sessions.

Shares in Biogen jumped almost 10% today, after the Wall Street Journal reported that Merck and Allergan have each informally expressed interest in a possible acquisition. A takeover of Biogen would be the biggest of a biotech company since 2008, and one of the largest takeovers by a drug company on record. Biogen makes drugs that treat multiple sclerosis and hemophilia, and its main focus overall is on neurological and autoimmune diseases, as well as rare diseases.

Pfizer said it has reached a $486 million settlement of shareholder litigation accusing it of causing big losses for shareholders by concealing safety risks associated with its Celebrex and Bextra pain-relieving drugs. Pfizer pulled Bextra from the U.S. market in April 2005, and agreed in September 2009 to pay $2.3 billion to settle a U.S. government probe into the marketing of Bextra and other drugs. The accord is subject to negotiation of a final settlement agreement and court approval, and would end more than 11 years of litigation against the drug maker.

Also, Pfizer reported better-than-expected quarterly results, driven by lower taxes and sales of generic medicines, but revenue from its array of branded patent-protected medicines brought disappointment. Pfizer did not offer any hints on whether it plans to split into two separate companies, a long-mulled potential decision that has kept investors in suspense.

Of the 353 companies in the S&P 500 that have reported earnings through Tuesday morning, 71 percent have topped analyst expectations, according to Thomson Reuters data. Earnings for the second quarter are expected to show a decline of 2.6 percent, an improvement from the expected 4.5 percent decline on July 1.

Emerson Electric, which makes factory automation equipment, said it would sell two units for a total of $5.2 billion as the company focuses on its high-growth businesses. Emerson will sell its network power unit to investment firm Platinum Equity in a deal worth $4 billion, while Japan’s Nidec Corp will buy its motors and electric power division for $1.2 billion.

Australia cut rates to a record low. The Reserve Bank of Australia lowered its benchmark interest rate to a record-low 1.50%, as expected. The central bank’s board noted “that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

European bank stocks were crushed again today. The sector remains under pressure after the results of the European Banking Association stress tests were released after markets closed on Friday. Europe’s STOXX Banking Index traded lower by 2.8%, taking this year’s total losses to more than 30%; with Germany’s Commerzbank pacing today’s decline among individual names, down 8.2% after reporting a 32% drop in quarterly profits.

Credit Suisse and Deutsche Bank – will be dropped from the STOXX 50, an index of Europe’s top 50 blue-chip companies next week. Credit Suisse and Deutsche Bank shares have lost half their value this year. Exclusion from a benchmark generally means that exchange-traded funds and other passive investors that track the index will be forced to sell the shares.

Deutsche’s plight should be of particular concern. Its shares are now worth barely a quarter of its book value. That is a twofold bind: proof that investors distrust the bank; and a practical block on being able to raise the equity needed to boost regulatory capital and absorb the cost of fines; and Deutsche faces considerable fines.  Investors are again pricing in a risk that the bank’s coco (or contingent convertible) bonds will be bailed in. Last month, the International Monetary Fund issued a report that concluded Deutsche is probably “the most important net contributor to systemic risks in the global banking system”.

And as bad as that is, the worst of the lot, is Italy’s Banca Monte dei Paschi, which utterly failed the stress test last week and now requires recapitalization. The Financial Times reports: “The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalization with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalization fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.”

The only good news is that Monte dei Paschi is nowhere near as big as Deutsche Bank. Italy is turning into the next Greece. Non-performing bank loans have risen to 18% in Italy. Monte dei Pachi has non-performing loans around one-third of its assets. I’m not sure how this plays out but it will probably be messy.

The Centers for Disease Control and Prevention advised pregnant women not to go to a Miami neighborhood where new, confirmed cases of Zika virus that appeared to be locally transmitted were reported. It was the first time the government health agency tasked with preventing the spread of disease has issued such an advisory for the Zika virus within the 48 contiguous US states, and it appeared to be the first time the CDC has warned against visiting any part of the continental United States for health reasons.

The warning applied to a one-square-mile area north of downtown Miami. Despite the narrowness of the warning, it may be problematic for Florida’s important tourism industry. The state drew in more than 100 million visitors and generated more than $89 billion of economic activity last year

At the end of last year, the FAA mandated—arguably as a stopgap against potentially stricter regulations from Congress about how citizens can use drones—that anyone wishing to fly a consumer drone weighing more than a half pound needed to get a registration number from the FAA for $5.

At a conference at the White House today on the future uses of drones in US airspace, Federal Aviation Administration director Michael Huerta told the gathered crowd that more than consumer 500,000 drones had been registered with the agency since December. According to the FAA, it took 100 years for about 320,000 regular aircraft to be registered with US officials—a feat that drones have surpassed in a matter of months.

Financial Review

Quiet and Overbought

Sinclair Noe — June 7, 2016

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DOW + 17 = 17,938
SPX + 2 = 2112
NAS – 6 = 4961
10 Y – .01 = 1.71%
OIL + .74 = 50.43
GOLD – 1.50 = 1244.20

Fed chief Janet Yellen on Monday called last week’s U.S. jobs numbers disappointing and opted not to repeat her message that U.S. interest rates could rise again in the coming months. That was balanced, however, by her cautioning against attaching too much significance to the payrolls data in isolation and as she pointed to other more upbeat signals for the economy and indicated rate hikes this year would still be appropriate.

On Friday, when the jobs report came in at a very weak 38,000 jobs added, the markets were down slightly. Clearly the news from the jobs report had the effect of taking a June rate hike off the table. In the past, the markets would have rallied on that kind of news, but it made for terrible optics, and so we had to wait for Fed chair Yellen to not say anything. And besides, the markets had already priced in no rate hike in June. So, what’s going on here?

The S&P 500 has gone 42 trading days without a decline of 1% or more. That’s the longest stretch without a big drop since a 66-day period that ended in July 2014, according to FactSet. The U.S. stock market hasn’t dropped by 1% or more since April 7. During one particularly scary stretch in mid-February, the S&P 500 suffered three plunges of 1% or more on separate occasions in just five days. This slow steady advance leaves the market in extremely overbought territory.

Economic data remains weak; we just wrapped up another horrible earnings season; valuations remain expensive; we are moving into a seasonally weak time period; the yield curve is flattening; volume is weak.

Meanwhile, the bullish case for this market is tenuous at best. It might be bullish…, if the Fed keeps rates unchanged; if the economy bounces back in the second half (we’ve already given up on a second quarter bounce); if earnings improve (which is plausible given how low the bar is now set); if oil trades higher (even though higher oil prices will surely lead to higher supplies); if the dollar doesn’t firm up again; if there is no Brexit; and if the markets continue to ignore the data.

You get the idea. Still, it is possible to take out the old highs on the S&P, even without a bullish case. If that happens I would still be left wondering what is pushing the bullish case, other than a herd mentality that is not sustainable. Today, stocks moved to an 11 month high and then faltered on weak volume.

Productivity remains a key weakness of the economy and is especially evident during the low output of the first quarter. American workers were less productive again in the first quarter. The Labor Department productivity declined at an annual rate of 0.6 percent in the first quarter after a 1.7 percent drop in the fourth quarter.

The government first estimated that productivity fell at a 1 percent rate. Not only did hours exceed output, compensation rose at the same time, up 3.9 percent to lift unit labor costs by 4.5 percent, even faster than the 4.1 percent gain first reported. Though there seems to still be a belief that wage growth remains sluggish, in reality, wages have finally begun to move higher in earnest. The anecdotal and survey evidence has been pointing to rising wages for a while, but the data were slow to fall into line. Now they have.

CoreLogic’s Home Price Index (HPI) shows that home prices in the USA are up 6.2 % year-over-year (reported up 1.8 % month-over-month). Last month’s 6.7 % year-over-year gain was revised downward to 5.5 %. CoreLogic HPI is used in the Federal Reserve’s Flow of Funds to calculate the values of residential real estate.

Consumer credit growth cooled off a bit in April from a torrid pace in March, according to the latest government estimates. Credit growth rose $13.4 billion in April, or at a seasonally adjusted annual rate of 4.5%, the Federal Reserve said Tuesday. Economists had expected a gain of $18 billion in April consumer credit. This is down from a revised $28.4 billion, or 9.6% pace in March. That was the largest dollar gain in consumer credit on record. The Fed said credit-card debt rose at a 2.1% rate in April, down from 13.3% in the prior month, which was the largest gain February 2001.

Non-revolving debt, mainly car and student loans, which has powered credit growth in recent years, expanded at a 5.4% rate in April, below the 8.2% gain in March. As a result of the gain in April, total outstanding consumer credit reached an all-time peak of $3.6 trillion.

Even before Mario Draghi starts his corporate-bond buying program tomorrow, he’s pushed down borrowing costs in Europe toward unprecedented levels, with the average yield on euro investment-grade company notes tumbling to 1%. On Tuesday, a series of government bond yields tumbled to multi-month and all-time lows.

The ECB in March announced it would expand its asset-purchasing program to include corporate bonds in an effort to directly lower borrowing costs for businesses and to help lift persistently low inflation. One concern is that corporate buybacks might have some unintended consequences, such as stock buybacks and widening spreads between bonds that are eligible for ECB’s purchases and those that aren’t.

Second-round bids for Yahoo’s internet business were due yesterday. Verizon Communications reportedly planned to submit a bid worth about $3 billion for Yahoo’s internet business, according to the Wall Street Journal. The telecom giant reportedly isn’t interested in other Yahoo assets such as patents and real estate. The private-equity firm TPG and a team led by Quicken Loans founder Dan Gilbert are said to be among the other interested parties. Yahoo is projected to hold at least one more cycle of bidding, and the offers could change by the final round.

U.S. investigators are trying to determine whether Goldman Sachs violated the Bank Secrecy Act when it didn’t sound an alarm over a suspicious transaction involving Malaysia’s state fund 1MDB. After raising $3 billion via a bond issue for the troubled fund, Goldman sent the proceeds to a Swiss bank account controlled by 1MDB, with half of the money disappearing offshore within days and some reappearing in the prime minister’s bank account.

Royal Dutch Shell will exit oil and gas operations in up to 10 countries in a drive to cut costs as it weathers weak oil prices and has to pay down debt following its $54 billion acquisition of BG Group. The company is active in more than 70 countries and said it would like to focus on 13 important nations where it is making good returns, including Brazil, Australia and the United States. The move, which includes the sale of 10 percent of its oil and gas production assets, will make Shell a smaller company that offers investors access to a more gas-heavy portfolio than some of its rivals.

Shares of Biogen dropped this morning after an experimental drug for multiple sclerosis failed in a mid-stage trial. The drug missed both the main and secondary goals for treating the disorder. Biogen makes most of its money from drugs treating MS and has been seeking new treatments to accelerate growth.

Valeant Pharmaceuticals announced a loss of $1.08 a share, which was adjusted to a gain of $1.27 when factoring out one-time adjustments. Valeant cut its 2016 earnings and sales forecasts, marking a major reset point as the once high-flying company tries to get back on its feet.

First-quarter earnings — the last set of full results under former Chief Executive Officer Michael Pearson — gave investors the first detailed picture of the drug maker’s struggles to sell its products during the recent months of chaos. Two of Valeant’s key categories, dermatology and prescription ophthalmology, slumped by 43 percent and 30 percent, respectively. In dermatology in particular, the company has faced push-back from health insurers and pharmacy benefit managers after increasing its prices.

A U.S. District Judge  has found a pattern of misconduct by Merck including lying under oath and other unethical practices, freeing Gilead Sciences from paying damages for infringing on Merck’s patents with its hepatitis C treatments – Sovaldi and Harvoni. The ruling comes after a federal jury on March 24 ordered Gilead to pay $200 million in damages, based on findings that Merck’s patents were valid.

Samsung is considering introducing two new smartphone models that will feature bendable screens. One model is said to fold in half like a cosmetic compact, while the other has a 5-inch display that “unfurls” into a tablet-sized 8-inch panel. The devices using organic light-emitting diodes could be unveiled as soon as early 2017.

Leading European countries have decided not to extend the license for glyphosate, a herbicide used in Monsanto’s top selling weed killer. The EU is worried about growing public concerns it could cause cancer.

Daimler is laying off more than 1,200 workers at three plants in the U.S. and one in Mexico, the second such cut this year in response to falling demand for commercial trucks. Last month, Daimler projected a 15% decline in North America sales of medium and heavy-duty trucks, warning that a slump in the market would significantly lower its earnings before interest and tax in 2016.

Ralph Lauren announced a restructuring plan. The company also plans to cut 8% of its workforce in the current fiscal year. As of April, it employed about 26,000 people around the world, 11,000 of whom are part-time workers. The planned job cuts will be in addition to the 5% workforce reduction that the company already implemented in its last fiscal year. The company plans to close about 50 stores. The company currently has 493 stores, including 216 in the U.S.

Financial Review

No Matter How Long the Winter

Sinclair Noe — March 20, 2015

 

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DOW + 168 = 18,127
SPX + 18 = 2108
NAS + 34 = 5026
10 YR YLD – .04 = 1.93%
OIL + 1.76 = 45.72
GOLD + 11.40 = 1183.40
SILV + .62 = 16.83

The Nasdaq Composite is back above 5,000. It couldn’t close above the old record high of 5048 from March 10, 2000, but it is close. Even with today’s advance it remains a long way from its intraday high of 5,132, reached the same day. For the week, the Dow gained 2.1 percent while the S&P 500 rose 2.7 percent, both snapping a three-week run of losses. The Nasdaq ended up 3.2 percent.

In London, the FTSE 100 Index hit a fresh record and climbed above 7,000 for the first time. The benchmark gauge of U.K. stocks climbed 0.9 percent to close at 7,022.51 in London, doubling since a low in 2009.  The index first surpassed its dotcom era record last month, having taken more than 15 years for it to regain all the losses from the burst of the tech bubble.

Today is a quadruple witch, and then some.  Index futures, stock index options, stock options, and single stock futures all expire Friday as the first quarter nears its end. Today also marks a rebalancing of the S&P 500 index, to reflect things like mergers, acquisitions, or other changes. About $15.9 billion of shares were specifically traded as investors bought and sold stocks to mimic the changes.

If you were in Norway this morning, you might have seen a solar eclipse. For 2.5 minutes, the moon blocked out the sun. And you don’t have to be in Norway to enjoy the first day of spring. The March equinox happens at the same moment across the world but when we convert to local time, it happened at 3:45 PM PDT (Arizona time).  In the northern hemisphere it is the vernal equinox and in the southern hemisphere it is the autumnal equinox. The combination of a total solar eclipse on the day of the vernal equinox is quite rare; the next time this happens is 2034. But wait, there’s more. Today also features a Supermoon, with the moon at its closest point to Earth.

I don’t know that meteorological events have much to do with the stock market, but the transition to spring seems to have some significance; it marks the transition from the best six months to the worst six months. Normally with think of this with the mnemonic “Sell in May and stay away.” According to the Stock Traders’ Almanac, since 1950, DJIA’s average annual gain has been 8.4%. Over the same time period, DJIA has lost an average 1.1% during the “Worst Six Months,” May through October, and gained an average 9.3% during the “Best Six Months,” November through April. And although the worst six months start in May, sometimes the markets get a little jumpstart on a selloff.

The Sell in May strategy is not a guarantee of a downturn, just a look at probabilities. And if you’re wondering about the thinking behind it, you would need to consider our agrarian roots, when farmers would plant in the spring, which required an investment of capital and labor, but the payoff doesn’t come until the harvest, six months later, around October.

Another consideration is that 2015 is a pre-election year. The idea is that political parties try to juice the economy ahead of elections. Midterm election years produce dismal results with big declines, and that pattern goes back to the 1920s; except it didn’t hold last year. We could toss in the decennial cycle, which holds that almost every fifth year of each decade going back to 1895 has been positive in the Dow, but given that last year did not follow historic norms, this year about all we can say is expect the unexpected.

The Department of the Interior has unveiled new regulations on hydraulic fracturing operations that take place on federal lands, requiring companies using the drilling technique to ensure wells are safe and to disclose chemicals used in the process. Key provisions of the new rules include: Requiring strong cement barriers between the well and any water zones it passes through. Requiring companies to publicly disclose chemicals used in fracking. Stricter storage protocols for recovered waste water used in fracking.  Measures to lower the risk of cross-contamination from fracking chemicals by requiring companies to submit detailed information on the geology, depth and locations of wells that already exist. The new rules are set to go into effect in 90 days. The new federal rules will cover about 100,000 oil and gas wells drilled on public lands, but the majority of fracking is done on private land or state owned land.

The new benchmark process for pricing gold in London began today. The new London Gold fix, or LBMA Gold Price, as it is now being called is supposed to replace the nearly 100 year old process of a few banks reporting a morning and afternoon price – the AM and PM Fix; which had some well-earned notoriety for manipulation. The London Bullion Market Association says the new electronic auction process for setting the gold price is designed to be transparent and to allow as many participants as possible. In the past, the price was set by 4 big banks: Barclays, HSBC, SocGen, and Bank of Nova Scotia; now they have added UBS and Goldman Sachs. So, the gold fix is dead, long live the gold fix.

January was a slow month for home sales and prices in Phoenix. According to a report from the W. P. Carey School of Business at Arizona State University. Home sales dropped 26 percent. The Valley’s median home sales price fell to $208,000 in January from $215,000 in December. Michael Orr, director of the Center for Real Estate at ASU, in a recent report, calls for sales to pick up, with a possible 30% jump in March.

A few earnings reports today. Nike revenues were hurt by the strong dollar. The athletic footwear giant reported revenues jumped 7% year-over-year to $7.5 billion, slightly missing the $7.6 billion that was expected. However, revenues would have been up 13% if not for the headwinds produced by the strong US dollar. As for earnings, Nike reported a gain of $0.89 per share, topping the $0.84 that analysts were expecting.

Tiffany missed analyst expectations. The luxury retailer posted earnings of $1.47 per share, missing the $1.51 that analysts were expecting. Revenues came in at $1.29 billion, just short of the $1.30 billion that analysts were hoping for. The company sees worldwide net sales increasing by a mid-single-digit percentage versus the prior guidance of low-to-mid single-digits.

Darden Restaurants topped estimates. The restaurant giant announced earnings of $0.99 per share ex-items, far above the $0.84 that analysts were expecting. Revenues rose 6.9% year-over-year to $1.73 billion, outpacing the $1.72 billion estimate. The company guided fourth-quarter earnings per share between $0.91 and $0.94, topping the $0.89 the Street was looking for.

Maybe that says something; the luxury jeweler missed on earnings, while the everyday restaurant brand beat earnings.

Big news today from Biogen. Back in December, Biogen announced they were working on an experimental drug for Alzheimer’s disease; since then the stock price has climbed by about 40%, and today the price jumped nearly 10%. Today, Biogen announced results of early phase, or Phase 1 trials, at a neurology meeting in France. And the results are good. The drug appears to have met or exceeded Wall Street expectations in terms of how much the highest dose slowed cognitive decline. That would be very good news indeed, but for now, expectations should be tempered. Phase 1 trials are designed to measure safety, not the effect on cognition. Also, other Alzheimer’s drugs that had looked promising in early studies ended up not working in larger trials. The drug is designed to get rid of amyloid plaque in the brain, which is believed to be the cause of dementia in Alzheimer’s disease.

Tapping into a gray area of the net neutrality debate, HBO, Showtime and Sony are in talks with broadband providers about having their Web TV services treated as “managed services,” giving them a separate lane that would ensure their content gets special treatment. While net neutrality states that all traffic on the Internet should be treated equal, the FCC maintains that cable and phone companies can offer “managed services” – digital phone and video-on-demand, for example – that run on a dedicated slice of bandwidth in the cable pipe which is separate from the portion reserved for public Internet access. The video industry is looking hard for new options. Between Sling TV, Playstation Vue, and Apple TV, the number of alternatives to cable and satellite TV is rapidly expanding. At this point, the government can either allow a handful of these services to prosper through special treatment—with cable companies serving as gatekeepers—or it can keep the lanes open to even more services, all competing for the same bandwidth, data, and dollars. The good news for net neutrality advocates: These negotiations aren’t getting anywhere.

The FAA has granted Amazon approval to test a delivery drone outdoors, allowing test flights over private, rural land in Washington State. The company also received an exemption from certain flight restrictions, but must keep flights below 400 feet and the drone in sight. Amazon would like to use the drones to deliver products to customers. It’s an interesting idea, but for now, that’s as far as it goes.

Greece managed to scrape together $2.1 billion dollars to pay debts today; they are still expected to run out of money by the end of the month, unless they can get the Euro Union to approve a financial aid payment. Despite a Feb. 20 deal to extend Greece’s €240 billion bailout by four months, its international creditors are withholding a €7 billion aid tranche until Athens provides a list of economic reforms that will satisfy its European Union partners. So far, the Greeks have not come up with a list. The talks seem to be dragging out a long time. Cash continues to flow out of Greece, and the most notable thing about the whole mess is that the European financial structure seems unfazed by it all – no collapse, no panic.

Also at the summit: EU leaders decided to keep sanctions on Russia in place until the end of this year at the earliest, linking them to the “complete implementation” of a Ukraine ceasefire deal.