Financial Review

Wild Ride

Sinclair Noe — November 29, 2017

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

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DOW + 103 = 23,940 (Record)
SPX – 0.97 = 2626
NAS – 88 = 6824
RUT + 29 = 1542
10 Y + .04 = 2.38%
OIL – .72 = 57.39
GOLD – 10.00 = 1284.40

Cryptocurrency

• Number of Currencies: 1,361
• Total Market Cap: $313,200,409,865
• 24H Volume: $25,745,255,963

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	24H Volume	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	10,440.0	$176.94B	$12.43B	48.17%	1	+6.76%	+28.76%
	Ethereum	ETH	447.67	$44.05B	$2.91B	11.27%	0.0445032	+6.04%	+21.31%
	Bitcoin Cash	BCH	1,389.00	$24.35B	$2.55B	9.88%	0.140411	+3.95%	+4.72%
	Ripple	XRP	0.24450	$10.06B	$559.05M	2.17%	0.00002528	+4.44%	+9.00%
	Dash	DASH	701.27	$5.64B	$460.44M	1.78%	0.0708762	+6.09%	+27.36%
	Bitcoin Gold	BTG	298.72	$5.34B	$277.71M	1.08%	0.0310805	+6.27%	+28.06%
	Litecoin	LTC	91.090	$4.96B	$827.06M	3.20%	0.00890424	+5.06%	+27.98%
	IOTA	MIOTA	1.37200	$3.83B	$309.61M	1.20%	0.00013365	+8.28%	+54.35%
	Monero	XMR	184.21	$2.91B	$191.79M	0.74%	0.0183086	+11.31%	+15.15%
	Cardano	ADA	0.114583	$2.87B	$207.27M	0.80%	0.00001074	+3.15%	+291.80%

The Dow Industrials hit another record high, even as the Nasdaq suffered a sharp drop.

The U.S. economy’s growth rate last quarter was revised upward to the fastest in three years on stronger investment from businesses and government agencies than previously estimated. Third quarter GDP grew at a 3.3% annualized rate (est. 3.2%), revised from 3%.

The performance, achieved despite two devastating hurricanes, marked the fastest expansion in gross domestic product since a 5.2 percent annual spurt in the third quarter of 2014. Consumer spending, which accounts for about 70 percent of the economy, continues to be the main driver of growth, though revisions showed it was slightly weaker than previously estimated on purchases of both durable and nondurable goods.

The biggest improvement came in business investment, which made a 1.2 percentage-point contribution to growth. In addition to greater spending on transportation equipment, the data also reflected more software spending. Nonresidential structures were revised to a bigger decline. While the first look at third-quarter gross domestic income showed a pickup, the prior quarter was revised downward by 0.6 percentage point, reflecting a smaller gain in wages and salaries.

Price data in the GDP report showed inflation remains behind the Fed’s 2 percent goal. Excluding food and energy, the central bank’s preferred price index tied to personal spending rose at a 1.4 percent annualized rate last quarter. Gross domestic income, adjusted for inflation, rose 2.5 percent after a downwardly revised 2.3 percent gain in the prior three months; second-quarter wages and salaries were revised downward by $26.5 billion.

The GDP report is the second of three estimates for the quarter; the third is due in December.

The pending home sales index, which measures signed contracts to buy existing homes, rose 3.5 percent for the month, but is still 0.6 percent lower than October 2016. That is the highest level since June. Sales were strongest in the South, jumping 7.4 percent for the month and 2 percent compared with a year ago. That was likely due to pent-up demand after two major hurricanes.

Federal Reserve Chair Janet Yellen delivered her final testimony before the Joint Economic Committee on Capitol Hill. Yellen said the country’s economic expansion had broadened and strengthened, and that she expected the growth to continue. Yellen was careful to say that the economy could be doing better. She noted that the pace of economic growth remained slow by historical standards.

The two major determinants of growth, the number of workers and the productivity of the average worker, are rising slowly. She said, “Congress might consider policies that encourage business investment and capital formation, improve the nation’s infrastructure, raise the quality of our educational system, and support innovation and the adoption of new technologies.”

She did not offer an opinion on tax policy but warned that debt-to-GDP ratios – around 75% – were high, though not excessive.  She added, “It’s the type of thing that should keep people awake at night.” In response to a question, Yellen added, “The equity of the tax code is important and should be taken into account.”

She also said changes in fiscal policy could affect how quickly the Fed raises rates. Fed officials have drawn a careful distinction between tax cuts that increase economic capacity — for example, by encouraging business investment — and tax cuts that provide a short-term sugar high, such as cuts in personal income taxes that would likely increase spending.

The Fed estimates that the economy is already growing at something close to the maximum sustainable pace. A short-term stimulus, therefore, would likely raise inflation. In turn, the Fed could seek to offset faster inflation by raising interest rates more quickly.

Also, today, at the ASU Economic Forecast Luncheon in Phoenix, San Francisco Fed President John Williams delivered an upbeat assessment of the economy, and falling unemployment is expected to put pressure on inflation… eventually, Williams anticipates the Fed will keep raising interest rates gradually.

Williams said, “The next time you see a headline about stubbornly low inflation, you can smile to yourself, knowing that the mystery isn’t all that mysterious after all. With the economy doing so well this year and based on the historical pattern, I expect to see a rise in inflation in 2018.” In a Q&A session, Williams said the Fed does not have plans to issue digital currency, but the central bank is interested in the underlying technology and is actively researching it.

Yesterday, Bitcoin hit $10,000. This morning it hit $11,000 – but by the end of the day it was back around $9,290. Wild ride doesn’t begin to describe it. Trading volume was a whopping $9.75 billion over the last 24 hours, according to CoinMarketCap, compared to $2.26 billion for digital currency Ethereum. The heaviest selling came amid reports of service outages and delays on some of the largest online exchanges. If it looks like a bubble, and walks like a bubble, and charts like a bubble….

If bitcoin is a bit too crazy for you, starting in 2018, investors can dump their money into deeply unBogle-like, totally non-passive Vanguard exchange-traded vehicles with flavors like volatility, momentum, value, and, for some reason, low liquidity. That’s right, actively managed ETFs.

Members of the Organization of the Petroleum Exporting Countries and other key producers, including Russia, meet on Nov. 30 to discuss whether to continue to limit production to drain global inventories to help push up prices. They cut production by 1.8 million barrels per day (bpd) in January and agreed to hold down output until March. The market had expected OPEC to extend the limits by another six to nine months, but this is now less certain.

The Supreme Court heard arguments today on whether police need a warrant for cellphone location data in a case that could reshape digital privacy protections. The defendant in the case was convicted of participating in a series of robberies, based in part on records provided by his cellular carrier showing his movements over several months. The defense lawyer said prosecutors had violated the Fourth Amendment, which bars unreasonable searches, by failing to get a warrant for the information.

The court’s decision in the case, Carpenter v. United States, will apply the Fourth Amendment, drafted in the 18th century, to a world in which people’s movements are continually recorded by devices in their pockets and cars, by toll plazas and by transit systems. A ruling in Mr. Carpenter’s favor could revise a fundamental Fourth Amendment principle: that people have no reasonable expectation of privacy when they voluntarily turn over information to a third party, like a phone company.

Recent Supreme Court decisions have expressed uneasiness with allowing the government to have unfettered access to vast amounts of digital data. By the end of arguments, at least five justices seemed prepared to limit the government’s power to obtain records from cellphone companies showing their customers’ locations over long periods of time. But there was no consensus about a rationale for a decision or about how far the court was prepared to go to reshape longstanding constitutional doctrines that allow the government to obtain business records held by third parties.

The Office of the Comptroller of the Currency has advised Wells Fargo’s board of directors that it is weighing a formal enforcement action against the bank over improprieties in its auto-insurance and mortgage operations. In a letter this month, the OCC said Wells had willingly hurt customers in the two businesses and had until Nov. 24 to respond. The OCC letter said Wells repeatedly failed to fix problems in a broad span of areas, not just auto insurance and mortgage-lending.

Nokia is reportedly in talks to buy Juniper Networks.  The offer would value Juniper at around $16 billion.

A scheduling glitch that allowed American Airlines pilots to take vacation at the same time has left thousands of flights during the busy holiday travel period next month without pilots assigned to them. Pilots loaded up their schedules with flights in early December, but many opted to take days off around the holidays, after the system allowed it.

American Airlines is now offering pilots 150 percent of hourly pay to work those dates. It was unclear how much the scheduling problem will cost American Airlines. Whoops.

Financial Review

Tax Gimmicks 

Sinclair Noe — November 28, 2017

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

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DOW + 255 = 23,836
SPX + 25 = 2627
NAS + 33 = 6912
RUT + 23 = 1536
10 Y + .01 = 2.34%
OIL – .36 = 57.75
GOLD – .60 = 1294.40

Cryptocurrency

• Number of Currencies: 916
• Total Market Cap: $318,106,894,241
• 24H Volume: $16,102,299,246

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	10,028.0	$170.97B	$6.71B	41.70%	1	+1.31%	+25.73%
	Ethereum	ETH	476.79	$46.48B	$1.43B	8.89%	0.0480758	+2.41%	+33.12%
	Bitcoin Cash	BCH	1,465.90	$25.65B	$1.25B	7.74%	0.151402	-1.06%	+28.52%
	Ripple	XRP	0.26999	$11.22B	$712.82M	4.43%	0.00002883	-3.54%	+23.99%
	Litecoin	LTC	98.780	$5.50B	$507.40M	3.15%	0.0100979	+4.54%	+44.48%
	Bitcoin Gold	BTG	314.88	$5.33B	$104.80M	0.65%	0.0317219	-4.41%	+24.48%
	Dash	DASH	619.01	$4.94B	$157.58M	0.98%	0.0635303	+1.06%	+26.26%
	IOTA	MIOTA	1.41960	$4.02B	$450.84M	2.80%	0.00014381	-2.29%	+59.65%
	Cardano	ADA	0.139936	$3.63B	$283.76M	1.76%	0.0000139	+184.73%	+390.74%
	Ethereum Classic	ETC	29.5348	$3.11B	$1.42B	8.81%	0.00315962	-6.06%	+77.49%

Record highs for the Dow, the S&P, Nasdaq, and Russell.

The big push to record highs came in the final 2 hours of trade as the Senate Budget Committee passed the tax-cut bill. The Tax Cuts and Jobs Act now moves to the full Senate for debate and a possible vote as early as Thursday.

The 12-11 party-line vote came after Republican leaders addressed objections raised by GOP committee members who threatened to block it. Just one GOP senator on the panel would have had the power to block the bill given the majority’s one-vote margin in committee.

GOP committee member Bob Corker of Tennessee said he reached an agreement with Senate tax writers on a broad outline for a revenue trigger provision that he and other GOP senators are seeking. He has sought a “backstop” that would create automatic tax increases if the tax bill doesn’t spur strong economic growth as Republicans have promised.

Senator Ron Johnson, a Wisconsin Republican, pushed to change the way pass-through businesses would be treated by increasing a proposed 17.4 percent deduction for pass-through business income to at least 20 percent. Johnson would pay for the heftier tax break by eliminating the corporate deduction for state and local taxes. Senator Lisa Murkowski of Alaska was swayed by a provision that opens the Arctic National Wildlife Refuge to oil drilling.

Here’s the problem with the compromises required to push the bill out of committee. By making the plan more generous to the wealthy by doing more for pass-throughs, this would also add to the deficit – which would then trigger the tax increases.

The tax hike trigger is supposed to appease Republican deficit hawks – notably, Senators Corker and Flake. But looking beyond the quick patch, they still must sell the plan to the public, which thinks the whole idea is a big giveaway for corporations. To win over middle-class voters, they offer a short-term tax cut – and because they know that the tax cuts will bust the deficit, the individual tax cuts will expire in 2025 and taxes on the middle class will go up.

The whole point of back-loading the losses on to the middle class later is to prevent the permanent corporate tax cuts from ballooning the long-term deficit. As of now, how this tax hike trigger would work, and whose taxes would go up, are unspecified. Three guesses….

For all of this to go through, consider the most likely way it would happen: The deficit hawks would have to accept a plan that on paper does balloon the deficit in the short term, based on triggers that allow them to claim tax hikes will kick in if growth doesn’t offset that. (Either these triggers remain unspecified, or Republicans will be declaring that some specific groups may be hit with tax hikes later.)

Meanwhile, to make conservatives happy, the plan would have to include still more benefits for the rich under the guise of mainly helping small businesses.

It looks like a few senators managed to add a few gimmicks to justify letting those who have argued that they don’t believe in increasing the deficit to vote for a bill which does exactly that. More broadly, the lesson is that it’s hard to take an inherently flawed concept like a large regressive tax cut enacted at a time of low unemployment, rising interest rates, and high debt, and then tack on extra provisions that make it workable.

The best solution is for Congress to manage the budget in a responsible way, enacting stimulus if the economy is in recession but aiming for deficit-neutral tax reform. But GOP senators are also facing intense pressure to “get to yes” on the bill rather than leaving town without a signature 2017 legislative accomplishment, so the old trigger idea is making a comeback despite significant conceptual flaws. Sometimes discretion is the better part of valor.

Republican leaders conceded that they have yet to round up the votes needed for passage in the Senate, where they hold a narrow 52-48 majority. Best estimates are that there are 8 Republican senators that could kill the tax plan; two of them are from Arizona. As the tax fight played out, a new battle opened on another front as Democrats canceled a White House meeting with Trump to discuss spending, immigration and other issues after Trump said on Twitter that he did not think a deal was likely. Lawmakers must renew government funding before it expires on Dec. 8 or risk a shutdown.

Earlier in the day came word North Korea fired an intercontinental ballistic missile for the first time in four months. The missile flew east for about 53 minutes before landing off the north of Honshu, Japan’s largest island, nearly 600 miles from the launch site. The missile was fired high into the air, reaching a maximum altitude of around 2,800 miles, in an arc like the North’s two previous intercontinental ballistic missiles, or ICBMs, which were launched in July.

The distance traveled appeared to be significantly greater than that of the two previous ICBMs. It is estimated the missile has a range of about 8,000 miles, able to reach Washington or any other part of the continental United States – although they would probably have to develop their missiles even more before they could reliably deliver nuclear armed weapons such distance. Washington is applying what it calls “maximum pressure and sanctions” to stop North Korea from reaching the stage where it would be able to deliver a nuclear warhead on its ICBMs.

Jerome Powell, Trump’s pick to be chairman of the Federal Reserve, told senators at his confirmation hearing today that he believes some bank regulations can be rolled back — something the administration and Wall Street favor. But he stressed that he will protect the central bank’s political independence, calling it vital for the Fed’s role.

Powell also strongly hinted in his appearance before the Senate Banking Committee that the Fed would hike rates again in December. Powell said he believed that the Dodd-Frank Act, passed in the wake of the 2008 financial crisis, the law had imposed unnecessary burdens on small banks. But the law had succeeded in making the financial system stronger, including ensuring that no major institution now is too big to fail. Which is a little strange because loose regulation didn’t prevent the meltdown in 2008 and the big banks are even bigger now.

The National Retail Federation reports more than 174 million U.S. shoppers made purchases over Thanksgiving weekend and Cyber Monday, beating the industry group’s expectations and signaling a strong start to the holiday quarter. The NRF, which had estimated about 164 million shoppers, attributed the even stronger turnout to better technology and discounting, low unemployment, rising consumer confidence and good weather across the country.

Shoppers on average spent $335.47 over the five-day period, with older millennials spending the most at $419.52 each. Online shopping rose sharply this year, with Cyber Monday becoming the largest online sales day in history at $6.6 billion. Sales on Thanksgiving and Black Friday also topped prior years and e-commerce leader Amazon.com said it broke sales records this weekend.

Not just Amazon, many traditional brick and mortar retailers also bulked up their online operations. The NRF said retailers’ investments in technology had paid off, noting that internet-only shoppers totaled more than 58 million during the 5-day period, over 64 million shopped both online and in stores, and about 51 million spent only in brick-and-mortar stores.

Bitcoin hit an all-time high above $10,000 in some smaller exchanges and digital currency indexes, but remained just below that milestone in major trading platforms such as Luxembourg-based BitStamp and U.S.-based GDAX. Still, bitcoin has gained more than 900 percent so far this year.

The Arby’s Restaurant Group is buying Buffalo Wild Wings, paying $157 in cash for each of the 15.51 million outstanding shares. The total value of the agreement swells to around $2.9 billion after Wild Wings’ debt is included.

Arby’s is controlled by the private equity firm the Roark Capital Group, which says it will be taking Buffalo Wild Wings private and continue to operate it as an independent brand. Shareholders of the chicken wing and sports bar chain will need to approve the deal before it’s finalized. Buffalo Wild Wings has more than 1,250 locations in 10 countries; Arby’s has more than 3,300 restaurants in seven countries.

Financial Review

Black Cyber-ish

Sinclair Noe — November 27, 2017

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

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DOW + 22 = 23,580
SPX – 1 = 2601
NAS – 10 = 6878
RUT – 5 = 1513
10 Y – .01 = 2.33%
OIL – 1.08 = 57.87
GOLD + 6.10 = 1295.00

Cryptocurrency

• Number of Currencies: 919
• Total Market Cap: $304,635,688,163
• 24H Volume: $12,910,150,130

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	9,647.3	$162.88B	$5.45B	41.99%	1	-0.84%	+20.29%
	Ethereum	ETH	474.73	$46.05B	$1.38B	10.66%	0.0494524	+0.24%	+31.65%
	Bitcoin Cash	BCH	1,566.80	$27.07B	$1.33B	10.26%	0.16585	-1.20%	+35.24%
	Ripple	XRP	0.25200	$10.06B	$247.07M	1.90%	0.00002685	+1.69%	+9.48%
	Bitcoin Gold	BTG	353.60	$5.90B	$111.60M	0.86%	0.0364681	-2.25%	+48.94%
	Litecoin	LTC	90.800	$4.90B	$424.45M	3.27%	0.00935105	-0.61%	+27.25%
	Dash	DASH	615.61	$4.83B	$133.23M	1.03%	0.0646084	-1.34%	+34.34%
	IOTA	MIOTA	1.16350	$3.22B	$218.03M	1.68%	0.0001195	+12.10%	+24.59%
	Ethereum Classic	ETC	27.9180	$2.90B	$963.35M	7.43%	0.00305606	+13.03%	+63.22%
	Monero	XMR	171.40	$2.68B	$97.71M	0.75%	0.0179119	-0.91%	+26.46%

Happy Cyber Monday.

Online shoppers in the U.S. are expected to spend about $6.6 billion today, up from $5.6 billion one year ago. Thanksgiving and Black Friday, when shoppers spent $7.9 billion and bought more on their mobile devices than last year, had also generated record online sales.

That brightened the overall outlook for traditional retailers that have expanded beyond brick-and-mortar outlets into e-commerce. The availability of deals and promotions throughout November hurt shopper traffic at stores. If you don’t find a great deal today, be patient – look for deeper discounts to be offered later in December.

Online sales at Wal-Mart grew 50 percent year-over-year in the most recent quarter. It now accounts for 3.6 percent of total U.S. online sales in the 12 months to October 2017, up from a 2.8 percent share a year ago. Even with this progress, Wal-Mart has a long way to go. Amazon’s share of the U.S. e-commerce market stands at 43.5 percent. About half of U.S. households are estimated to have Amazon Prime subscriptions.

GlobalData’s preliminary tracking figures have already predicted total Black Friday sales to have risen the most since 2011. The National Retail Federation (NRF), the industry’s trade group, is calling for an increase as much as 4 percent, with those results set to be released Tuesday afternoon.

After several years of growth, Small Business Saturday saw a dip in both foot traffic and overall dollars spent. The American Express-sponsored shopping holiday saw 108 million shoppers spend $12.9 billion on Nov. 25 at independently owned businesses. That is down from $15 billion in 2016.

Increasingly, the idea of one single day of shopping has been replaced by a month of holiday shopping. It’s no longer Black Friday. It’s now Black November. As retailers increasingly spread sales and discounts throughout the month, November has become a shopping extravaganza.

Online sales from November 1 through 22 totaled almost $30.4 billion this year, accounting for nearly 18% year-over-year growth, according to Adobe Analytics. In fact, every day in November so far has seen over $1 billion in online sales, creating a new paradigm for shoppers and retailers. Black Friday sales events are starting earlier and earlier in November every year as retailers try to get the jump on one another.

The Census Bureau reports sales of new single-family houses in October 2017 were at a seasonally adjusted annual rate of 685,000 – that’s a 10-year high. This is 6.2 percent above the revised September rate of 645,000 and is 18.7 percent above the October 2016 estimate.

Inventories are tight: it would take 4.9 months to sell all existing inventory – that’s down from 5.2 months’ supply of homes in September. The median sales price of new houses sold in October 2017 was $312,800. The average sales price was $400,200. New-home sales, tabulated when contracts get signed, account for about 10 percent of the market.

Congress is back in session for the next 3 weeks, with a busy schedule. Tomorrow, we’ll hear the Senate confirmation hearing for Jerome Powell, Trump’s nominee to head the Federal Reserve. We’ll get to hear Powell’s ideas on monetary policy, banking regulation and his general approach to run one of the most important institutions in the world.

Confirmation hearings are often unpredictable. While Powell could face some scrutiny, particularly from Republicans who don’t care for the central bank to begin with, and Democrats who want a tighter rein on Wall Street, Powell’s confirmation is all but assured.

Wednesday morning, current Fed Chair Janet Yellen delivers her final Humphrey Hawkins testimony on the economy, before the Joint Economic Committee.

Today, Dallas Fed President Robert Kaplan delivered an especially hawkish speech. Kaplan said he is “cognizant of financial imbalances” present in the current economy and suggested that the unemployment rate may be starting to extend too far beyond its natural level.

Specifically, Kaplan noted: stock market capitalization is about 135% of GDP, the highest since 1999-2000 just before the technology bubble burst; Commercial real estate prices and the valuation of debt both appearing “notably extended”; Historically low stock market volatility, which Kaplan described as “extraordinarily unusual”; Margin debt at record-high levels and Kaplan warned, “In the event of a sell-off, high levels of margin debt can encourage additional selling, which could, in turn, lead to a more rapid tightening of financial conditions”; and US government debt at about 75 per cent of GDP – a level Kaplan calls “unlikely to be sustainable”.

The big news on Capitol Hill continues to be the tax reform legislation, which might see a final Senate vote this week if they can muster the votes. With several senators not yet committed to supporting the $1.5 trillion tax plan, the week is expected to be punctuated by behind-the-scenes arm-twisting and deal-making as Republican leaders work to find enough votes to pass the bill along party lines.

At least a half-dozen senators have raised concerns about the bill, including its potential to add to the federal deficit and a provision that would eliminate the Affordable Care Act requirement that most Americans have health insurance or pay a penalty. The talks could result in substantial changes to the bill before it reaches the Senate floor, or, more likely, in amendments that the full Senate would vote on.

Any bill that passes the Senate is likely to differ in significant ways from the House-passed version, and Republican leaders in both chambers have said repeatedly that such differences will be worked out in a formal conference committee.

Recent national polls show the plan fails to garner the support of a majority of Americans; several polls show a majority actually opposing it. According to a new analysis from the Tax Policy Center, the Senate bill gives more than 60% of its benefits to the top 1% of taxpayers. Those in the top 0.1% of incomes are set to get 40% of all cuts.

The ongoing brouhaha over who is the rightful interim leader of the Consumer Financial Protection Bureau spilled over into Monday morning, as the two people separately tasked with leading the independent agency sent dueling emails asserting their authority.

In the first email to staffers this morning Leandra English — whom the departing director, Richard Cordray, named the acting director on Friday — called herself “acting director” and expressed gratitude to her CFPB colleagues “for your service.” That was followed up by a memo from Mick Mulvaney, the director of the Office of Management and Budget who was tapped by Trump to serve as acting director of the agency shortly after Cordray announced English, his chief of staff, as his interim successor.

Mulvaney’s memo told staffers to disregard the memo from acting director English. Then English filed a lawsuit in federal court seeking a temporary restraining order to prevent Mulvaney from fulfilling Trump’s appointment. Either English or Mulvaney will serve as acting director until the Senate can confirm a permanent nominee.

Media company Meredith Corp said on Sunday it will buy Time Inc, the publisher of People, Sports Illustrated and Fortune magazines, in a $1.84 billion all-cash deal backed by conservative billionaire brothers Charles and David Koch.

The state of Maryland passed a ban on “assault” weapons after the 2012 mass shooting at a Newtown, Conn., elementary school. A district judge had cast doubt on the constitutionality of the law. But the full U.S. Court of Appeals for the 4th Circuit in Richmond upheld the ban in a 10-to-4 vote.

That court went further than other appellate courts that have reviewed similar laws, stating that “assault weapons and large-capacity magazines are not protected by the Second Amendment.” That court went further than other appellate courts that have reviewed similar laws, stating that “assault weapons and large-capacity magazines are not protected by the Second Amendment.”

The majority opinion refers to the banned firearms as “weapons of war” that the court says are most useful in the military. Attorneys general in 21 states asked the Supreme Court to hear the Maryland case, and the National Rifle Association and other gun rights groups had joined the effort.  Today, the U.S. Supreme Court declined to hear the case, meaning the Maryland ban on assault weapons stands.

In the past year, bitcoins have generated transaction fees of nearly $219 million. And at $9,600 a piece, the total value of all bitcoins — their market cap — now tops $160 billion. That gives bitcoins the equivalent of a trailing P/E ratio of 708. Bitcoin now has a bigger market cap than General Electric, or Disney.

Bitcoin has increased nearly tenfold in price so far, this year. The digital currency has surged 50 percent in November alone. Bitcoin’s price has been helped in recent months by the announcement that the world’s biggest derivatives exchange operator CME Group would start offering bitcoin futures. The company said last week the futures would launch by the end of the year though no precise date had been set.

If you still don’t understand the underlying premise of bitcoin, you are not alone. There is no inherent value, just a transaction that happens based upon blockchain. Blockchain creates a quick, permanent and secure record of transactions, eliminating the need for a third party such as a bank.

Banks and other large corporations are testing how blockchain can help improve everything from supply chain management to global payments. The blockchain technology is very real but bitcoins are pure speculation that has now grown into a bubble. Not a huge bubble but big enough to pain.

Financial Review

10 Years On

Sinclair Noe — August 9, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 36 = 22,048
SPX – 0.90 = 2474
NAS – 18 = 6352
RUT – 13 = 1396
10 Y – .04 = 22.4%
OIL + .52 = 49.69
GOLD + 16.20 = 1277.90

“Fire and fury, and, frankly, power the likes of which this world has never seen,” is not a phrase that resonates well on Wall Street. Following Trump’s remarks, North Korea said it was “carefully examining” plans for a missile attack on the US Pacific territory of Guam, which is home to a large US military base. U.S. Defense Secretary Jim Mattis told Pyongyang it should stop any actions that would lead to the “end of its regime and the destruction of its people.”

Investors scurried to safe haven assets today. At this point, the threats are just rhetoric, so there was no freak out. Global markets switched to risk-off mode, with gold, bonds and the yen all rising but world financial markets don’t seem to be worried about war breaking out on the Korean Peninsula any time soon.

Historically, financial markets haven’t exhibited any extraordinary volatility in response to provocations from North Korea. North Korea says crazy stuff and the country has a very long history of not delivering on its threats.

South Korea’s Kospi index fell 1.1% and its won currency fell 0.9% against the dollar. The South Korean stock market has year-to-date roughly tripled the performance of the US market, and is up more than 30% and that outperformance comes despite the geopolitical risks posed by North Korea.

Actual war or military action would be cause for alarm but right now, thankfully, it is just saber rattling. Secretary of State Tillerson says that “Americans should sleep well at night.” (At least until 3am, when the next Tweet drops.) We’ll see what tomorrow brings.

A handful of defense contractors trended higher with the saber-rattling. Shares of Raytheon, L3 Technologies, Lockheed Martin, Northrop Grumman, and General Dynamics, all rose more than 1%.

Retailer Office Depot plummeted nearly 26% after it posted a quarterly profit that missed expectations.

The FBI searched a home belonging to Paul Manafort, President Donald Trump’s former campaign chairman, as part of the federal probe into Russian meddling in the 2016 election. The raid took place at Manafort’s residence in Alexandria, Virginia, on July 26, according to a person familiar with the details of the search.

Investigators collected some material during the search that they then took with them. FBI agents are working with a team of prosecutors led by special counsel Robert Mueller. The Trump campaign last week turned over about 20,000 pages of documents to the Senate Judiciary Committee, which is conducting its own Russia probe. Manafort provided about 400 pages on Aug. 2, including his foreign-advocacy filing.

Productivity grew more than expected in the second quarter as hours worked rose at their fastest pace in 1-1/2 years, leading to a modest increase in labor costs. The trend in productivity, however, remains weak, suggesting robust economic growth will be hard to achieve.

The Labor Department said nonfarm productivity, which measures hourly output per worker, rose at a 0.9 percent annualized rate in the April-June period. First-quarter productivity was revised to show it edging up at a 0.1 percent pace instead of being unchanged as previously reported.

With productivity rising, unit labor costs, the price of labor per single unit of output, increased at only a 0.6 percent pace in the second quarter after jumping at a 5.4 percent rate in the January-March period.

Productivity increased at an average annual rate of 1.2 percent from 2007 to 2016, below its long-term rate of 2.1 percent from 1947 to 2016, indicating the economy’s potential growth rate has declined.

To get back to 3 percent real GDP growth with the demographics the US is facing, productivity growth will have to exceed its long-run average growth rate of 2.1 percent – don’t hold your breath.

U.S. credit card processing company Vantiv secured a deal to buy British-based rival Worldpay for $10.4 billion. Although Vantiv’s deal was first announced on July 5, it has taken several weeks to conclude, with the deadline for a formal offer extended twice.

Goldman Sachs is acknowledging that it’s getting harder for institutional investors to ignore the Bitcoin market, which has ballooned to about $120 billion. The debate has shifted from its legitimacy to how fast new entrants are raising funds.

Do a lot of investors use digital currencies like bitcoin? Are those digital currencies a big part of a lot of investors’ portfolios? Are those digital currencies a threat to financial institutions in any way, or a potential ally?

To find out, Fidelity Labs — the R&D arm of Boston-based Fidelity Investments — is starting a test to let its customers see their digital currency holdings on Fidelity.com, like any other security in their portfolio’s summary view. Fidelity is partnering with Coinbase, a digital wallet and asset-exchange platform.

Customers can give Coinbase permission to share data about their holdings in Coinbase wallet accounts with Fidelity. Customers can then view their bitcoin, Ethereum and Litecoin balances like any other information in their Fidelity accounts. Bitcoin is a digital currency. It operates through its own blockchain, the shared, tamper-resistant record-keeping technology that can also be used to verify other transactions.

Fidelity has a stake in the emerging technology. The organization has venture investments in organizations performing blockchain research, including TradeBlock and Axoni. And while the blockchain technology behind bitcoin might have value, the actual bitcoins have no inherent value, just what the market is willing to pay. What could go wrong?

Today marks the 10-year anniversary of the financial crisis. On Aug. 9, 2007, BNP Paribas froze three of its investment funds—barring investors from withdrawing billions of euros—because of a lack of liquidity in the US markets. At that time, the French bank was the third-largest in the world by assets. BNP had invested in mortgage backed securities and 10 years ago today, they could not figure out valuations, and when that happens it means the investments are worthless.

For a bank that size to admit that it simply had no idea what some of its US property assets were worth rattled the markets. Many now consider this the unofficial start of the global financial crisis, which led to millions of job losses and trillions of dollars spent to bail out banks around the world.

At the time, banks really didn’t know what was hitting them. There were earlier warning signs. In June of 2007 Bear Stearns, a venerable Wall Street bank, had to stop customers withdrawing money from two of its investment funds.

The funds had specialized in the financial products that had been created on the back of those sub-prime mortgages. These products were, in theory, designed to spread risk; individual loans were packaged up into new types of securities called collateralized debt obligations, or CDOs.

These packages contained a mix of loans; the plan was that because it was highly unlikely that all the loans would fail, they were safer. But Wall Street built a financial pyramid on top of them, creating new derivative trades that piled risk and leverage on top of the basic lending.

When a few of the loans started to go wrong, the panic spread. Bear Stearns found, suddenly, that it could not find a buyer for any of its investment funds; at that moment, they were worthless. The crisis peaked with the demise of Lehman Brothers, another Wall Street bank that, like Bear Stearns, had piled aggressively into various derivatives that bet on other derivatives, with no inherent value.

Credit became unavailable throughout the economy. A full-blown systemic banking crisis was at hand, the root of which was a lack of trust. Banks would not lend to each other. Knowing all too well the dodgy assets on their own books, they feared they would not be repaid. Countrywide Financial and numerous other lenders could no longer obtain financing starting in 2007. Housing values came racing down, and stock prices followed their precipitous descent.

One of the most remarkable commentaries—in retrospect—about the burgeoning crisis came from Bear Stearns chief economist David Malpass, writing for the Wall Street Journal  on Aug. 7, 2007, days before the BNP fund freeze. “Don’t Panic About the Credit Market,” read the op-ed’s headline.

Malpass wrote: “Housing and debt markets are not that big a part of the U.S. economy, or of job creation. It’s more likely the economy is sturdy and will grow solidly in coming months, and perhaps years.”

Last week, Malpass was confirmed by the US senate to serve as Undersecretary for International Affairs at the Treasury Department.

10 years ago, the four biggest banks in the world were Royal Bank of Scotland, Deutsche Bank, BNP and UBS. Today, the 4 biggest banks in the world are all in China. The Royal Bank of Scotland and Deutsche Bank, the first- and second-ranked global banks (by assets) at the end of 2007, are still paying the price for their involvement in the selling of dodgy US mortgages and many other misdeeds.

RBS, which was bailed out by the UK government and is still majority owned by British taxpayers, expects to make it a full 10 years before it returns to making annual profits. It is now the 24th largest bank in the world. Meanwhile, Deutsche Bank’s share price has fallen by 80% over the past decade.

The US government pumped money into its banking system to recapitalize shaky lenders during the depths of the crisis, and strict new regulations to make the system safer were introduced faster than in Europe. If US banks were “too big to fail” back then, they are even more so now.

Financial Review

Stormy Weather

Sinclair Noe — March 13, 2017

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

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DOW – 21 = 20,881
SPX + 0.87 = 2372
NAS + 14 = 5875
RUT + 5 = 1370
10 Y + .03 = 2.61%
OIL – .07 = 48.42
GOLD – .80 = 12-04.70

The Dow Jones industrial average, S&P 500 and Nasdaq all turned in lackluster performance last week, with each posting declines of 0.2% to 0.5%. However, they’re still not far from all-time highs set in early March; the S&P is down about 1% from its record high.

Per Ritholtz Wealth Management, the average stock in the S&P was down just 10% from its 52-week high, and the median stock was off 6% from this high. If it sounds like the math doesn’t add up, consider that the S&P is a market-capitalization weighted index; meaning the biggest stocks count for more than the smaller stocks.

The Federal Reserve is expected to hike interest rates when they wrap up their policy meeting on Wednesday; there are also monetary decisions due from the Bank of Japan and the Bank of England on Thursday; German Chancellor Angela Merkel will meet President Trump; and The Netherlands is holding a closely-watched election.

Plus, the U.K. could formally trigger Brexit negotiations. Scotland’s First Minister Nicola Sturgeon on Monday confirmed plans for a second Scottish independence referendum.

Wednesday is decision day for the rate-setting Federal Open Market Committee (FOMC), and traders give it a 100% chance of raising the federal funds rate by a quarter point, to 0.75% to 1%. Friday’s jobs report gives policy makers a green light to hike.

An additional 235,000 jobs in February, a 4.7% unemployment rate, and wage growth of 2.8% over the past 12 months tick off one box for the Fed’s mandate; and the Fed is leery of wage-push inflation. Of course, the flip side of the argument is that there is still plenty of slack in the labor market, we are nowhere near full employment, and the Fed is overly sensitive to inflation.

The open question is whether the Fed will indicate they will continue with a couple more rate hikes this year, or maybe up guidance to 3 more hikes. It is a delicate balancing act for the Fed: raise rates too slowly and the inflation hawks will claim the Fed is falling behind the curve; raise rates too fast or too far and the Fed risks a shock to financial markets, a halt to hiring, and a possible recession.

It looks like the Fed’s era of easy money is coming to an end – they appear set to raise rates, above historic lows, back to more normal levels; probably in a very gradual, well-communicated manner. And the Fed has been very outspoken that they will raise rates; and the markets believe them. The difference this time is that there appears to be fiscal policy that can carry the economic torch. Time will tell if there is a smooth hand-off.

The Fed’s action will affect almost everyone, even if you don’t invest on Wall Street. Look for higher interest rates on credit cards, car loans, and mortgages – all of which could slow down consumers. For savers, don’t expect a quick uptick in returns on CD’s and bonds – while rates are going higher, there is usually a lag time; still we have seen the rate on the 10-year Treasury note hit 2.6%, breaking out of a very long-term bond bull trendline.

The Congressional Budget Office projects that 14 million people will lose coverage by 2018 under the Republican ObamaCare replacement bill. 24 million would lose coverage by 2026. The CBO score is way worse than most analysts had expected. Most thought 10-15 million could lose coverage, not 24 million.

The CBO estimates a disproportionate increase in people losing insurance coverage in the 50 to 64 age group with low to medium incomes. The CBO, along with the Joint Committee on Taxation, estimated that the bill would decrease the federal deficit by $337 billion over the next 10 years.

The report also estimated the impact on premiums in the individual market, saying that costs would increase in 2018 and 2019 before declining thereafter. The CBO and JCT did say that provisions of the AHCA would raise premiums for older Americans “substantially” while shrinking them for younger Americans.

The long-awaited analysis from the nonpartisan congressional scorekeeper is sure to shake up the debate over the measure, which is already facing sharp criticism from conservatives and many centrist Republicans. The GOP bill repeals ObamaCare’s subsidies to buy coverage, replacing them with smaller tax credits. The law would also cut Medicaid. Both moves were expected to lead to coverage losses.

The White House has already started complaining that the CBO analysis is flawed but remember last Friday’s jobs report; for years, Trump had complained the jobs numbers were phony, until last month came in good and then he admitted the numbers were real. And while the nonpartisan Congressional Budget Office economic estimates are not perfect, they are immensely better than any economic estimates from the White House.

Intel will purchase driverless technology firm Mobileye for more than $15 billion in cash. The deal values Mobileye at $63.54 a share, a 34% premium to its closing price Friday. Mobileye makes chip-based camera systems that power semi-automated driving features that are already being used in cars today and is working to put that technology in the center of self-driving cars of the future.

Mobileye has supply and tech-sharing agreements with several auto makers and other auto suppliers. Intel CEO Brian Krzanich said the deal “merges the intelligent eyes of the autonomous car with the intelligent brain that actually drives the car.” Self-driving vehicles are likely to be one of the most ubiquitous technologies over the next few years, with many manufacturers committing to launching autonomous ride-hailing services, and even consumer cars, by the end of the decade.

And Intel wants to be at the heart of these machines, whether with the vision systems used to see the road, or with the processors making sense of all the information cars will be receiving. When you consider that Intel missed the boat on smartphones, it seems to make sense that they would try to get an inside track on the next big thing in tech.

Lloyds is set to agree a £1.3-billion-pound contract with IBM to outsource many of its computer systems and shift more than 1,900 jobs to the IT services provider. The deal will see most of the transferred employees lose their jobs after four years. Lloyds hopes to cut almost £760-million-pounds of costs.

The federal board overseeing Puerto Rico’s finances is meeting today in New York, where it must decide on a plan for ending its chronic deficits. The island hopes to restructure more than $110 billion of debt and pension obligations, but it must first produce a credible fiscal plan. Last week, the board told Gov. Ricardo Rossello his proposal was unrealistic and asked him to make revisions.

South Korea’s impeached president finally left office. Park Geun-hye departed the Blue House on Sunday, her motorcade flanked by supporters as she headed to her home in the posh Gangnam district of Seoul. She could face prosecution and jail time for the corruption scandal that led to her ouster.

The striking union at BHP Billiton’s Escondida copper mine in Chile, the world’s largest, said it will not accept the company’s offer to return to the negotiating table, and called on BHP to clarify its negotiating positions. During the strike, which started on Feb. 9, Escondida’s 2,500-member Union has repeatedly said it has three non-negotiable demands the company must commit to before starting discussions.

Cameron and Tyler Winklevoss, the twins famous for butting heads with Mark Zuckerberg over Facebook, were denied permission Friday by the Securities and Exchange Commission to launch a bitcoin exchange-traded product (also known as an ETP). The SEC said it rejected the proposal because it was inconsistent with the agency’s Exchange Act rules, and the markets for bitcoin are unregulated.

Many tax liens and civil judgments soon will be removed from people’s credit reports, the latest in a series of moves to omit negative information from these financial scorecards. The development could help boost credit scores for millions of consumers.

The three major credit-reporting firms — Equifax, Experian and TransUnion — decided to remove tax-lien and civil-judgment data starting around July 1, if that data don’t include a complete list of a person’s name, address, as well as a social security number or date of birth. Many liens and most judgments don’t include all three or four.

New York City is preparing for what could be the season’s worst snowstorm. The National Weather Service issued a blizzard warning for New York City, forecasting 12 to 20 inches of snow and winds between 25 and 35 mph on Tuesday.

The nor’easter is expected to cripple much of the Northeast. Public schools in Philadelphia, Boston and New York City have already canceled classes for Tuesday. Flights within, into or out of the United States on Monday saw 2,613 delays and another 1,524 cancellations as of 5 p.m., ET. Another 4,779 flights originally scheduled for Tuesday were canceled.

American Airlines, United Airlines and Delta Air Lines issued travel alerts and began waiving re-booking fees for flights within affected regions. Amtrak said it would operate on a modified schedule in the Northeast on Tuesday. A flood watch is expected to go into effect Tuesday for coastal regions in New York.