Financial Review

A Long Week

Sinclair Noe — August 11, 2017

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

DOW + 14 = 21,858
SPX + 3 = 2441
NAS + 39 = 6256
RUT + 1 = 1374
10 Y – .02 = 2.19%
OIL + .16 = 48.75
GOLD + 2.90 = 1289.70
BITCOIN + 0.39% = 3693.86 USD
ETHEREUM + 3.87% = 312.44

The tweets continued today.

Trump says the US military is “locked and loaded”. In Guam, they are telling the schoolkids to duck and cover. China published an editorial in a state-run newspaper, basically saying that the first one to throw a punch loses. If North Korea launches a missile first, threatening U.S. territories and triggering retaliation, China will remain neutral.

A pre-emptive strike against Pyongyang, however, would provoke a Chinese response and they would counter reunification of the peninsula. Russian Foreign Minister Sergei Lavrov said “Unfortunately, the rhetoric in Washington and Pyongyang is now starting to go over the top. We still hope and believe that common sense will prevail.”

Wall Street is betting nothing will happen, which is a smart bet in an otherwise insane news cycle. Fire and Fury. Locked and Loaded. Duck and cover. Dumb and Dumber… It’s been a long week.

And, if nobody does something incredibly stupid, we get back to business as usual, sort of. 200 S&P 500 components, or 40 percent, are in correction territory. A stock or an asset class enters a correction when it falls at least 10 percent from its 52-week high. Among the stocks in a correction were e-commerce giant Amazon.com, Goldman Sachs, Exxon Mobil, Starbucks and Netflix.

After a calm and pleasant summer, we can probably expect more volatility. August is when traders take vacation and drama hits the markets. September and October are typically volatile months; and typically trade lower. The past may be prologue or irrelevant, which is what makes stock markets so interesting.

Traders are digesting second quarter earnings and trying to decide if recent record highs are justified. In Washington, the politicians will pull up their socks and get to work on the debt ceiling, plus tax reform at some point, and maybe eventually infrastructure, and there is still work to do on healthcare – repeal has failed, so now they need to fix what they have.

Meanwhile the Fed wants to normalize and tighten, which sends shivers down the jellied spines of Wall Street traders. So, there is still plenty of stuff that could blow up. For individual investors, the key is now and will remain – discipline.

You wouldn’t know it from today, but it’s been just about the worst week all year. For the week, the S&P fell 1.4 percent and the Dow lost 1.1 percent – their largest weekly drops since the week ending March 24 – the Nasdaq was off 1.5 percent and the Russell 2000 index lost 2.7% for the week.

European stocks fell and U.S. junk bonds had the biggest drop since March. Nearly $1 trillion has been wiped out from global equity markets since Trump’s vow on Tuesday to unleash “fire and fury” on North Korea if it threatens the United States.

The VIX briefly topped 16.

Consumer prices remained soft for the fifth straight month in July. The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.2% in July while energy prices slipped 0.1%.

The core CPI, which excludes volatile food and energy costs, also rose 0.1%. Consumer prices have risen an unadjusted 1.7% over the past 12 months, up slightly from 1.6% in June.

But on a core basis, which is watched more closely by Fed officials, consumer prices remained at a 1.7% annual rate, the same rate as in May and June. The core rate was held down by a sharp decline in new vehicle prices, which fell 0.5%, the biggest decline since August 2009.

The cost of cell phones continued to decline, falling 0.3%. The index of used cars fell 0.5%, its seventh consecutive decline. The price of a car may be lower but the rent is still too damn high.

The cost of rent was up 3.8% compared to a year ago, according to the Labor Department. That’s down a tick from the 3.9% annual pace it notched in June. And it’s not as high as the 4.3% annual pace it averaged in the year before the Great Recession started.

It’s not just renters who are feeling the squeeze. The inflation category called “Owner’s equivalent rent,” which tries to quantify how much homeowners would pay for their housing if they rented it, was 3.2% higher in July than a year ago. Still, it’s growing a lot faster than wages.

Muted inflation in the July consumer price data is not something the Federal Reserve is going to be happy to see. But the central bank will have four more reports to review before it needs to decide late year whether to raise short-term interest rates again, as had been previously projected.

Shares of Snap ended down 14 percent after hitting another record low following a miss on revenue and daily active users. At least 12 brokerages cut their price targets on the stock. Valuation is disappearing faster than its messages.

Blue Apron’s stock “performance” makes one wonder why the company ever wanted to go public and why anyone agreed to underwrite it. The recipe-in-a-box startup failed to show adequate signs of life in its first quarter and even reported a very nettlesome operations problem.

Shares of APRN have fallen as far as 20% since the results came out yesterday morning and now even Blue Apron’s underwriters are admitting that they might have missed something during the IPO journey. Goldman Sachs led the underwriting and they just downgraded the stock. Maybe they can their free Blue Apron subscription to order crow.

Starbucks is now facing some serious competition. From other Starbucks. The old joke about a Starbucks on every corner may be coming true. The coffee chain’s relentless pursuit of ubiquity is becoming one of its own foils, according to analysts at BMO Capital Markets, saying the company has saturated the American market so much that it’s now losing sales competing with itself.

Market watchers have an all-too appropriate term for this phenomenon: cannibalization. On average, for every one Starbucks location in the US, there are now about four others within a one-mile radius to compete against. Over all in 2017, more than 62% of Starbucks now compete with at least one other Starbucks coffeeshop.

More than 100 Applebee’s locations and around 20 IHOPs will shutter this year. DineEquity, the parent company of both brands, is focusing on shuttering under-performing locations. An earnings report released yesterday shows sales fell by more than six percent at Applebee’s and nearly three percent at IHOP in the last quarter; meanwhile, DineEquity’s stock has lost almost half its value this year.

Diners these days tend to go either high, spending money on special, fine-dining experiences, or low, eating at cheaper fast-casual chains, meaning places in the middle are feeling the squeeze. These kinds of chains tend to suffer from bloated menus that try to do everything at once, versus the currently-booming specialty fast-casual spots that focus on doing one or two things and doing them well.

J.C. Penney finished down 16.6 percent after hitting a record low following the retailer’s bigger-than-expected quarterly loss. Its 1.3% drop in same-store sales was slightly worse than anticipated, and it lost $62 million in the quarter. The company has been trying to refocus its business more on home appliances and services and less on apparel, but the efforts evidently haven’t paid off.

Department stores almost across the board are in a period of turmoil as they battle the rise of e-commerce, especially Amazon. and in any case, are contending with shoppers who are heading out to malls and stores less often—and usually looking for deep discounts whenever they do. Many chains have announced widespread store closures, and even more may be necessary to get their businesses to the right size for the current era.

President Trump just got a nasty review of his immigration plans from the alma mater he loves to tout. A new study from the University of Pennsylvania’s Wharton business school found that the proposals he backs would dent growth and cost over 1 million jobs over 10 years.

The president has strongly endorsed a bill introduced by US Sens. Tom Cotton and David Perdue called the Raise Act, which adds to the president’s campaign promise to focus on illegal immigration by going after legal immigrants as well. Its proponents say they want to welcome only “good” immigrants — those with a lot of money and high levels of education.

But the Wharton report finds that the legislation, which is supposedly aimed at boosting economic growth and creating more American jobs, would actually have the opposite effect. According to the Wharton model, the Raise Act would reduce GDP by 0.7% and reduce jobs by 1.3 million, over the next 10 years. The estimates suggest nearly 100,000 jobs would be lost in the first year alone.

Vegetable prices may be going up soon, as a shortage of migrant workers is resulting in lost crops in California. Farmers say they’re having trouble hiring enough people to work during harvest season, causing some crops to rot before they can be picked. Already, the situation has triggered losses of more than $13 million in two California counties alone.

It’s unclear exactly how widespread the labor shortage is for farmers throughout the country, which would have a bigger impact on prices consumers pay. Ultimately, drought and flooding have a more significant impact on farms.

Low oil prices could also offset any impact of the worker shortage. But for farmers, who have seen net farm income fall 50% since 2013, any lost income could be potentially devastating.

Financial Review

Not Happening

Sinclair Noe — July 17, 2017

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

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DOW – 8 = 21,629
SPX – 0.13 = 2459
NAS + 1 = 6314
RUT + 2 = 1431
10 Y – .01 = 2.31%
OIL – .54 = 46.00
GOLD + 5.30 = 1234.70
BITCOIN – 1.51% = 2210.29 USD
ETHEREUM + 6.95% = 187.67

Sen. John McCain revealed over the weekend that he had surgery to remove a blood clot from above his eye. His doctors also said the surgery went “very well,” and the senator is resting at home. As a result, he will not be returning to Washington this week and there is no guarantee he’ll be back after this week, and his absence has suddenly brought consideration of the Senate health care bill to a halt.

Here’s what McCain’s absence does to McConnell’s whip count: There were already two Senate Republicans who have said they would vote “no” on motion to proceed on this bill — Sens. Rand Paul and Susan Collins. McCain’s absence means there is not a Republican majority on the healthcare legislation.

Leadership was pushing for a first procedural vote on the Senate health care bill for as early as Tuesday. That’s no longer happening. We were expecting an updated score from the Congressional Budget Office on the revised Senate bill today. That is also not happening. No guidance from the CBO on when we’ll see that score.

Regardless of the timing, Republicans hope the report will look better than an earlier version, which said the Republican plan would cause 22 million Americans to lose insurance by 2026. It’s not guaranteed, though, that the fresh analysis will show dramatically better effects.

Meanwhile, the delay on healthcare legislation is likely to spill over to tax reform. It would be difficult to address taxes without understanding the potential impact of healthcare.

Before the opening bell, Blackrock, the world’s largest asset manager reported second-quarter adjusted earnings per share of $5.24 on revenue of $2.96 billion, missing estimates on both the top and bottom lines. The firm’s second-quarter assets under management rose 16 percent year over year to $5.689 trillion, topping analyst expectations.

BlackRock also said assets under management for its exchange-traded fund business iShares topped $1.5 trillion, helped by record net inflows of $74 billion.  Blackrock dropped over 3% today.

After the closing bell, Netflix reported earnings – although for Netflix the attention is on subscribers, rather than traditional top line, bottom line numbers. Netflix added more than 5 million subscribers in the June quarter, bringing its total subscriber base to about 104 million. Most new subscribers — more than 4 million — came from its overseas markets.

In fact, Netflix’s international subscriber base is now larger than the U.S. for the first time. The strong growth beat Netflix’s own estimates and caused the stock to spike 10% in after-hours trading. Oh yeah, revenue came in at $2.79 billion, a little better than estimates. Earnings were 15 cents per share missing estimates of 16 cents.

A moat is a deep, wide ditch surrounding a castle or fort, typically filled with water and intended as a defense against attack. An economic moat refers to a business’ ability to maintain competitive advantages over its competitors to protect its long-term profits and market share from competing firms.

Blue Apron Holdings does not have a moat. Shares of the meal-kit delivery company sank as low as $6.51, a 35 percent drop since its initial public offering. Amazon filed a July 6 trademark application for “prepared food kits composed of meat, poultry, fish, seafood, fruit and/or vegetables . . . ready for cooking and assembly as a meal.”

Blue Apron has been telling investors that its offering is different than basic grocery delivery. Amazon’s interest in meal kits directly undermines that pitch. The barbarians are at the drawbridge.

A mix of financial services, entertainment, transportation and technology companies are reporting earnings this week. JPMorgan Chase, Citigroup and Wells Fargo all posted higher-than-expected second-quarter earnings on Friday, even though they had weak trading revenue. That trend is expected to continue this week when Bank of America and Goldman Sachs post results.

The FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet-Google) are expected to be an overall drag on second quarter earnings growth despite their stock performance. The FAANG companies’ earnings growth is expected to be 6 percent for the second quarter. But the overall earnings growth for the S&P is expected to be north of 8 percent. The overall earnings growth for FAANG stocks contrasts with their stock performance.

The market cap of the FAANGs increased by $119.85 billion during the second quarter, or about 22.2 percent of the overall increase in market cap of the S&P 500. Each of the FAANG stocks has significantly outperformed the S&P 500 this year.

Business activity grew modestly in New York State. The July 2017 Empire State Manufacturing Survey general business conditions index fell ten points to 9.8. The new orders index moved down to 13.3, and the shipments index fell to 10.5, suggesting that orders and shipments continued to grow, though at a somewhat slower pace than in June.

China’s gross domestic product grew 6.9% in the second quarter, according to government data released Monday, the same figure as the previous quarter and marginally higher than most forecasts. The latest numbers position the economy above Beijing’s stated growth target for 2017. But China’s speedy growth – an uptick from the 6.7% it recorded last year –  will be difficult to sustain in the months to come.

The Chinese government announced last week it would change the way it calculated economic growth for the first time in 15 years, adding healthcare, tourism and the “new economy” to the overall figure. It was not immediately clear whether those additions had an impact on growth.

The latest growth numbers will also likely reinforce skepticism among analysts about the reliability of official statistics. But, there’s a bigger story, which is that emerging-market finances are their best in years, bolstering confidence that they can withstand monetary policy tightening in developed economies.

The 12-largest emerging-markets now have foreign-exchange reserves totaling $3 trillion, up from $2.92 trillion in late 2015 and the most since 2014. Emerging-market stocks posted their best performance in a year last week, gaining 4.45 percent as the MSCI Emerging Markets Index rose for five straight days. So, time for a breather, right? Not exactly. The market for developing-nation stocks plowed ahead again on Monday, bringing its year-to-date gain to 21.9 percent.

Brexit negotiations between the UK and the EU officially kicked off today. Over the course of the next few years the UK’s entire relationship with the rest of Europe is likely to be totally reshaped. Nowhere is that truer than in British industry, where firms are almost certain to have to adjust to life outside the European Single Market and to an entirely new trading relationship with what is for most industries, their biggest trading partner.

The Office for National Statistics dropped a whole heap of data about the British industries that are likely to be most impacted by Brexit, as well as where those industries are clustered. This helps to create a reasonable picture of the parts of the UK where Brexit could have the largest impression.

For example, one of the industries likely to suffer most at the hands of Brexit is the UK’s automobile industry. Financial services are another area where the Brexit negotiations could cause trouble, causing problems for London, where the sector is heavily concentrated.

Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing. The troubled loans, which total at least $5 billion, are at the center of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments.

Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing. A review of court records by The New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation.

Some of the problems playing out now in the $108 billion private student loan market are reminiscent of those that arose from the subprime mortgage crisis a decade ago, when billions of dollars in subprime mortgage loans were ruled uncollectable by courts because of missing or fake documentation.

And like those troubled mortgages, private student loans — which come with higher interest rates and fewer consumer protections than federal loans — are often targeted at the most vulnerable borrowers, like those attending for-profit schools.

One of the nation’s largest owners of private student loans and one of the most aggressive at collecting delinquent loans, the National Collegiate Student Loan Trusts, is struggling to prove in court that it has the legal paperwork showing ownership of its loans, which were originally made by banks and then sold to investors.

Judges throughout the county, including recently in cases in New Hampshire, Ohio and Texas, have tossed out lawsuits by National Collegiate, ruling that it did not prove it owned the debt on which it was trying to collect.

The White House is highlighting products Made in America. They have compiled a list of products from each state. Some are obvious: wine from California and Stetson cowboy hats from Texas. Other picks were less obvious: North Carolina’s product is Cheerwine soda. I’ve never heard of Cheerwine soda.

Meanwhile, Georgia’s product is Chik-fil-a sandwiches, not Coca-Cola.  So, go figure. Arizona’s Made in America product is Ping golf clubs.

Financial Review

Heading into the Holiday

Sinclair Noe — June 29, 2017

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

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DOW – 167 = 21,287
SPX – 20 = 2419
NAS – 90 = 6144
RUT – 9 = 1416
10 Y + .05 = 2.27%
OIL + .12 = 44.86
GOLD – 3.40 = 1246.40
BITCOIN – 0.21% = 2556.09 USD
ETHEREUM – 4.42% = 289.77

We had a nice trend so far, this year. The stock market has been moving forward in small, steady gains. Volatility has been low, almost imperceptible. The markets just kept moving higher. When we have had a pullback, it was followed the next day by a rally, even if there was no conviction.

That was the case this week. Down on Tuesday, back up on Wednesday. Today throws a wrench in the pattern, with the S&P 500 and the Dow industrials suffering their worst daily percentage drops in about six weeks. The tech sector was the worst performing group today. There’s a lot more volatility in tech this month and that’s in part due to stretched P/Es.

At this point, it’s just a couple of down days, and we are heading into a long holiday weekend, a good time to take profits off the table and enjoy a barbeque without worries. Still, valuations are high and it’s one of the longest bull markets in history. Bull markets don’t last forever.

June has not been kind to the FAANG stocks, – Facebook, Apple, Amazon, Netflix, and Google, which were market leaders and then hit a down draft. There is no question the FAANGs have become pricey. The market caps are so huge they dominate the indexes. But markets can stay exuberant and irrational for a very long time. And this is not the first time we have seen a sell-off in the FAANGs, only to watch them move higher.

Today, money was rotating from tech and into the financials after the big banks passed the Fed stress tests and now can offer bigger dividends and buybacks. JPMorgan, the nation’s largest lender, said it’s boosting its quarterly dividend 12 percent and may increase share repurchases to $19.4 billion over the next 12 months — roughly 90 percent more than in the prior year.

Citigroup plans to double its dividend and may purchase up to $15.6 billion. Bank of America hiked its dividend 60 percent and will buy back up to $12 billion. Shares of all three rose at least 2 percent in early trading in New York. They, along with Wells Fargo and Morgan Stanley, may collectively buy as much as $64 billion in stock. Goldman Sachs has yet to make an announcement.

The Commerce Department posted its third and sort of final revision to first quarter Gross Domestic Product, and the revision came in higher; up 0.2% to 1.4%, instead of the 1.2% reported last month. The government had pegged first-quarter growth at a paltry 0.7% in its first estimate in April.

First-quarter economic growth was boosted by an upward revision to consumer spending, which accounts for more than two-thirds of U.S. economic activity. Consumer spending rose at a 1.1 percent pace, the weakest reading since the second quarter of 2013 but almost double the 0.6 percent reported last month. A sustained average growth rate of 3 percent has not been achieved in the United States since the 1990s.

The U.S. economy has grown an average 2 percent since 2000 and it expanded only 1.6 percent in 2016, which was the weakest growth in five years. Initial signs that economic growth re-accelerated sharply in the second quarter have also faltered in the face of recent disappointing data on retail sales, manufacturing production and inflation. Housing data has also been mixed.

Exports for the period were revised to show a 7.0 percent rate of growth from the previously reported 5.8 percent. Exports in the fourth quarter fell at a rate of 4.5 percent. Business spending on equipment was revised to show it increasing at a rate of 7.8 percent in the January-March period rather than the 7.2 percent previously estimated.

The government also reported that corporate profits after tax with inventory valuation and capital consumption adjustments fell at an annual rate of 2.7 percent in the first quarter after rising at a 2.3 percent pace in the prior three months.

The Bank of International Settlements, or BIS, is the central bank for the central bankers of the world. According the BIS’s annual report, the global economy faces four risks, “(i) financial cycle risks for financial stability; (ii) risks to consumption growth from household debt; (iii) risks to investment from weak productivity growth and high corporate debt; and (iv) risks from rising protectionism.”

From the report:
“These risks may appear independent, but they are not. For instance, policy tightening to contain an inflation spurt could trigger, or amplify, a financial bust in the more vulnerable countries… Indeed, an overarching issue is the global economy’s sensitivity to higher interest rates given the continued accumulation of debt in relation to GDP, complicating the policy normalization process.

“As another example, a withdrawal into trade protectionism could spark financial strains and make higher inflation more likely. And the emergence of systemic financial strains yet again, or simply much slower growth, could heighten the protectionist threat beyond critical levels.”

Of all those risks, protectionism is the only one a government can fully control. A government can choose to engage in global free market capitalism, or it can aggressively try to distort the market by blocking competing goods and services. It can either work amicably with neighbors and allies, or it can create tension felt across the globe.

A revised version of President Trump’s travel ban approved by the Supreme Court is set to take effect at 8:00 p.m. ET on Thursday. The justices implemented an exemption for travelers from six-Muslim majority countries with a “bona fide relationship” to people or entities in the US.

The Trump administration has adopted a narrow definition of “bona fide relationship.” According to guidelines the Trump administration has sent to US embassies and consulates, only a family member who is a parent, spouse, child, adult son or daughter, son-in-law, daughter-in-law, or sibling of US residents will be allowed to enter the country.

Fiancées, grandparents, grandchildren, aunts, uncles, nieces, nephews, cousins, and other extended family members are not considered to have “close familial ties”. And if you think this might lead to mass confusion, well…

The Congressional Budget Office has come out with a long-term analysis of Senate Republicans’ health-care legislation found that the bill would slash spending on Medicaid by about 35 percent over the next 20 years. The analysis follows a 10-year look by the agency released earlier this week.

The new CBO estimate doesn’t include a projection of how many people would be covered under the Republican bill. The CBO estimate shows that states would be forced to make trade-offs in how to allocate their far more limited funds.

Drugstore chain Walgreens Boots Alliance scrapped its deal to buy Rite Aid after failing to win antitrust approval, but said it would instead buy nearly half of the smaller rival’s U.S. stores for $5.18 billion. Rite Aid’s shares plunged about 28 percent to $2.85, while Walgreens shares were up 1 percent at $77.97.

Walgreens also ended a related deal to sell as many as 1,200 Rite Aid stores to Fred’s, sending Fred’s shares down 19 percent. Walgreens’ plan to buy 2,186 Rite Aid stores accomplishes many of the same goals as the merger – including eliminating Rite Aid as a rival – but does so in a way that makes it harder for the FTC to take the companies to court to stop the transaction.

The FTC will review the new deal. Walgreens also reported better-than-expected profit and sales for the third quarter, helped by a rise in prescription volumes in its U.S. pharmacy business. The company also authorized a $5 billion buyback program and raised the lower end of its full-year profit forecast.

Nike reported quarterly revenue and profit that topped Street estimates as the company kept a lid on costs and saw greater demand in Western Europe, China and emerging markets. Shares of the Dow component were up nearly 3 percent.

Britain intends to subject Rupert Murdoch’s takeover of European pay-TV group Sky to a lengthy in-depth investigation after finding that Twenty-First Century Fox’s $15 billion deal risks giving the media mogul too much power over the news agenda.

The proposed entity would have the third largest total reach of any news provider – lower only than the BBC and ITN – and would, uniquely, span news coverage on television, radio, in newspapers and online. Regulators will make a final decision on July 14, giving Fox two weeks to address concerns.

Blue Apron shares debuted today. The IPO stumbled but did not fall. Blue Apron’s 30-million share offering was priced at $10 per share late on Wednesday, after the company slashed its valuation expectations by a third. Shares gained 1% in the first day of trading.

Blue Apron spent roughly 18 percent of its $795 million revenue in 2016 on marketing, posting a net loss of $54 million. It has also faced steep costs of building out delivery infrastructure for fresh food. The biggest problem for Blue Apron might be Amazon-Whole Foods, which looks well-positioned to offer competition.

This should be a very interesting Fourth of July celebration in Las Vegas. Recreational marijuana becomes legal to buy Saturday in Nevada. That doesn’t mean it can be smoked everywhere only in private homes, yards or porches.

It’s prohibited in casinos, bars, restaurants, parks, concerts and on any federal property. You can’t walk down the street, or the Strip, smoking a joint. Also, prohibited in all forms at airports. No driving while stoned. And what’s smoked in Vegas stays in Vegas.

Financial Review

Bounce Back

Sinclair Noe — June 28, 2017

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

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DOW + 143 = 21,454
SPX + 21 = 2440
NAS + 87 = 6234
RUT + 21 = 1425
10 Y + .02 = 2.22%
OIL + .54 = 44.78
GOLD + 2.10 = 1249.80
BITCOIN + 0.05% = 2585.84 USD
ETHEREUM + 3.73% = 314.34

Well, isn’t this familiar. The markets have a down day only to bounce back. The S&P 500 posted its largest one-day gain in two months while Nasdaq Composite recorded its best day in eight months. The S&P 500 has been somewhat fickle this month with three of this year’s biggest gains and two of its worst losses having occurred in June.

For the first time in seven years, the Federal Reserve did not object to any of the capital plans of 34 banks it reviewed in the second part of the annual stress tests implemented in the wake of the financial crisis.  Only Capital One Financial needed to submit a new capital plan by Dec. 28 to address “weaknesses in its capital planning process.”

Last Thursday, all 34 banks passed the Dodd-Frank Act Stress Tests for the third time by topping the Fed’s requirements for being able to handle a severe recession. Wednesday’s results from the Comprehensive Capital Analysis and Review, or CCAR, marked the first time since the test launched seven years ago that the Fed did not object to any of the banks’ capital plans.

The passing grade means banks can use extra capital for stock buybacks, dividends and other purposes beyond a cushion against possible catastrophe. And we are already hearing from big banks. Citigroup announced plans to repurchase up to $15.6 billion of common stock over the next 12 months and double its quarterly dividend to 32 cents per share, bringing total payouts to $18.9 billion.

Fewer buyers signed contracts to buy existing homes in May, likely because they can’t find or afford what they want. The pending home sales index from the National Association of Realtors dropped 0.8 percent month to month and is now 1.7 percent lower than May 2016.

The number of home sales that closed this spring was slightly higher than a year ago, but the lack of listings clearly held the market back. The supply of homes for sale at the end of May was down more than 8 percent from a year ago, and homes that were listed sold at the fastest rate on record. The tight supply is pushing home prices higher, considerably faster than income growth.

Low mortgage rates have not been much help in offsetting these big price gains, and in fact may be exacerbating the problem, especially if rates begin to rise as is widely expected. The inventory crisis is worst on the low end of the market, where demand is highest.

The number of starter and trade-up homes currently on the market is down 15.6 percent and 13 percent, respectively, compared with a year ago, according to Trulia. The inventory of premium homes has fallen 3.9 percent.

The supply situation has buyer confidence in the housing market dropping. Just over half of renters say they think now is a good time to buy. That is down from 62 percent one year ago. While about 80 percent of current homeowners think now is a good time to buy, they are not listing their homes for sale. This may have more to do with weakening affordability than anything else. They don’t want to sell if they can’t afford a move-up home.

Senate leadership has reportedly set a Friday deadline for a new draft of the Better Care Reconciliation Act. The Congressional Budget Office could score it next week, setting up a mid-July vote. The vote has been delayed, but the Senate’s repeal and replace efforts are far from over.

When it comes to public support, there’s room for improvement. Just 17 Percent of Americans approve of the Republican Senate Health Care Bill – that’s almost as low as the approval rating for Congress. Fifty-five percent say they disapprove, while about a quarter said they hadn’t heard enough about the proposal to have an opinion on it.

Yesterday, we told you about the new Petya cyber virus that started in Ukraine and was infecting computers around the globe. The malicious code locked machines and demanded victims post a ransom worth $300 in bitcoins or lose their data entirely, like the extortion tactic used in the global WannaCry ransomware attack in May.

Day 2 of the ransomware attack and the situation is getting worse. Danish shipping giant A.P. Moller-Maersk said it was struggling to process orders and shift cargoes, congesting some of the 76 ports around the world run by its APM Terminals subsidiary.

FedEx shares temporarily halted trading before the package delivery giant disclosed that an information system virus significantly affected the global operations of its TNT Express subsidiary. In a statement, FedEx said that while TNT’s operations and communications systems were disrupted, “no data breach is known to have occurred.” The company noted that operations of all other FedEx companies were unaffected. FedEx shares finished the day up 1.3%.

United Parcel Service will freeze a pension plan for about 70,000 nonunion U.S. employees because of escalating costs and volatility in determining future payments, replacing it with a different retirement benefit. UPS’s pension plans in the U.S. had a $9.85 billion shortfall at the end of last year, meaning they were about 76 percent funded. The shift won’t occur until Jan. 1, 2023, giving affected workers more than five years to prepare.

The US announced today it’s rolling out a set of new, largely undisclosed security measures targeting some 2,000 international flights arriving at American airports every day.  The new rules will apply to 180 airlines flying out of 280 airports in 105 countries, and could prompt additional screening time for the 325,000 airline passengers arriving in the United States daily.

The move aims to end a limited in-cabin ban on laptops and other large electronic devices and prevent its expansion to additional airports. Officials said that travelers can expect intensified screening at airports, in the form of sniffing dogs, or more screening equipment. Details are still sketchy, including when the new confidential rules will be put in place. Sometime in the short and medium term.

Blue Apron Holdings cut the expected price range for its initial public offering to $10 to $11 per share from its previous estimate of $15 to $17 per share after potential investors expressed concerns about Amazon’s Whole Foods deal as well as Blue Apron’s marketing costs and lack of profitability.

Blue Apron’s new pricing guidance gives the company a valuation of up to $2.08 billion, below both the $3.2 billion implied by its previous estimate and the $2.2 billion by its latest private fundraising round two years ago. Blue Apron is the biggest U.S. meal-kit company and the first set to go public.

Amazon already has a small meal-kit business, delivering ingredients and recipes to customers in a handful of cities, and the Whole Foods deal announced could provide a ready-made distribution system for food delivery in the form of brick-and-mortar grocery stores.

Dutch healthcare company Philips has agreed to buy U.S.-based Spectranetics for $2.1 billion including debt. Spectranetics uses techniques including lasers and tiny drug-covered balloons to clean the insides of veins and arteries that have become clogged due to heart disease.

Beef Products Inc has settled its defamation lawsuit against the ABC television network over news reports on its processed beef product known as “pink slime.” The settlement came 3-1/2 weeks after the trial in the case got under way. Terms of the settlement were not disclosed. ABC used the term “pink slime” more than 350 times across six different media platforms including TV and online. ABC said it is not retracting or apologizing for anything. Bon Appetit.

Facebook tops 2 billion users. CEO Mark Zuckerberg made the announcement on his personal Facebook page. Facebook now becomes the unofficial least exclusive club in the world.

Brazil’s federal police have halted issuing new passports on the eve of school vacations, citing insufficient funds. The federal police exhausted its budget for immigration control and travel documents and won’t be able to restore the service until additional funds are approved.

For the third year in a row, the state of Illinois is poised to begin its fiscal year on July 1 with no state budget and billions of dollars in the red. If that happens, S&P Global Ratings says Illinois will probably lose its ­investment-grade status and become the first U.S. state on record to have its general obligation debt rated as junk.

Illinois is already the worst-rated state at BBB-, S&P’s lowest investment-grade rating. The state owes at least $800 million in interest and late fees on its unpaid bills. Any further downgrade will make it more expensive the next time the state needs to sell bonds.

Two years ago, Illinois’s budget impasse meant that the state’s lottery winners had to wait for months to get their winnings. Now, with $15 billion in unpaid bills, Illinois is on the brink of being unable to even sell Powerball tickets. And winning the Powerball was probably their best chance of breaking the budget impasse.

KB Homes  announced earnings of $0.33 a share on revenue of $1 billion, both better than expected. KB Home climbed 5 percent.

General Mills rose 1.9 percent after the maker of Cheerios cereal, Yoplait yogurt and other packaged foods served up fourth-quarter earnings and revenue that beat expectations.

Staples will be acquired by Sycamore Partners for about $6.9 billion in one of the largest retail deals of the year. Sycamore is paying $10.25 a share for the retailer; that represents a 12 percent premium to its share price on Tuesday, before reports surfaced that the transaction was close to be being completed.

Financial Review

Milk and Cookies

Sinclair Noe — June 19, 2017

DOW + 144 = 21,528
SPX + 20 = 2453
NAS + 87 = 6239
RUT + 11 = 1418
10Y + .03 = 2.19%
OIL – .64 = 44.10
GOLD – 9.80 = 1244.60
BITCOIN + 1.34% = 2677.18 USD
ETHEREUM – 3.60% = 358.49

The Dow Industrial Average hit another record high today. The S&P 500 is up 9% so far, this year, hitting another record high close today.

Just 10 companies have accounted for almost half of the benchmark’s return this year. While stock bears have been stressing caution, some have gone as far as to compare the current environment to the dotcom bubble. The reality is that this concentration is not unusual; it happens in rallies.

On June 9, tech stocks in the S&P 500 dropped 2.7%. But that money mostly stayed in the stock market, flowing into energy and financial shares. Nasdaq’s biotechnology index rose 2.5 percent in its biggest one-day gain since February while the S&P’s healthcare index had a record-high close.

The S&P’s financial sector was also one of the benchmark’s strongest gainers with a 1% rise after New York Federal Reserve President William Dudley said U.S. inflation was a bit low but should rise alongside wages as the labor market continues to improve, allowing the Fed to continue gradually tightening monetary policy.

Dudley said: “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go. This is actually a pretty good place to be.” Apparently, the Fed sees underlying strength in the economy that the data doesn’t show right now. The Fed’s base case is that this is just kind of a soft patch and we will continue to cycle higher.

And Wall Street always seems to be optimistic when we have big merger and acquisition news – which we saw on Friday with the Amazon/Whole Foods deal. Not everybody loved the deal, Kroger lost 19% on Thursday when they announced a bad earnings report, then came news of Amazon, and Kroger dropped another 9%, losing $7 billion in market cap in just 2 days. Today, the bottom fishers came in and Kroger bounced 1.5%.

Also, Blue Apron started its IPO roadshow today, hoping that nobody paid any attention to anything last week. Blue Apron Holdings, a startup that offers cook-at-home preparation kits, expects shares to price between $15 and $17 in its initial public offering. With Amazon now casting an anticipatory shadow over the “Fresh food to urban yuppie home delivery” sector, Blue Apron is caught in a gnarly Catch 22.

Its IPO only makes sense if people believe that its business model can drive revenue and maybe create profit, but if that model can indeed drive revenue, what’s to stop Amazon from copying it, using 80 million Prime subscribers and the vast coverage of Whole Foods distribution network?

Resurgent growth is reviving one of the past decade’s hottest trades. Emerging-market investors are again piling into the so-called BRIC nations — Brazil, Russia, India and China — pushing monthly inflows and stock prices to almost two-year highs. Non-resident portfolio flows into BRIC nations rose to $166 billion last month, from $28 billion of outflows 12 months prior.

Oil fell, extending four weeks of declines, as U.S. drillers continue adding rigs and Libya boosts output. U.S. drillers added rigs for a 22nd straight week, the longest uninterrupted stretch of growth in three decades.

The Supreme Court just ruled that social media is a constitutional right. Today, the justices unanimously held that states can’t broadly limit access to social media because cyberspace “is one of the most important places to exchange views.”

In Packingham v. North Carolina, the justices were asked to review a North Carolina statute that bars sex offenders from accessing social media altogether and makes it a felony if they post on any platform. The case has implications for all members of American society, however, not just sex offenders, and the court appears to be extremely conscious of the broader effect.

Justice Anthony Kennedy wrote, “A fundamental First Amendment principle is that all persons have access to places where they can speak and listen, and then, after reflection, speak and listen once more.” Given the fact that social-media platforms allow for this kind of free communication, and that the constitution protects the right to exchange, the justices recognized this case was widely societally important.

North Carolina convicted over 1,000 sex offenders based on its statute barring access to all social platforms. That, according to the high court, simply isn’t acceptable considering the role Facebook, Twitter, Snapchat and others play in current public communication.

The Supreme Court agreed to consider whether there are constitutional limits to how far lawmakers can go in drawing electoral districts to maximize partisan political advantage, a case that could have profound implications for US elections.

The justices in a brief written order said they would review a redistricting case from Wisconsin, where a three-judge lower court last year invalidated a redistricting plan enacted by the Republican-controlled Wisconsin legislature in 2011. That court said Wisconsin lawmakers redrew the state’s legislative districts after the 2010 census to unlawfully maximize the number of Republicans elected and dilute the power of Democratic voters.

Democrats won a popular majority of assembly votes in 2012 and 2014, but Republicans managed to take 60 of the 99 assembly seats. The practice of redrawing electoral maps along partisan lines is known as “gerrymandering.” The Supreme Court has previously struck down gerrymandered maps that disadvantage minority voters, but has yet to prohibit a map because it unfairly advantages one political party over another.

Also today, the Supreme Court struck down part of a law that bans offensive trademarks, ruling in favor of an Asian-American rock band called the Slants and giving a major boost to the Washington Redskins in their separate legal fight over the team name.

The justices were unanimous in saying that the 71-year-old trademark law barring disparaging terms infringes free speech rights guaranteed in the Constitution’s First Amendment. Justice Samuel Alito said in his opinion for the court, “It offends a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.”

Silicon Valley went to Washington today. The White House has enlisted tech CEOs to improve government services, reform outdated information technology systems, cut fraud and government costs and improve services for taxpayers. It has cited an economic opportunity to save up to $1 trillion over 10 years through such measures.

Jared Kushner, Trump’s son-in-law, said before the sessions began that the administration wanted to “unleash the creativity of the private sector to provide citizen services in a way that has never happened before.”

French President Emmanuel Macron is poised to rearrange his Cabinet after his new centrist party won a solid majority in the country’s parliamentary election, enabling the government to quickly start passing its first big laws. President Macron flew opened the world’s biggest air show in Paris, today.

Boeing generated a burst of activity on the opening day by launching the 737 MAX 10. Boeing said it had more than 240 orders and commitments from at least 10 customers for the new 737, which can carry up to 230 people in a single-class configuration. Airbus immediately hit back with an order for 100 of its popular A320neo planes.

The Federal Trade Commission said it will seek to stop the merger of DraftKings and FanDuel, because the combined company would control more than 90 percent of the U.S. market for paid daily fantasy sports contests.

This is the latest setback for two companies, which have faced regulatory challenges in several states. They announced the deal in November 2016 as a merger of equals that would cut their legal bills. The companies said in a joint statement that they were considering their legal options.

Late Friday, we told you that CenturyLink had been sued in Arizona by a former employee for allegedly running a sales incentive scheme, by adding services to accounts without customer approval. The whistleblower was fired.

Now, the case is going to class action status in California, seeking damages up to $12 billion. CenturyLink is amid a $34 billion merger with Level 3 Communications.