Financial Review

Theresa May is Britain’s new prime minister, replacing David Cameron

Sinclair Noe — July 13, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 24 = 18,372
SPX + 0.29 = 2152
NAS – 17 = 5005
10 Y – .03 = 1.47%
OIL – 1.37 = 45.43
GOLD + 9.60 = 1343.30

The cost of imported goods increased 0.2% in June, led again by the higher cost of fuel. Import prices have risen four straight months following five straight declines, largely because of the price of oil has climbed from multiyear lows. Excluding fuel, the cost of imports fell 0.3% in June. Over the past year, import prices are still 4.8% lower, reflecting a big drop in the oil prices in 2015.

That’s helped to keep overall U.S. inflation on the low side. Import prices minus fuel are down 1.8% in the past 12 months. U.S. export prices climbed 0.8% in June. Export prices are 3.5% lower in the past 12 months.

Corporations are paying less to the Treasury this fiscal year, and the government’s budget deficit is ballooning because of it. In its latest monthly budget report, the Treasury Department said the deficit through June was $401 billion, up 27% from the same period a year ago. In the month of June, the government managed to post a budget surplus of $6 billion, but that was down from a surplus of $50 billion in June of 2015.

While individual income tax collection has risen so far this fiscal year, it’s a far different story with corporate taxes: revenues are down 11%. The government’s budget year runs from October through September.  The nonpartisan Congressional Budget Office blamed the tax extenders, legislation that gives breaks for both businesses and individuals, for helping to blow up the federal debt in the long term; another possible culprit is that the decrease in corporate taxes may partly reflect lower taxable profits earned so far this calendar year.

The Federal Reserve published its Beige Book today, two weeks before the next FOMC policy meeting. The anecdotal assessment finds the economy chugging along through the end of June with little indication of inflation now or in the near future. Despite a strong rebound in U.S. job growth in June; pressure to raise wages at the end of the second quarter was centered on skilled workers and difficult-to-fill positions. Fed districts also reported some signs of softening in consumer spending but most retained an optimistic outlook, the report said. Manufacturing activity remained mixed while growth in the services sector was seen as “slight to modest.”

Oil industry hopes that markets are about return to balance, ending a global glut that pulled down prices by over 70 percent between 2014 and early 2016, might be abruptly dashed. Despite recent disruptions and output cuts, there is mounting evidence that plentiful supplies and brimming inventories will delay a much-quoted re-balancing of oil markets. Not just are supplies improving, now demand may be waning.

With the United States and Europe stagnating, Asia has been the main pillar of oil demand growth. But that too is now stuttering, with tanker flows into the region down for four straight months. So much oil is now stored that the world is running out of space, forcing traders to charter supertankers in which to keep unsold fuel. There is so much oil in storage that it could take well into 2018 for the glut to clear.

The latest American Petroleum Institute (API) showed crude oil supplies rose to their highest point in ten weeks. Meanwhile, the International Energy Agency said oil production from the Middle East has climbed to a record while U.S. output slumps. Middle Eastern output exceeded 31 million barrels a day for a third month in June amid near-record supply from Saudi Arabia, while U.S. oil production slid 140,000 barrels a day to 12.45 million. The IEA, which mostly kept forecasts for supply and demand unchanged, said that while the rebalancing of the oil market is progressing, brimming inventories remain “a threat to the recent stability of oil prices.”

Theresa May is Britain’s new prime minister, replacing David Cameron. The appointment was official today. May will face immediate pressure from EU leaders to serve formal notice of Britain’s withdrawal and set the clock ticking on a two-year countdown to its final departure. May has already started naming new members of her cabinet. She appointed former foreign minister Philip Hammond to take charge of the finance ministry. He replaces George Osborne, whose determination to balance Britain’s books made him synonymous with austerity.

May also named Boris Johnson, the former mayor of London and a leading Eurosceptic who had until recently been seen as her main rival for the prime minister’s job, to take over as foreign secretary. Meanwhile, the Bank of England holds a policy meeting tomorrow and they are expected to cut the key lending rate to 0.25% form 0.5%, to try to ward off a recession and to reassure markets.

PC sales in the US are growing again. Both Gartner and IDC data shows that PC shipments in the US have returned to growth for the first time in over a year. Gartner data, which includes Windows tablets, showed that PC shipments grew 1.4% in the second quarter. IDC data, which doesn’t include Windows tablets, showed growth of 4.9%.

A federal appeals court ruled General Motors’ 2009 bankruptcy does not shield it from lawsuits over a deadly ignition-switch defect that led to criminal charges against the automaker and prompted the recall of 2.6 million vehicles in 2014.  The 2nd Circuit’s decision affects some injury and death cases stemming from pre-bankruptcy crashes. It will also impact claims from customers who say their vehicles lost value as a result of the ignition switch and recalls involving other parts, which plaintiffs’ lawyers have estimated to be worth between $7 billion and $10 billion.

A bankruptcy judge ruled in 2015 that New GM was shielded from liability over Old GM’s pre-bankruptcy actions, but he allowed some “independent” claims based solely on New GM’s conduct to proceed. Lawyers for GM customers argued that New GM should not be protected because it knowingly concealed the switch defect for more than a decade before it recalled the vehicles in 2014. The ruling allows the cases to proceed but does not address the underlying merits of the claims.

Line Corp. shares are getting popular in the gray market ahead of this week’s trading debut, which will mark the largest initial public offering for a tech company in 2016. According to Cantor Fitzgerald, investors are willing to buy shares for $36, 15% higher than the IPO price. Line will debut in a dual listing in the U.S. tomorrow and Tokyo on Friday.

The FTC has requested additional information from Abbott Laboratories and St. Jude Medical, which are attempting to complete a $25 billion deal combining two of the leading makers of heart-related devices. The request extends the waiting period – the time frame before companies can close a transaction – by 30 days.

One year after hackers showed they could control a moving Jeep; Fiat Chrysler has a new solution to get computer whizzes to work more closely with the company: pay them. The automaker is launching a bug bounty program aimed at compensating hackers between $150 and $1,500 every time they uncover potential cyber-security flaws in vehicles and alert the company.

Elon Musk has no plans to disable Tesla’s Autopilot function in the wake of a fatal Model S crash in May that used the technology, and instead plans to redouble efforts to educate customers on how the system works. Tesla also confirmed that the weekend crash involving Autopilot in Montana, the third serious accident tied to the self-driving feature, resulted from the driver’s hands not being on the wheel ahead of the collision.

Seven years ago, chemistry researchers from Oregon State University were conducting an experiment testing materials for applications in circuit boards and semiconductors; they heated manganese oxide and other substances to 2000 degrees Fahrenheit, when one of their samples came out a vivid blue. They had accidentally created a new color and they named it YInMn, after the elements yttrium, indium and manganese that compose it. Some artists have already given the new color a nickname – Mas Blue. In about a month, the new color will be available as paint.

While the same shade could be created in other ways, what makes this pigment particularly special is its durability and color-fast properties as a chemical coloring agent. Most blue dyes tend to fade, but Mas Blue is resistant to water, oil or acid and non-toxic. The paint will be distributed by the Ohio-based color supplier Shepherd Color Company. Scientists are also exploring the use of Mas Blue as an energy-saving roofing material, since the compound has been found to reflect 40% of infrared light.

Financial Review

Brexit Breakdown Continues

Sinclair Noe — June 27, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 260 = 17,140
SPX – 36 = 2000
NAS – 113 = 4594
10 Y – .12 = 1.46%
OIL – 1.31 = 46.33
GOLD + 8.50 = 1325.10

The aftershocks of the U.K.’s vote to leave the European Union reverberated across financial markets again today. The victory for Brexit tore through world markets on Friday, pummeling the pound and high-yielding assets as more than $2.5 trillion was wiped from global equity values. Prime Minister David Cameron resigned without spelling out when the U.K. intends to leave the EU and at least 30 members of Labour Party leader Jeremy Corbyn’s team quit amid calls for his ouster.

On Wall Street, the Dow Industrial average dropped about 300 points and then bounced around, adding to the 610-point loss on Friday. Meanwhile, 10-year U.S. Treasury yields have extended their fall to 1.46.

The pound is getting slammed all over again. It extended its record decline against the dollar, falling 3.1% to as low as 1.315. Cable — as the dollar/pound currency pair is nicknamed — is one of the biggest casualties of the global-market rout triggered late last week by Britain’s vote to leave the European Union.

On Friday, the pound fell to a 30-year low versus the dollar in its biggest single-day collapse ever. UK 10-year Gilt yields have dropped below 1% for the first time to hit a new record low. The fall came after Moody’s downgraded its U.K. sovereign rating to negative from stable, citing diminished policy predictability and economic effectiveness. S&P Global Ratings cut the U.K.’s top credit grade by two levels, to AA from AAA.

British stocks were down 2.5% today. While the slide in Europe’s equity benchmark reached 11% over two days, the most since 2008. European bank stocks are still tumbling, too. Shares of RBS and Barclays were briefly halted for about five minutes in London as they plunged 10%. A gauge of European lenders headed for its biggest two-day drop ever.

Many banks may move huge numbers of workers from their UK operations to elsewhere on the continent as the City of London’s role as the region’s financial hub becomes uncertain; at the very least, the UK will have to negotiate new agreements for handling financial transactions with the rest of the world.

Barclays shares fell more than 17% for the second straight day, and the stock has now lost more than half its value in the last 12 months. RBS plummeted as much as 26% in London trading, reaching the lowest levels since January 2009. Lloyds fell 10% at 4 p.m. in London, while challenger banks Virgin Money Holdings, OneSavings Bank and Shawbrook Group all plunged more than 25%.

US bank shares have taken pretty big hits, down nearly 10% since the Brexit vote; but keep in mind US bank stocks have had an atrocious year to date. Since the start of the year, Citi is down 22%, BofA down 23%, JPMorgan down 10%, Goldman Sachs down 21%, and Morgan Stanley down 23%.

The next days and weeks will be key for central banks as they seek to limit volatility in financial markets. The European Central Bank was hosting a three-day meeting in Portugal that will include speeches from its president, Mario Draghi, and Federal Reserve Chair Janet Yellen, plus UK PM David Cameron, German Chancellor Angela Merkel and EU President Donald Tusk. The meeting was cancelled. They can’t even figure out if they want to talk to each other.

The Chinese yuan tumbled to a 6-year low against the dollar. This happened after the People’s Bank of China weakened the currency’s reference rate per dollar by 0.9%, the steepest devaluation since August. China weakened the yuan after Friday’s post-Brexit foreign-exchange action that sent the dollar flying. The Nikkei regained some lost ground overnight after Japanese Prime Minister Shinzo Abe instructed his finance minister to intervene in the currency markets if needed in the wake of Brexit.

The U.K. is ready to face the challenges thrown up by the vote to leave the EU, so said UK Chancellor George Osborne at a press conference today, but be cautioned it would not be “plain sailing” in the days ahead. “Our economy is about as strong as it could be to confront the challenge our country now faces,” he declared, adding that the result was not the one he “campaigned for” but the will of the people “had to be respected.”

Brexit comments from around the world… Boris Johnson: “I cannot stress too much that Britain is part of Europe, and always will be.” (Which is strange because Johnson was the leader behind the Leave movement), Nicola Sturgeon: “We will explore all possible options to protect Scotland’s place in the EU.” (And now we have leaders from Italy, France, Spain, and the Netherlands saying they want to explore their options), Francois Hollande: “What was once unthinkable has become irreversible.” (As in you Brexit, you bought it.) Angela Merkel: Exit talks “shouldn’t drag on forever.” (Meanwhile, Germany, France and Italy said the European Union won’t hold talks with the U.K. on its future relationship with the EU until the government in London formally asks to leave the bloc.)  Barack Obama: “One thing that will not change is the special relationship that exists between our two nations.” (A marked changed from the claim that the Brits would be at the back of the queue.)

More remarks… Jean-Claude Juncker: I would like Brexit proceedings “to get started immediately.” (As in, “you want a divorce? All right, get out of the house.”) Christine Lagarde: Brexit fallout hinges on what “policy makers do in coming days.” George Soros: The decision makes “the disintegration of the EU practically irreversible.” (As in, “I tried to warn you.”) Deutsche Bank: London’s role as a financial center will “weaken, but won’t die.” (As in, we are going to poach as many clients as possible.) Goldman Sachs: The U.K. is now likely to enter a “mild recession” by early 2017. (As in be scared, be very, very scared.)

Adding to political uncertainty in Europe, Spain’s weekend elections delivered a hung parliament for the second time in six months. Acting Prime Minister Mariano Rajoy’s People’s Party again emerged with the single biggest bloc of seats but fell short of a majority, leaving the Eurozone’s fourth-largest economy at risk of another lengthy political stalemate.

So, the question is, what does Brexit mean? The answer is, no one knows. It might be the end of the European Union and the beginning of years of financial and political chaos in Europe which would undoubtedly wreak havoc with global markets. Or it might be the event that forces the EU to reorganize itself and take serious measures to ensure fairness among its members. Again, the truth is that we simply don’t know yet.

What does it mean for you as an investor? It shouldn’t make much difference at all. You should already have a plan; that plan should guide you whether the markets are up or down or sideways. Whatever your plan indicates for you is what you should stick to doing.

If your plan calls for rebalancing, then rebalance; if your plan calls for no change, then do nothing; if your plan calls for buying or selling, then do it. If your plan calls for market timing, then pick some trades. If your plan calls for refinancing your mortgage, then refi. While market moves can be dramatic, there is no reason to get emotional about it. Stick to the plan, stick to your discipline. If you don’t have a plan, you shouldn’t be investing.

The Supreme Court struck down Texas abortion restrictions that had threatened to close three-quarters of the state’s clinics by putting new requirements on facilities and doctors. The 5-3 ruling is the court’s first abortion decision in almost a decade. It invalidates a law that required clinics to meet hospital-like surgical standards and forced abortion doctors to get admitting privileges at a local hospital.

Panama officially opened an addition to its legendary sea canal on Sunday, capping a nine-year, $5.4 billion expansion project that will double shipping capacity and affect global trade routes. A third lane has been added to the waterway that can accommodate a new generation of super cargo ships large enough to carry up to 14,000 containers, compared with around 5,000 currently.

Saudi Arabia has appointed JPMorgan, HSBC and Citi to arrange its debut international bond as the kingdom presses ahead with fundraising efforts amid an oil price slump. Lenders were summoned to Riyadh last month to submit proposals on how they would help the country to raise money internationally. At the time, bankers said that the kingdom was seeking to raise as much as $15 billion.

Research to be presented this week at a conference in San Antonio suggests that serious joint problems, seizures, vision impairment and other medical issues can be added to the list of risks from Zika exposure in the womb. The new findings also confirm that even when Zika-exposed babies are born without microcephaly, developmental delays may appear in the weeks or months following birth.

New York’s landmark Waldorf Astoria hotel plans to close for up to three years starting next spring so owner Anbang Insurance can begin converting most of its more than 1,400 rooms into luxury condominiums. Anbang and Hilton Worldwide, which will continue to manage the property when it reopens, are said to have reached severance agreements with hundreds of the hotel’s 1,500 employees at a cost of $100 million or more.

Financial Review

Spotting Highs and Lows

Sinclair Noe — February 22, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 228 = 16,620
SPX + 27 = 1945
NAS + 66 = 4570
10 Y + .02 = 1.77%
OIL + 1.84 = 31.48
GOLD – 17.70 = 1209.30

Stocks across the globe rallied today, sending Dubai shares into a bull market, as oil rebounded and metals advanced. The pound slid as a split in the U.K.’s ruling party over European Union membership increased the potential for an exit from the bloc. The U.K. currency weakened the most in almost seven years against the dollar after London’s Conservative Mayor Boris Johnson said he’ll campaign for Britain’s exit from the EU, opposing Prime Minister David Cameron.

We all know the old saying, “Buy low and sell high.” The problem is picking the highs and lows. John Stoltzfus, Oppenheimer’s chief market strategist has noticed a trend; in a report this morning he looked at the lows over the past year; there were 7 major lows and they all happened as the S&P 500 dipped down to 16.5 to 17 times earnings. That is when stocks looked cheap and buyers stepped in. Of course, this is not a hard and fast rule; it only works until it doesn’t.

The IEA says, “Today’s oil market conditions do not suggest that prices can recover sharply in the immediate future.”  The IEA says oil markets will begin to re-balance in 2017 thanks to falling U.S. production but that decline will prove short-lived as efficiency gains will push U.S. output to new records by the beginning of the next decade. Production of U.S. shale oil is expected to drop by 600,000 barrels per day this year, and a further 200,000 barrels per day next year before gradually recovering.

Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit US oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers Sabine Oil & Gas and Quicksilver Resources are trying to use Chapter 11 bankruptcy protection to drop long-term contracts with the pipeline operators. Pipeline operators have argued the contracts are secure, but restructuring experts say that if the two producers manage to tear up or renegotiate their deals, others will follow.

Exactly how major asset sales and defaults are handled will be a big part of figuring out where oil prices go from here. We really haven’t seen much in the way of major assets sales in the oil patch... yet. There have been some distressed sales and some defaults, and when the banks take over, they are quick to unload assets. Those banks are motivated sellers and will likely keep the market for energy assets depressed for at least a year.

Of course for the big private investors with a long-term time horizon like Blackstone or KKR, this could create a major opportunity. Yet private equity firms are being very disciplined with their capital and are only slowly starting to enter the market for such assets. We haven’t seen much M&A activity, probably because sellers have been clinging to the hope that prices will come back and they will be vindicated for sitting on their assets.

But that might change this year as more sellers are forced by defaults to accept any price they can find, or alternately lose the asset to BK. It will take some time to work through the carnage, probably another year at least. Clearly these are dangerous times for equity investors in the oil patch.

As the U.S. farming sector enters the third year of a downturn caused by a global glut of grains and slumping commodity prices, bankers across the Midwest are starting to tighten lending conditions and even cutting some clients off. Many corn and soybean farmers already are trying to adjust by selling off grain stockpiles, and begging bankers to restructure debt and give them more time to pay it back. Farm sector debt soared past $364 billion last year and is forecast at over $372 billion in 2016.

The flash manufacturing purchasing managers index from Markit fell to 51.0 from 52.4 in January. This matches the lowest level since September 2009. Economists had been expecting a reading of 52.5. While a reading above 50 represents expansion, softer rates of output, new business and employment growth all weighed on the index.

Manufacturing output fell for the third time in the past four months. Markit’s chief economist said: “U.S. factories are reporting the worst business conditions for over three years. Every indicator from the flash PMI survey, from output, order books and exports to employment, inventories and prices, is flashing a warning light about the health of the manufacturing economy.”

CNBC reports that Honeywell and United Technologies have held talks about a merger. A deal would create a company with combined sales of more than $90 billion. It is not a done deal; terms have not been worked out, and there would be some anti-trust hurdles as well.

Sysco has agreed to acquire the Brakes Group, a European food distributor, for $3.1 billion. The deal comes less than a year after Sysco terminated its $3.5 billion deal with US Foods after regulators determined that the combination would be harmful to consumers by leading to higher prices and lower service.

The private banking and asset management firm EFG International has agreed to acquire BSI, the Swiss private-banking arm of the Brazilian investment bank BTG Pactual, for about $1.3 billion; and creating one of the largest private banks in Switzerland with 170 billion francs under management.

HSBC Holdings posted a loss of $858 million, falling far short of analyst expectations for a profit of $1.9 billion. The profit miss is not the only problem facing the bank, the SEC is investigating the company’s Asia Pacific hiring practices. The investigation concerns the bank’s hiring of people that have close government ties.

Fannie Mae is at risk of needing a government bailout that could shake up confidence in the housing finance market, so says the Financial Times.  The reason is because the government does not let Fannie Mae retain profits, its capital buffer (which has dwindled from $30 billion before the financial crisis to $1.2 billion today) is on track to disappear by January 2018. At that point it would be unable to weather quarterly losses and would need to draw on Treasury funds to avoid being placed into receivership.

Highlights from the Mobile World Congress: Samsung Electronics and LG Electronics unveiled their latest flagship devices, seeking to revive sales momentum and buck slowing industry growth. The new Galaxy S7 comes with an improved camera, memory storage, water resistance and a longer battery life, while the LG G5 showed off a similar range of new features.

The biggest news, however, was the firms’ big jumps into virtual reality. Samsung is teaming up with Facebook to push VR elements into phones and social networking, and the two companies unveiled 360 degree recorders, cameras and viewers.

Payment card operators are also taking part in Mobile World Congress. MasterCard is bringing facial recognition services dubbed “selfie pay” to the U.K. to improve identity verification for mobile phone payments. British users will be able to scan fingerprints or snap selfies to validate their identities for completing online purchases. Meanwhile, Visa wants to turn your car into a mobile payments platform, showing off a concept app that will let drivers pay for fuel and parking without leaving their vehicles.

Also on display at the Mobile World Congress in Barcelona: 5G, or the fifth generation of wireless technology, offering mobile Internet speeds that will let people download entire movies within seconds, and it may pave the way for new types of mobile applications. Under plans for 5G, carriers will most likely offer mobile Internet speeds of more than 10 gigabits per second, or roughly 100 times faster than current networks (and significantly quicker than existing broadband). That would allow you to download high-definition movies almost instantaneously, even if you’re on the go.

Such technology will not come cheap. Carriers and telecom equipment makers will have to install new hardware like cellphone towers in rural areas and tiny mobile hot spots in dense urban areas to reach the 10 gigabits per second target. They will also have to increasingly rely on sophisticated software to manage the expected exponential jump in mobile data traffic.

AT&T is partnering with Intel to test and optimize how drones perform on LTE connections beyond line of sight, at higher altitudes, or when faced with external interference. The collaboration is designed to show how a network that has primarily been designed to connect devices (such as smartphones) on the ground can be re-worked for unmanned aerial vehicles.

Apple CEO Tim Cook has sent a new memo to all Apple employees explaining why the company is resisting an FBI request to decrypt an iPhone used by one of the San Bernardino shooters. In the memo, Cook says the FBI should withdraw its demand to force Apple to develop a tool to help it break into the iPhone.

He writes: “At stake is the data security of hundreds of millions of law-abiding people, and setting a dangerous precedent that threatens everyone’s civil liberties.” A court last week ordered Apple to comply, but the company is challenging the order. Apple is calling for the government to launch a commission of experts to examine the effects of encryption technology on law enforcement.

Lumber Liquidators’ flooring, tested for formaldehyde, was found to have a three times higher risk of causing cancer than previously stated. A report released Feb. 10 used incorrect ceiling heights, lowering by about three times the airborne concentration that should have been examined and reducing the danger. According to the Centers for Disease Control and Prevention the estimated risk of tumors is six cases to 30 cases per 100,000 people, and not the two to nine cases in the earlier report.

US auto safety regulators are examining whether an additional 70 million-90 million Takata airbag inflators should be recalled because they may endanger drivers, according to Reuters. That would nearly quadruple the 29 million inflators that have been called back so far. New recalls would translate into billions of dollars in additional costs for the company and also add years to the replacement process.

US authorities have asked Volkswagen to produce electric vehicles in the U.S. as a way of making up for its rigging of emission tests. The plan would see VW manufacture electric cars at its plant in Tennessee, and help build a network of charging stations for electric vehicles. A VW spokesman said, “Talks with the EPA are ongoing.”