Financial Review

Delayed Not Dead

Sinclair Noe — June 27, 2017

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

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DOW – 98 = 21,310
SPX – 19 = 2419
NAS – 100 = 6146
RUT – 13 = 1403
10 Y + .06 = 2.20%
OIL + .34 = 43.72
GOLD + 2.20 = 1247.70
BITCOIN – 1.73% = 2548.23 USD
ETHEREUM – 1.73% = 287.89

Last week, Senate Majority Leader Mitch McConnell unveiled Trumpcare, the Better Care Reconciliation Act of 2017, the Senate version of the American Health Care Act, which was the House version of a plan to repeal and replace Obamacare. Yesterday, the Congressional Budget Office published its analysis, or score for Trumpcare and it was ugly.

The Senate legislation would repeal Obamacare’s taxes and insurance mandates and phase out its Medicaid expansion, but it drew criticism from Republican senators on both ends of the ideological spectrum. Conservatives were miffed that it did not fully repeal the 2010 health law, while moderates opposed its deep cuts to Medicaid and blanched at a projection from the Congressional Budget Office that it would result in 22 million fewer people having insurance over a decade.

McConnell said he wanted a vote by Thursday or Friday, before senators recessed for the July 4^th holiday. But that won’t happen. Today, McConnell says the vote will be delayed; they will try to make adjustments to the bill to make it acceptable. GOP leaders had argued that more time would not help the public perception of the bill, which is broadly like legislation the House passed last month that polls show is deeply unpopular.

Now, lawmakers will go home for the holiday, and they are going to hear from constituents. And it will get loud. The president invited all 52 Republican senators to the White House for a meeting this afternoon after initially having little involvement in the Senate’s deliberations. Under the reconciliation process, the bill only needs 51 votes to pass; 50 senators plus the vice president.

That means if 3 Republicans vote against the bill, it does not pass. But at least 6 GOP senators—Susan Collins of Maine, Dean Heller of Nevada, Ron Johnson of Wisconsin, Mike Lee of Utah, Rand Paul of Kentucky, and Ted Cruz of Texas – said they would vote against even bringing the bill up for debate this week unless changes were made.

And there are others stepping up: Senator Jerry Moran of Kansas tweeted that he, too, was against the bill. Senators Rob Portman of Ohio and Shelley Moore Capito of West Virginia followed suit soon afterward.  Senators Cory Gardner of Colorado and Lisa Murkowski of Alaska are likely to jump ship, or at least press for a better deal. That’s at least 11 republican senators who are not on board.

Conservatives like Johnson, Paul, and Cruz were pushing for amendments that would lower premiums and eliminate—or allow states to opt out of—Obamacare insurance regulations, including the provision prohibiting companies from charging higher rates to people with preexisting conditions.

Portman and Capito, meanwhile, wanted tens of billions of dollars more to help states fight the opioid epidemic and changes that would soften the billions in cuts to Medicaid. So far, McConnell has not open the bill to negotiation.

For now, the plan is to squeeze holdouts, but it doesn’t seem to be working. Yet it would be premature to consider the bill dead. House Republican leaders were also forced to put off a vote on their bill earlier this year only to work out a compromise that allowed it to pass weeks later.

While the delivery of health care is of vital social importance, Wall Street is focused on the next thing – tax reform. But to get there, the administration must work through health care first so that its impact on the budget can be determined. Without a deal on health care, representing one-fifth to one-sixth of GDP, it is difficult to figure out taxes.

Wall Street has generally risen since President Donald Trump’s election in November, in large part due to hopes that his economic agenda—including massive tax cuts and deregulation—would accelerate economic growth. However, his administration has seen few legislative successes, raising questions about whether the broader market’s valuations are justified if the thesis that drove them higher fails to come to fruition.

This does not mean that tax reform is dead, just slightly delayed. This means that GOP donors are going to turn up the heat on senators over the coming days pushing for health care and/or tax reform, and the donors will be pushing hard.

Fed Chairwoman Janet Yellen told an audience in London that asset valuations are “somewhat rich.” She repeated plans to hike interest rates gradually. Fed Vice Chairman Stanley Fischer told an International Monetary Fund event that price-to-earnings ratios now stand in the top quintiles of their historical distributions.

Fischer also said rising valuations in equities and in other parts of the global market are partly explained by a brighter economic outlook but also by elevated risk appetite. San Francisco Fed President John Williams gave the bluntest assessment, telling an Australian television station that the stock market is running on “fumes.”

Both Yellen and Fischer touted the capital built up at the nation’s biggest banks. Ahead of the release of the second stage of the stress tests due Wednesday, Fischer pointed out that regulatory capital at large banks is now at multidecade highs.

Yellen went further and said another crisis like the one that caused the Great Recession isn’t likely in our lifetimes. And of course, Chair Yellen will be absolutely and totally correct, if we all die by Friday.

The Fed famously was not particularly contrarian in identifying risks before the Great Recession.

The IMF, coincidentally, blessed the Fed’s rate hike cycle in their annual review of the US. The IMF isn’t terribly optimistic on the US economy, projecting 2.1% growth this year and seeing growth slow from there. The IMF also said there were “larger than usual” risks to the US economy, given policy uncertainties.

They threw some shade on Trump’s pro-growth agenda, say that even with an “ideal constellation of pro-growth policies,” the Trump administration’s forecast that it would boost GDP by 1 percentage point is “unlikely.” The IMF said the US dollar is moderately overvalued, by 10% to 20%.

Home prices pulled back slightly in the latest Case Shiller report. The S&P/Case-Shiller 20-city index rose 5.7% in the three-month period ending in April compared to a year ago, down two ticks from the 5.9% annual gain notched in March.

Despite those decelerations, prices continued to reflect sturdy demand. Only one metro in the 20-city index, Cleveland, saw a monthly decline, while in Seattle, prices surged 2.6% for the month. Phoenix posted a 0.8% increase for the month and a 5.7% gain over the past 12 months.

European Union antitrust regulators have leveled a $2.7 billion fine against Google. EU antitrust regulators said Google abused its dominance in search to promote its own comparison shopping service while demoting those of competitors. Alphabet said it disagreed with the decision and would consider an appeal.

Alphabet had $92 billion in cash or equivalents at the end of the first quarter. That means the fine represents less than 3% of Alphabet’s cash position. Considering the company generated an average of about $68 million a day in cash during the first quarter, it could raise the cash to pay for the fine in just 40 days, or by Aug. 8.

The market hit was bigger, Alphabet lost about $16 billion in market capitalization today. Regulators promised Google was in for years of monitoring to guard against further abuses. And Google will have to prove that rivals have made substantial inroads into its businesses before there is much chance of it being let off the regulatory hook.

Google does not want to change its search business model but the economics of continuing the fight aren’t really in Google’s favor. Google has 90 days to comply or face an additional daily fines.

A ransomware cyberattack has hit Europe and spread to the US. The “Petya” ransomware attack was first reported in Ukraine, where the government, banks, state power utility and Kiev’s airport and metro system were all affected. The radiation monitoring system at Chernobyl was taken offline, forcing employees to use hand-held counters to measure levels at the former nuclear plant’s exclusion zone.

The food giant Mondelez, legal firm DLA Piper, Danish shipping and transport giant AP Moller-Maersk and Heritage Valley Health System, which runs hospitals and care facilities in Pittsburgh, also said their systems had been hit by the malware.

Brazil is bracing for a fresh bout of political turmoil after the president, Michel Temer, became the country’s first sitting head of state to be formally charged with a crime. Less than a year after taking power following impeachment of Dilma Rousseff, the deeply unpopular leader was formally accused of corruption by the attorney general Rodrigo Janot and could now face a lower house vote on whether he should be tried by the supreme court for taking bribes.

In a damning indictment to the supreme court, Janot alleged Temer took millions of dollars in bribes from meat-packing giant JBS. The attorney general said the president had “fooled Brazilian citizens” and compromised the image of the country.

These allegations followed the release of a secret recording of a conversation earlier this year between Temer and the JBS executive Joesley Batista, in which the president appeared to endorse hush money payoffs to former house speaker Eduardo Cunha, a member of Temer’s party who is serving a 15-year sentence for corruption.

Temer’s predecessor Dilma Rousseff – who was ousted in an impeachment plot in May 2016 – was quick to note that her former running mate was now accused of greater crimes than those for which she was removed from office last year. She tweeted: “The result of the 2016 coup: leaving the country in the hands of the only president indicted for corruption.”

Financial Review

Stuff Happening

Sinclair Noe — June 8, 2017

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

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DOW + 8 = 21,182
SPX + 0.65 = 2433
NAS + 24 = 6321
RUT + 18 = 1415
10 Y + .02 = 2.19%
OIL + .04 = 45.68
GOLD – 9.20 = 1278.60
BITCOIN + 0.04% = 2826.04
ETHEREUM + 0.61% = 259.56

We had a bunch of stuff happening today. The Dow Industrials hit a record high intraday, but could not hold on for a record high close. The trading session went from positive to negative and back.

The Nasdaq Composite did manage a new record high. But it looks like markets are still trying to digest everything. The S&P 500 traded in a range of about one-half of one percent.

The VIX, the volatility index, also known as the “fear gauge,” held at historically low levels. The dollar and bonds both traded lower but nothing out of the daily norm.

Let’s start with the testimony of former FBI Director Jim Comey before the Senate Intelligence Committee. The public hearing lasted nearly 3 hours. I won’t try to recap everything. One or two interesting points. None of the senators questioning Comey tried to claim that Comey was lying about his representation of his meetings with President Trump, however there was sharp disagreement over the significance of their conversations.

A one point, Comey said Trump lied. None of the senators tried to claim Trump did not lie. However, after the hearing, Trump’s lawyer, and spokesperson Sarah Huckabee Sanders had the unenviable task of proclaiming the president is not a liar. Comey did not answer some of the most pointed questions because of the classified nature. He later testified before a closed-door committee. We do not know what he said there.

We certainly learned more today than yesterday, when Intelligence chiefs Coats and Rogers stonewalled the Committee, but what Comey said in public is not the be-all, end-all of this investigation, no matter how much you might want to debate about the minutiae and innuendo and nuances of the testimony.

While it was compelling television, it is just one small piece of the puzzle; nothing that exonerated nor nailed the coffin. Perhaps the most important thing we learned today is that contemporaneous memorandums of communication carry probative value.

In other words, it was a smart move to keep a diary. The bottom line is what I said a month ago when Comey was fired: “Comey… is going to consume most of the oxygen in Washington for the foreseeable future.”

We are not seeing much progress on tax reform or an infrastructure plan. This doesn’t mean nothing is happening, just that it is now on a back burner, and time is running out. The Senate is working on its version of Trumpcare but if they can’t come up with something substantially different than the House, it will be dead on arrival.

Today, the House of Representatives voted largely along party lines to replace the 2010 Dodd-Frank Wall Street reform law, a move that is expected to die in the Senate but open the door to revamping or eliminating regulations that came out of the 2007-09 financial crisis. No real word on what might replace Dodd-Frank, other than the prospect of just letting the banksters run wild.

The  European Central Bank left interest rates and policies unchanged while trimming expectations for inflation through 2019. While that was largely expected, the shared currency fell as ECB President Mario Draghi said in his news conference that the euro area still isn’t generating enough inflation, overshadowing improved prospects for the economy that led officials to upgrade their growth assessment.

The change in the assessment of risks for the economy sets the scene for the ECB to start a discussion about the timing for the removal of the stimulus, but that is apparently a debate for another day.

According to an exit poll released shortly after voting ended, Prime Minister Theresa May will win 314 seats in Britain’s election, short of a majority in the 650-seat parliament. That is an exit poll, not official results.

Prime Minister May called the snap election in a bid to strengthen her hand in Brexit negotiations, to win more time to deal with the impact of the divorce and to strengthen her grip on the Conservative Party. It appears that her electoral gamble failed. If the exit polling numbers hold, it means May’s Conservative Party would have to form a coalition or attempt to govern with the backing of other smaller parties.

For investors, the over-riding factor is likely to be greater uncertainty about whether there will be a deal on Brexit and what it will look like. A delay in forming a government could push back the start of Brexit talks, currently scheduled for June 19, and reduce the time available for what are expected to be the most complex negotiations in post-World War Two European history.

Labour, led by veteran socialist Jeremy Corbyn, could attempt to form a government with those smaller parties, which strongly oppose most of May’s policies on domestic issues such as public spending cuts.

If Corbyn’s Labour does take power with the backing of the Scottish nationalists and the Liberal Democrats, both parties adamantly opposed to Brexit, Britain’s future will be very different to the course the Conservatives were planning and could even raise the possibility of a second referendum. The unofficial exit polls sent a small shock through markets, pushing the pound sterling down.

Brazil’s top electoral court excluded testimony of engineering company executives from an illegal campaign funding trial against President Michel Temer, a move that suggested it would throw out a case that had threatened to unseat him.

The Commerce Department’s quarterly services survey, or QSS, showed consumer spending, including healthcare spending, increased at a faster clip than the government had assumed in its second estimate of gross domestic product published last month.

The QSS data suggested first-quarter GDP could be revised up to as high as a 1.5 percent annualized rate from the 1.2 percent growth pace reported in May. Growth in the current quarter may be above 3 percent, due to payback from the first quarter’s 1.2 percent reading, but the underlying trend appears to be holding steady at close to 2 percent for the year.

The Federal Reserve reports net worth of U.S. households and nonprofit groups rose by $2.35 trillion, or 2.5 percent, to $94.84 trillion in the first quarter from the previous three-month period. Household wealth has grown, boosted mostly by a 5.5 percent gain in the Standard & Poor’s 500 Index last quarter and house price appreciation that matched the biggest year-over-year increase since 2014.

Now, the bad news. Household debt increased at a faster rate, or 3.2 percent, as mortgage borrowing advanced at a 3 percent pace. Other forms of consumer credit, including auto and student loans, climbed at a 5 percent rate, the slowest since 2013.

Although measures of consumer confidence have risen since the elections in November, that hasn’t necessarily translated into spending, helping to temper economic growth.

The number of Americans filing for unemployment benefits fell last week. Initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 245,000 for the week ended June 3. The Tuesday JOLT survey showed high job openings, and firms appear to be holding on to their workers.

Claims have now been below 300,000, a threshold associated with a healthy labor market, for 118 straight weeks. Low layoffs and record high job openings suggest a deceleration in job growth in May was likely because companies could not find suitable workers. Labor market tightness could encourage the Federal Reserve to raise interest rates at its June 13-14 policy meeting.

Department store operator Nordstrom said that some members of the Nordstrom family were considering taking the company private as it struggles with an industry-wide sales slowdown. Going private, which would involve raising debt, would be a risky but potentially profitable bet by Nordstrom’s founding family and largest shareholder bloc that the company can reshape itself and emerge from the retail meltdown stronger.

Shares of the Seattle-based clothing and accessories retailer ended 10.3 percent higher.

Hudson’s Bay Company disclosed that it will be cutting around 2,000 positions within North America as part of a major restructuring effort. HBC owns several major department stores, including Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor.

Yahoo shareholders approved the company’s pending sale of its core internet business to Verizon for $4.48 billion. Yahoo expects that the deal will close on June 13, 2017. The closing of the deal, announced in July, had been delayed as the companies assessed the fallout from two data breaches that Yahoo disclosed last year. Verizon plans to cut 2,100 jobs upon completing the acquisition.

Alibaba Group announced today at an investor conference that is expects revenue growth of 45-49 percent in the 2018 fiscal year. That figure compared with 56 percent revenue growth posted for the 2017 fiscal year ended March 31. At the same event last year, the firm predicted 48 percent revenue growth

 Alibaba was up almost 14% today.

The FDA just requested that Endo International take its extended-release opioid painkiller Opana ER (otherwise known as oxymorphone hydrochloride) off the market. The agency said that the decision came after it found that the drug’s benefits no longer outweighed its risk for abuse.

FDA commissioner Scott Gottlieb said in a news release: “We are facing an opioid epidemic – a public health crisis, and we must take all necessary steps to reduce the scope of opioid misuse and abuse.” If Endo doesn’t remove the drug from the market voluntarily, then the FDA can formally withdraw its approval.

Endo shares dropped 14% in after-hours trade.

Financial Review

Go Placidly

Sinclair Noe — May 19, 2017

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

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DOW + 141 = 20,804
SPX + 16 = 2381
NAS + 28 = 6083
RUT + 6 = 1367
10 Y + .01 = 2.23%
OIL + 1.18 = 50.53
GOLD + 8.80 = 1256.60

Stocks finished with triple digit gains but well off session highs as news headlines once again rattled traders. The Dow gave back more than 50 points and the S&P 500 saw gains cut in half following an afternoon news dump. The Washington Post is reporting that a current White House official is a significant person of interest in the law enforcement investigation.

Separately the New York Times reported that Trump told Russian officials at the White House that firing FBI Director James Comey relieved “great pressure” from an ongoing probe into Russia and the election. The Times report cited a document summarizing the meeting.

Trump is on the first leg of a ten-day overseas trip that starts in Saudi Arabia, then moves to Israel, the Vatican, Brussels (for a NATO summit), and then Sicily for a G7 summit. The Trump administration planned to announce $110 billion in sales of advanced military equipment and training to Saudi Arabia this weekend.

Despite the firing of James Comey, and a general sense from the mainstream media that the Trump White House is in disarray, and the lowest public approval ratings since the inauguration, Wall Street continues to trade near record highs.  For the week, the Dow and S&P dropped 0.4 percent and Nasdaq was down 0.6 percent.

The dollar index lost 1.6 percent in the five days, the worst week since July 2016. Gold capped its best week in a month. The yield on 10-year Treasuries climbed less than one basis point to 2.23 percent, after rising as much as three basis points earlier in the session. It fell nine basis points this week.

Oil prices rose. West Texas crude rose 2.2 percent to settle at $50.53 a barrel in New York, for a weekly increase of 5.4 percent, the most since March and the second week of gains, on growing expectations that OPEC and other producing countries will agree next week to extend output cuts.

OPEC and other producers including Russia are scheduled to meet on May 25. They are expected to extend output cuts of 1.8 million barrels a day until the end of March 2018. U.S. crude production has climbed 10 percent since mid-2016 to 9.3 million barrels per day as shale producers have taken advantage of higher prices to boost activity.

Iran holds its first round of presidential elections this weekend. If President Hassan Rouhani remains in office, it should encourage Western investment and boost Iranian oil production. If the winner is Ebrahim Raisi, a critic of Iran’s nuclear deal with the West, then it is possible that new sanctions could be imposed, which could reduce the oil supply from Iran.

After two weeks chock full of retailers’ earnings — largely disappointing Wall Street and missing analysts’ expectations — the S&P 500’s Retail ETF (XRT) finished the week down about 3.5%. Leading the declines were names like Ascena Retail Group, Foot Locker, American Eagle and Sears.

Ascena — the parent of clothing companies such as Ann Taylor and dressbarn — saw its shares plunge more than 30 percent earlier in the week, after it adjusted its second-half outlook to reflect worse-than-expected business conditions. Meanwhile, Foot Locker’s same-store sales fell short of expectations.

Off-price retailer TJX, which operates T.J. Maxx, Marshalls and HomeGoods stores, was expected to be an upbeat outlier for the week, but even its first-quarter comparable sales couldn’t match Street estimates. Gap reported a surprise rise in quarterly same-store sales, bucking the trend of dismal results in the U.S. retail industry, as the company benefited from the robust performance at its Old Navy brand.

Campbell Soup’s quarterly sales and profit missed analysts’ estimates, hurt by higher promotions and weak demand for its condensed soups, broths and V8 vegetable juices, and the company warned that its full-year sales could decline.

Deere & Co raised its full-year sales and profit forecast for the second time, as demand improves for its farm and construction equipment, particularly in South America, sending its shares to a record high of $122. The company said it expected fiscal 2017 industry sales of tractors and combined harvesters in South America to be at the high-end of its earlier forecast of about 15-20 percent rise.

While farmers in South America have been complaining about low prices, they have enjoyed big gains in corn and soybean output.

Brazil’s Supreme Court released explosive plea-bargain testimony today accusing President Michel Temer, along with former presidents Lula da Silva and Dilma Rousseff, of receiving millions in bribes. The testimony raises serious doubts about whether Temer, who replaced the impeached Rousseff last year, can maintain his grip on the presidency.

The testimony implicates both ruling and opposition parties and indicates that Temer, a conservative, accepted $4.6 million in bribes from JBS, which ranks as the world’s largest meat processor. It also alleges that Lula, who is already facing five corruption trials, received $50 million in bribes in offshore accounts from JBS, while Rousseff took $30 million in bribes.

Temer said he would not resign from the presidency. The Supreme Court released an audio tape of Temer, approving the payment of hush money to former lower house speaker Eduardo Cunha, who last year orchestrated Rousseff’s impeachment and was later convicted for corruption.

Many politicians fear that if Cunha should turn state’s witness, his testimony could implicate scores of congressmen and members of the executive branch.

About 37,000 AT&T workers, or less than 14 percent of the company’s total workforce, began a three-day strike after failing to reach an agreement with the No. 2 U.S. wireless carrier over new contracts. This is the first time that AT&T wireless workers are on strike, which could result in closed retail stores during the weekend.

The workers on strike are members of the CWA Communications Workers of America union. The workers are demanding wage increases that cover rising healthcare costs, job security against outsourcing, affordable healthcare and a fair scheduling policy.

Slightly over half of the workers on strike are part of the wireless segment and the rest wireline workers, including a small number of DirecTV technicians.

Fiat Chrysler plans to update software that it expects will resolve the concerns of U.S. regulators about excess emissions in 104,000 older diesels. The software update would begin rolling out once the Environmental Protection Agency and California Air Resources Board approved.

In January, the EPA and California accused Fiat Chrysler of illegally using undisclosed software to allow excess diesel emissions in 104,000 U.S. 2014-2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks in a notice of violation.

The Environmental Protection Agency and California Air Resources Board announced approval of a fix for about 84,000 older Volkswagen diesel vehicles that can emit excess emissions. Volkswagen agreed last year to offer to buy back up to 475,000 2.0-liter diesel vehicles that had been sold in the United States or offer fixes if regulators approved.

Friday’s announcement covers a fix for 84,000 2012-2014 Passat diesel vehicles with automatic transmissions. A fix for vehicles with manual transmissions has not yet been approved. In January, regulators approved a fix for 67,000 2015 model diesels, leaving around 325,000 older vehicles still awaiting approval for a fix.

The federal government has, in recent years, paid debt collectors close to $1 billion annually to help distressed borrowers climb out of default and scrounge up regular monthly payments. New government figures suggest much of that money may have been wasted.

Nearly half of defaulted student-loan borrowers who worked with debt collectors to return to good standing on their loans defaulted again within three years, according to an analysis by the Consumer Financial Protection Bureau. For their work, debt collectors receive up to $1,710 in payment from the Department of Education each time a borrower makes good on soured debt through a process known as rehabilitation.

They keep those funds even if borrowers subsequently default again. What constitutes rehabilitation? Nine months of on-time payments, even if the borrower only pays $5 a month. That means that in many cases, the government pays $38 to collect one dollar. The department has earmarked more than $4.2 billion for payments to its debt collectors since the start of the 2013 fiscal year.

Seven years into an economic recovery, nearly half of Americans didn’t have enough cash available to cover a $400 emergency. That’s according to the latest findings from the Federal Reserve’s annual economic well-being of U.S. households, which found 44% in 2016 said such an expense would have to be covered by borrowing or selling something.

That’s a similar percentage to what was found in past Fed surveys. Of the group that can’t pay in cash, 45% would use a credit card to pay off the expense over time, about a quarter would borrow from friends of family, another 27% just couldn’t pay the expense and smaller fractions would turn to selling items or using a payday loan.

We now know where all the money is hiding. Retirees who are usually expected to spend that hard-earned nest egg are instead cutting their spending and living frugally, according to a University of Michigan survey analyzed by software company United Income. The median retiree spends 8 percent less than they comfortably could afford; the result, retirees now hold assets totaling more than $25 trillion.

Spending money, besides being a boost for the economy, could help retirees be more active, if they physically get out of the house to do it. Meanwhile, younger Americans, whose incomes are falling behind those of previous generations, aren’t saving enough.

So, the moral of the story is get out and spend some money this weekend, you might feel younger.

Financial Review

Black Hole Sun

Sinclair Noe — May 18, 2017

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

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DOW + 56 = 20,663
SPX + 8 = 2365
NAS + 43 = 6055
RUT + 5 = 1361
10 Y + .02 = 2.23%
OIL – .01 = 49.34
GOLD – 14.10 = 1247.80

Yesterday the stock market had a little panic attack. As is often the case, these things pass. Therefore, it is important to see confirmation of a major move.

Today we did not see confirmation. Equities did not take kindly to news of Trump influencing or impeding an FBI investigation. The S&P 500 closed at the lows, down 1.8%, and the Nasdaq wiped out 18 days of gains in one session.

So, yesterday was not insignificant, but looking back over the last half year, it is not enough, in and of itself to change the trend, which is still up.

The news of the week is important, and it was a catalyst for the big sell-off yesterday, but while the term ‘impeachment’ may appear more frequently in the press today, the process is initiated by a vote in the House, where Republicans hold a 45-seat majority.

A House impeachment of President Trump would look unlikely. But that doesn’t mean Trump’s problems have been resolved, just slow-tracked. Late yesterday, a special prosecutor was named – former FBI Director Robert Mueller – and whatever the outcome of his investigation, nothing will happen immediately.

Meanwhile, Rep. Jason Chaffetz said today that he will resign from Congress next month, a move that calls into question the future of the House Oversight Committee’s investigation of President Donald Trump and his campaign’s ties with Russia.

Washington can make a slug look like a speed demon. Nothing is imminent and so the markets rebooted. Traders bought the dips. That said, this is proving a distraction from the president’s agenda, including what should be a more detailed budget released next week.

After months of major stock markets posting record highs and historically low volatility across a range of asset classes, something was bound to snap and nobody knows whether it was a one-off or an omen. We’ll get clues in the days and weeks ahead, but a day like yesterday should jolt us from our lethargy and remind us that volatility hasn’t died.

The VIX index was jolted from its slumber yesterday and chalked up its seventh-biggest rise in percentage terms since its launch in 1990. This is an appropriate time to look at risk levels and reassess where we are as investors.

The dollar, two- to 10-year Treasury yield curve and yields on 10-year Treasury Inflation-Protected Securities (TIPS) are all back where they were before Trump was elected in November. The spread between two- and 10-year Treasury yields is its smallest since before the presidential election.

This so-called yield curve flattening suggests investors are losing faith in the economy’s ability to withstand higher interest rates. Money markets have slashed the probability of the Federal Reserve raising rates next month to less than 60 percent from over 90 percent last week.

The U.S. economy is already into its third-longest expansion ever, and a recent fall in the U.S. economic surprises index suggests it is running out of steam. That does not mean a recession is in the offing but it might point to slightly slower growth.

Any time we see a shift, the fast money will look for fresh opportunities. The gap between the U.S. and European surprises indexes is the widest in two years, U.S. corporate earnings growth is double-digit but still lagging the euro zone, and the political turmoil that was supposed to beset Europe this year is concentrated in the United States.

Yesterday was not enough to push investors to cash or run scared but today many investors reconsidered their tactical positions, and rethink their appetite for risk.

Earlier in the day the Philadelphia Federal Reserve said business activity index rose in May after declining for two months. Weekly unemployment data also pointed to strength in the labor market.

Brazilian markets took a big hit, the benchmark Bovespa dropped about 9%. One of the country’s largest newspapers reported that a secret recording exists of President Michele Temer approving a payment to Eduardo Cunha, the former House speaker and mastermind behind last year’s impeachment of former President Dilma Rousseff.

The tape was submitted to the Supreme Court by two senior executives from meat-packing giant JBS as part of a plea bargain deal, according to O Globo newspaper, in which information is offered in exchange for reduced sentences. Though the president’s office confirmed the meeting between Temer and a JBS executive took place in March, it denied Temer asked for payments to silence Cunha.

Temer is far from the only politician to be tied to the corruption scandal, dubbed “Operation Car Wash,” which has implicated nearly all of Brazil’s political class, including every senior member of the ruling party.

Earnings reports from major brick and mortar retailers have been a long list of disappointments, with the occasional exception of Home Depot or Target, and today Walmart reported. Wal-Mart said sales at U.S. stores open at least a year rose 1.4 percent, better than estimates. Investments to bring more customers into the discount retailer paid off and a bigger push into e-commerce boosted online purchases.

Online sales rose 63 percent in the first quarter, which was higher than 29 percent growth in the fourth quarter and 20 percent in the third quarter. Walmart said it is benefiting from a $2.7 billion investment to increase entry-level wages and enhance the training of its workforce, which has led to better stocked shelves and cleaner stores.

Walmart earned $1 per share, topping estimates of 96 cents. Consolidated net income fell to $3.04 billion from $3.08 billion due to a higher tax rate. Revenue rose 1.4 percent to $117.5 billion, slightly lower than analysts’ expectations of $117.7 billion due to a stronger dollar, which reduces the value of overseas sales. Revenue grew 2.8 percent on a currency neutral basis.

Walmart shares flirted with 52-week highs.

Alibaba Group beat first-quarter revenue forecasts but fell short of earnings estimates. The Chinese company, which is targeting new business lines such as cloud computing, big data, entertainment and offline retail as it expands beyond e-commerce, also announcing it will buy back $6 billion shares over the next 2 years.

Salesforce.com reported better-than-expected earnings and raised its full-year revenue guidance. The cloud-software company reported a net loss of $9.2 million on revenue of $2.39 billion for its fiscal first quarter. After adjustments for stock-based compensation and other effects, the company claimed a profit of 28 cents a share, which topped estimates.

Facebook celebrates its fifth anniversary as a publicly traded company. The IPO was 5 years ago today, and it was a mess, but since then the stock is up 279%.

The Telecommunications Services sector was the S&P’s biggest percentage gainer with a 1.2-percent rise. The Federal Communications Commission has officially begun undoing net neutrality rules the agency passed two years ago. The FCC voted 2-1, along political party lines to begin a rule-making process to replace the Open Internet order, or net neutrality rules, adopted in 2015.

The rules won’t disappear overnight but FCC chair Ajit Pai has made it clear that, barring a successful legal challenge, the agency will give up its authority to enforce net neutrality regulations. The rules, first passed in 2015, ban internet service providers from blocking, slowing down, or otherwise discriminating against lawful content.

Without these rules in place, your home internet provider would be free to slow down your Netflix connection to try to keep you paying for cable TV. Your mobile carrier would be allowed to block Skype to promote its own voice plan. Naturally, the country’s largest broadband providers say you have nothing to worry about.

In fact, the industry now claims to love net neutrality. But what the industry is calling “net neutrality” doesn’t really fit the full definition. It’s a version of net neutrality that doesn’t cover the loopholes internet providers have already discovered. If the FCC decides to drop its own protections, you probably won’t wake up one day to find YouTube or Slack blocked. But the principles that made the internet what it is today could still erode over time.

We are already seeing a “toll road’ version of internet service. AT&T, for example, allows users to watch as much video as they want from its own DirecTV Live streaming service without having it count toward their data caps. Competing services like Dish’s Sling, on the other hand, will count against those caps unless the companies behind them pay AT&T to “sponsor” that data.

Verizon has a similar system in place. These data exemptions, known as “zero rating,” may sound innocent enough. Everyone loves getting free stuff. But critics argue that they will end up harming competition.

Although the telecommunications industry group US Telecom sued the FCC to try to reverse its net neutrality protections, most big internet providers say they support net neutrality in principle. Their beef, they say, is just that the FCC went too far in reclassifying broadband access as a “Title II” common carrier service, much like telephone services.

The telecoms say they don’t mind a little regulation if there are great big loopholes. The problem is that without Title II, the FCC won’t be able to enforce net neutrality. And that means that the big, beautiful, collaborative mosaic of the internet could soon be missing many of the smaller tiles that add so much color to the overall picture.

Financial Review

Trumpcare

Sinclair Noe — March 7, 2017

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

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DOW – 29 = 20,924
SPX – 6 = 2368
NAS – 15 = 5833
RUT – 9 = 1374
10 Y + .02 = 2.51%
OIL – .16 = 53.04
GOLD – 9.70 = 1216.40

Healthcare stocks were in focus today after the GOP unveiled its Obamacare replacement bill, called the American Health Care Act. The bill rolls back the Medicaid expansion and eliminates the individual mandate, which requires everyone to buy health insurance.

Under the ACA, tax credits were provided to 85% of people enrolled in the exchanges, and the amount of the subsidy was determined based on income level, geographic region, and age. The amount of the tax credit in the House bill is based exclusively on age: The older you are, the more you get per month (though still less than you would get under the ACA).

A report from the non-profit Kaiser Family Foundation found that older Americans will receive significantly less help paying for their premiums, as will the poorest young Americans. Americans earning $40,000 to $75,000, on the other hand, are the winners—their subsidies will increase. The proposal would  kill a 3.8% investment tax on the wealthy that had used to finance the health-care law. It would also kill a 0.9% surcharge on wages above $250,000.

Under the ACA, insurers could not discriminate against people with pre-existing conditions like cancer, diabetes, or heart disease. The new plan does away with coverage for pre-existing conditions and institutes a continuous coverage provision.

People who have lapses in insurance cannot be denied coverage, but they can be charged more. Enrollees cannot have gone 63 continuous days (or more) without coverage, or they would pay a 30% penalty on premiums.

Older consumers would pay more for coverage under the GOP plan. The oldest consumers on the individual market are 64, just shy of the Medicare eligibility age of 65, and under the Affordable Care Act they can be charged no more than 3 times what a 21-year-old would pay. The GOP plan would broaden the age bands, as these rate limits are called, to 5 to 1, allowing insurers to charge the oldest consumers five times more than younger ones.

What’s more, the proposal would give the states the latitude to broaden those limits even further or to constrict them back to 3 to 1 or another level. Moving to a 5-to-1 rating would increase monthly premiums for a silver plan in 2018 by 25% for a 64-year-old before tax credits.

Older consumers would get hit with a double whammy: not only may their premiums increase, but the restructured tax credits won’t go as far as those under the Affordable Care Act in subsidizing the premium cost. The new tax credits are based on age, not on income, while many of the consumers on the individual market are lower income.

The new tax credits would also rise at a slower rate than under the Affordable Care Act, where credits were pegged to the cost of the second-lowest cost silver plan in the consumer’s region. That benchmark reflects the true market cost of the plan. The new peg, by contrast, is pegged only to a measure of inflation.

The GOP’s plan includes the phase out of the Medicaid expansion. About 10.7 million people were newly eligible for Medicaid coverage after the ACA went into effect. One of the only ways to pay for the GOP’s health subsidies and cut taxes the ACA imposed on the wealthy is to cut off federal Medicaid funding.

States will be allowed to continue to enroll people into Medicaid until 2020. Then, it will “freeze,” and no other enrollees can be added, the thinking being people will eventually drop out of the program as they earn more money; 31 states expanded Medicaid to people above the poverty level under the ACA, and the Republican plan would roll that back, though how has become a major point of argument inside the party.

There are several other components to the bill, including restrictions on funding for Planned Parenthood, plus more generous use of health savings accounts. But the meat and potatoes is that the bill repeals the mandate and replaces it with a 30 percent premium penalty for anyone – healthy or sick – who does not maintain continuous insurance coverage; which sounds kind of like a mandate, and will surely be challenged in the courts.

The tax credits for buying insurance are also altered and reduced, making it more expensive for the old and poor. And major cuts to Medicaid funding which are already running into roadblocks. With Medicaid reductions and smaller tax credits, there is a strong chance that many people would lose their coverage. In other words, the new plan is less of a repeal and more of a revamp or re-branding, absent significant improvements and sustainable solutions.

The proposal has not yet been scored by the Congressional Budget Office, the federal agency that calculates the impact that proposed legislation would have on the debt and other considerations; that means we do not know how it will be paid for and whether it will cost more than ACA.

If all proceeds smoothly, and the votes are lined up, the full House could vote on the bill within two weeks. The votes might not be lining up. The new bill to replace Obamacare is being savaged by early bad reviews from a wide range of conservatives, with one Republican senator declaring it “dead on arrival” in the Senate – if it can make it through the House, and it would take less than two dozen defections among Republicans to sink the repeal effort, assuming Democrats vote as a bloc.

In other words, this could be a long, drawn out process. Just a reminder, Trump has said the repeal and replace of Obamacare needed to take place before moving on to tax reform.

Drug companies were generally lower today, including Endo, Valeant, and Mallinckrodt, which were all down more than 4%. Generics giants Allergan and Mylan were also down as much as 2%.

Losers in the hospital space include Tenet Healthcare, down 4%, and Universal Health Services, down about 2%, and HCA Holdings was down a bit less than 1%.

Biotech stocks were also getting hit, including Juno Therapeutics, Sage Therapeutics, and Intercept Pharmaceuticals, each down as much as 2%. The large health insurance stocks were flat.

The US Citizenship and Immigration Services said it plans to suspend fast-track processing for the H-1B skilled-worker visa program, a move that could slow down the process of hiring foreign workers for US companies.

The US trade deficit shot up in January to a five-year high. The trade deficit rose 9.6% to $48 billion in January from a revised $44 billion in December. The wider deficit was spurred by a 2.3% increase in imports of consumer goods such as cell phones from China and other countries.

The higher cost of oil also boosted the value of US imports. Imports totaled $240 billion in January. US exports, meanwhile, rose a smaller 0.6% to $192 billion. Exports of cars and trucks, oil and soybeans all rose sharply.

Looking further afield, a new report shows the Eurozone economy grew by 1.7% in the fourth quarter. This was in line with expectations and slightly slower than US growth over the same period. However, German industrial orders in January delivered a nasty shock, slumping 7.4%.

In South America, new figures from Brazil show the country continues to grind through its longest recession ever, spanning eight consecutive quarters. Brazil’s economy shrank 3.6% in 2016. That’s just a slight improvement from 2015, when it contracted 3.8%, but still far from good.

Exxon Mobil promised to invest $20 billion over 10 years to build and expand refineries, chemical and liquefied natural gas plants along the Gulf Coast. Chairman and CEO Darren Woods said the work, which would focus on 11 plants in Texas and Louisiana, would create 12,000 permanent jobs and 35,000 construction jobs. Exxon currently has about 71,000 employees. The promised $20 billion, decade-long investment would be roughly equal to Exxon’s total capital spending last year.

The Justice Department is seeking additional information from General Electric and Baker Hughes over their pending merger, extending the waiting period related to the regulatory review until 30 days after the companies comply. GE announced a deal in October to combine its oil and gas business with Baker Hughes, forming one of the industry’s largest oilfield services and equipment companies.

Salesforce announced an artificial intelligence partnership with IBM. As part of the agreement, data from Big Blue’s Watson will be available to Salesforce customers, and the cloud company’s technology will be integrated into IBM’s system for internal use.

Amazon has abandoned its legal battle to protect its Alexa assistant with First Amendment rights – for now. The company filed a motion against a police search warrant in an Arkansas murder case earlier this month, but dropped it after the defendant agreed to hand over the data contained on his Echo speaker. Amazon previously claimed that voice interactions were a “constitutionally protected opinion.”

RadioShack stores are closing again. General Wireless, the joint venture with Sprint that purchased 1,700 stores from the original RadioShack Corp. after it filed for bankruptcy in 2015, apparently hasn’t been able to fix the 96-year-old brand. General Wireless is now preparing its own bankruptcy filing.

Toshiba is spinning-off its core memory chip business and seeking outside investors in it. Potential suitors include Apple, Foxconn, TSMC, Microsoft, Western Digital, Micron, and SK Hynix. Apple could have the edge to win the business, which would allow it to lock in memory technology for its iPhone and other products. Micron and SK Hynix face antitrust issues while Foxconn faces national security issues. The seller values the business at $17-18 billion. Bids are due March 29.

The Oakland Raiders have found a financial partner to back their new proposed stadium in Las Vegas. Bank of America has been secured to help complete financing on a $1.9 billion, 65,000-seat stadium that would be located on the Las Vegas Strip.

The state of Nevada has committed $750 million to the project, with the team and the league paying the remaining cost contingent on the owners’ approval. The Raiders are eligible for relocation, but 24 of the 32 NFL owners must approve any move. The league’s owners are set to meet in Phoenix later this month.

Financial Review

Dilma’s Demise

Sinclair Noe — August 31, 2016

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

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DOW – 53 = 18,400
SPX – 5 = 2170
NAS – 9 = 5213
10 Y + .01 = 1.58%
OIL + .20 = 44.90
GOLD – 2.00 = 1309.50

Since the Dow Jones Industrial Average was created in the late 1890s, September has produced an average loss of 1.1%. The 11 other months of the calendar, in contrast, have produced an average gain of 0.8%. September has an impressively consistent record at or near the bottom of the rankings, not just one or two really horrible years. Just a reminder – correlation is not the same as causation.

The S&P 500 lost 3 points for the month of August. The Dow Industrials dropped 56 points for the month, but both indices hit record highs during the month. Speculative long contracts, or bets that stocks are going higher, on the Dow at the Chicago Board of Trade recently hit a record of 38,382; with long bets on the S&P 500 rising to the highest level in three years.

Gold fell again today, holding ground at the lowest levels in two months and down about $40 for the month, the first monthly loss since May.

Oil futures slid to their lowest levels in nearly three weeks, then recovered to post a small gain at the close. Data by industry group American Petroleum Institute late Tuesday showed U.S. crude stocks rose by 942,000 barrels in the week ended Aug. 26.

The EIA report Wednesday showed crude-oil and product exports totaling an estimated 4.976 million barrels a day, up from 4.578 million a week earlier. The report also showed a bigger-than-expected rise in crude supplies.

U.S. Treasuries posted their largest monthly loss since June 2015 after a slew of hawkish rhetoric from Fed officials almost doubled the probability of a September rate hike to 34% in the futures market. Fed Vice Chairman Stanley Fischer said that any increase will be data dependent, having previously pointed to employment figures on Friday as being of key importance.

ADP reports private-sector hiring stayed strong in August, as employers added 177,000 jobs.  ADP’s data gives us a hint about the Labor Department’s employment report, which will be released Friday and covers government jobs in addition to the private sector. The ADP report is not an exact match to the government report, and there can be significant differences in any given month, but they are usually pretty similar.

Fed Chair Yellen cited 190,000 as a three-month average in her speech and is likely a key number needed to see a rate hike in September. On August 5, just before the release of the July Jobs Report, the Wall Street Journal, reported the following: “The magic number in Friday’s jobs report is 200,000.

If the Labor Department reports that employers expanded payrolls by 200,000 or more in July, then that will likely keep alive the possibility of a Federal Reserve interest rate increase at its September policy meeting.”

We know the jobs reported last month came in way above 200,000 at 255,000. If above 200,000 for July’s NFP had a rate hike “alive” then another 200,000 for an additional month (August) should have it as a near “lock.”

The National Association of Realtors reports its pending home sales index rose 1.3% in July. It’s 1.4% above year-ago levels and the second-strongest reading since April. The index for the west rose to the highest level in over three years. A sale is listed as pending when the contract has been signed but the transaction has not closed.

The pending-home sales index typically represents about 20% of the transactions for existing-home sales so is a leading indicator for that series. The NAR forecast that existing home sales will reach 5.38 million this year, up 2.8% and the highest level since 2006.

Consumer price inflation in the Eurozone was stuck at 0.2% in August, leaving the ECB no closer to its inflation target than when it launched the first of a series of stimulus measures more than two years ago. Other data released by Eurostat showed the bloc’s unemployment rate unchanged at 10.1% (more than double the U.S.). The figures could push the ECB to launch additional stimulus at its next policy meeting on Sept. 8, like extending the duration of its bond-buying program by at least another six months.

Donald Trump will deliver his immigration policy in a speech in Phoenix later today. Earlier today he traveled to Mexico City to meet with Mexican President Enrique Peña Nieto. Standing on stage with Mexican President Enrique Peña Nieto after their brief meeting, Trump described the encounter between the two men as a “great honor” and sang the praises of Mexican-Americans.

Trump ticked off a list of five things that he described as shared goals between the US and Mexican governments. For his part, Peña Nieto emphasized the importance of the historic alliance, but did not hesitate to acknowledge the areas where the two leaders differ. In response to questions from reporters, Trump said, “We did discuss the wall. We did not discuss payment of the wall.”

Brazil’s Senate voted to impeach suspended President Dilma Rousseff. Rousseff is accused of mishandling Brazil’s budget and misrepresenting the state of the economy. Some of her accusers, as Rousseff noted in her testimony, are themselves accused or convicted of serious corruption charges.

She testified for 14 hours straight on Monday. Rousseff defended her innocence and characterized the impeachment as a coup. The most remarkable aspect of all of this – and what fundamentally distinguishes this process from impeachment in, say, the US – is that Dilma’s removal results in the empowerment of a completely different party that was not elected to the presidency.

Michel Temer the interim president who served as Ms. Rousseff’s vice president before breaking with her this year, is now expected to remain in office until the end of the current term in 2018. Several of the men Temer named to his cabinet have already resigned under the cloud of scandal, including his anticorruption minister and his planning minister, because of claims that they were trying to stymie investigations into the bribery engulfing the national oil company, Petrobras.

Temer is accused of accepting bribes and was recently found guilty of violating campaign finance limits, a conviction that could make him ineligible to run for office for eight years.

The first regularly scheduled commercial flight between the U.S. and Cuba since 1961 is set to fly today, as a JetBlue plane departs Fort Lauderdale for Santa Clara. Transportation Secretary Anthony Foxx will be on board. Other U.S. air carriers that are planning to begin airline service to Cuba include American Airlines, Frontier Airlines, Silver Airways, Southwest Airlines and Sun Country Airlines.

A seven-member board has been appointed to oversee a financial restructuring for Puerto Rico, which has been crippled by a $70 billion debt crisis. The idea of a fiscal control board, known colloquially as La Junta in Puerto Rico, is largely reviled on the island, which has a 45 percent poverty rate and whose chronic economic slump has helped spur rampant out-migration.

The board was created under the federal law known as PROMESA, passed earlier this year, which will bring Puerto Rico’s finances under federal oversight and give it the authority to restructure some of its debt. The board will be tasked with assessing and certifying annual budgets and a fiscal recovery plan presented by the island’s government, as well as facilitating debt restructuring talks on the island, possibly through a bankruptcy-like process.

SWIFT has disclosed new hacking attacks on its member banks as it pressured them to comply with security procedures instituted after February’s $81 million heist at the central bank of Bangladesh. The global financial messaging system said it might report institutions if they failed to meet a November 19 deadline for installing the latest version of software which includes a host of new security features.

A former Monsanto executive who tipped the Securities and Exchange Commission to accounting improprieties involving the company’s top-selling Roundup product has been awarded more than $22 million from the agency’s whistle-blower program. The award was tied to an $80 million settlement between the SEC and Monsanto in February.

The SEC said Monsanto lacked sufficient internal controls to account for millions of dollars in rebates that it offered to retailers and distributors. It ultimately booked a sizeable amount of revenue, but then failed to recognize the costs of the rebate programs on its books. That led Monsanto to “materially” misstate its consolidated earnings for a three-year period.

For-profit educator ITT Technical Institute announced today that it will no longer accept any new enrollments. The news came four days after the US Department of Education imposed sanctions on ITT Education Services, the college chain’s parent company, barring the school from enrolling students who use federal financial aid and requiring ITT to provide a letter of credit showing it’s sufficiently funded.

The sanctions prohibiting the enrollment of students who use financial aid struck such a blow to ITT Tech because, like most for-profit colleges, it’s highly dependent on federal aid. Last year, ITT fell into hot water with the Education Department because of its refusal to provide the proper accounting of federal grants it distributes to students dating back to 2009. The department then placed restrictions on federal financial aid at ITT. ITT Tech is under multiple federal and state investigations relating to the way the for-profit organization runs its operations.

“All hands on deck” may soon be a thing of the past. Ship designers, their operators and regulators are gearing up for a future in which cargo vessels sail the oceans autonomously with minimal or even no crew. British engine maker Rolls-Royce is among those leading the pack, with its Advanced Autonomous Waterborne Applications initiative involving other companies and universities. It predicts unmanned shipping to cut transport costs by 22%.

Financial Review

Fed Day

Sinclair Noe — June 15, 2016

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

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DOW – 34 = 17,640
SPX – 3 = 2071
NAS – 8 = 4834
10 Y – .02 = 1.60%
OIL – 1.00 = 47.49
GOLD + 6.00 = 1292.50

It’s Fed Day. The Federal Open Market Committee (the FOMC) released a policy statement leaving the fed funds rate unchanged at 0.25 percent to 0.5 percent, in the first unanimous decision since January. The FOMC statement read: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.”

The Fed expressed confidence that jobs will rebound, saying that it expects “labor market indicators will strengthen.” It said that the “drag from net exports appears to have lessened” and housing has improved, while business fixed investment has been “soft.”

At the start of the year, the Fed was projecting up to 4 rate increases in 2016; they have now revised that down to 2 rate hikes. The median long-run projection for the federal funds rate fell to 3 percent from 3.3 percent in March. Most market watchers do not expect a rate hike in July, although that is subject to change between now and then, if we see a really significant pickup in economic data.

The risk of the Fed prematurely raising interest rates at this point is extremely low. They are going to let this cycle lengthen and strengthen by keeping rates low. Unfortunately, this means the economic data of the past few months has really been bad. Job gains and overall output have disappointed, projections of future growth have declined, and inflation expectations remain far short of targets. And if there is a Brexit next week, we may be wondering why the Fed didn’t cut rates.

The statement said the Fed continues to monitor global market risks but in a press conference following the release, Fed chair Janet Yellen said next week’s referendum in the U.K. on whether to remain in the European Union was a factor in the U.S. central bank’s decision to hold interest rates steady. The Bank of England has begun a series of extra market operations aimed at boosting bank funding around the referendum. The European Central Bank said last week the bank is prepared to offer euro liquidity.

The dollar extended losses, touching a 20-month low versus the yen. Fed Chair Janet Yellen said in a news conference, that while the currency is “certainly relevant” to Fed rate decisions, “I really would not go so far as to say it is a constraint on monetary policy.” Treasuries gained, with two-year note yields touching the lowest since February. Gold rallied again.

Oil prices extended their losses for the fifth straight day, the longest losing streak since February. Goldman Sachs published a research note predicting the price recovery is likely to stall. The bank explained that the restart of Canadian production, prospects of a solution to Nigerian outages, larger-than-expected output from OPEC members, and the risk of smaller-than-expected production declines as result of higher crude prices are likely to temper price gains going forward.

With opinion polls showing momentum swinging to the “Leave” camp, British finance chief George Osborne is warning voters that he will increase taxes and cut spending if they decide to leave the bloc in next week’s referendum. Meanwhile, the world’s biggest banks are drafting senior traders to work through the night of June 23, which might be one of the most volatile 24 hours for markets since Black Wednesday of 1992. If it sounds like political fear mongering…, yea, that’s about right.

The Labor Department said its producer price index, a measure of prices at the wholesale level, increased 0.4 percent last month after rising 0.2% in April. In the 12 months through May, the PPI slipped 0.1% after being unchanged in April. The core PPI, a measure of underlying producer price pressures that excludes food, energy and trade services dipped 0.1% last month.

Industrial production fell more than expected in May on a decline in utilities output and auto manufacturing, a sign that the economy may be losing some steam in the second quarter. Industrial output declined 0.4 percent last month. American producers are still battling the fallout from the plunge in energy prices that has sapped the appetite for investment, while a strong dollar and slow global growth have weighed on exports. Manufacturers could find some relief as companies have trimmed stockpiles, leaving them with fewer goods on hand should consumer spending continue to climb.

Chinese stocks rose the most in two weeks today as investors shrugged off MSCI’s decision not to add mainland shares to its key Emerging Markets Index. This marks the third year running it has given Chinese A-shares the thumbs-down, given lingering concerns about market accessibility. MSCI noted that it would consider including the equities as part of its 2017 review, but did not rule out a potential off-cycle announcement.

California has overtaken France as the world’s sixth-largest economy, growing by 4.1% in 2015. The most-populous U.S. state, with a gross domestic product of $2.5 trillion, has also eclipsed recession-plagued Brazil. Irena Asmundson, chief economist of the California Department of Finance said, “This is the result of both good growth in California and exchange-rate movements of the dollar vs. other currencies.”

In an effort to make good on a pledge to cut its carbon output anywhere from 80 percent to 95 percent by 2050, Germany is mandating that new cars registered there will have to be emissions-free by the year 2030. The German government is planning to provide subsidies that it hopes will boost the sale of electric cars. In a plan similar to those in other countries, people who buy electric or hybrid cars would be eligible for cash incentives. The Environment Ministry is hopeful that the move will help to sell around 500,000 electric cars by the year 2020.

As many as 8,000 more jobs are set to go at Bank of America’s consumer arm as the digital banking revolution gathers pace and reduces the need for back-office staff and bank tellers. The biggest US retail bank by deposits also plans to add sales staff — including mortgage loan officers, small business bankers and personal investment advisers. Even so, the overall headcount is expected to decline by several thousand as the number of consumers who visit branches falls steadily.

Office Depot said it planned to hire 8,000 temporary and full-time workers during the busy back-to-school season. Office Depot said temporary staffing will rise by a third as it prepares for the increased customer traffic from July through September. Some of the new hires will help fulfill the “buy online, pick up in store” service that the company offers.

U.S. Senator Charles Grassley, chairman of the Senate Judiciary Committee, is urging federal antitrust officials to conduct a “careful analysis” of Dow Chemical’s proposed $130 billion merger with DuPont. Among the concerns: A decrease in farming competition, raising barriers to entry for smaller companies, hurting innovation and higher prices.

Google Fiber is looking to expand in Texas. The Alphabet unit is working with Dallas leaders to learn more about the city’s existing infrastructure, local topography and other factors that could impact the building of a fiber network. The service, which costs $70 per month, is already available in Austin and is set to roll out in San Antonio.

The U.S. and Venezuela are launching high-level diplomatic talks to ease tensions in the South American country amid deepening social and economic crises. Secretary of State John Kerry said the talks with Washington’s ideological foe would begin in Caracas “as soon as possible” and that the U.S. was looking at ways to provide assistance.

More political earthquakes in Brazil… The country’s Supreme Court has denied ex-president Lula da Silva a privileged legal protection, increasing the likelihood he will be arrested in connection with a corruption probe centered on the state run oil company, Petrobras. Meanwhile, Speaker Eduardo Cunha has lost his seat for allegedly lying about undeclared Swiss bank accounts and President Dilma Rousseff has been stripped of some perks, including her use of Air Force planes and hotel bill allowances.

A World Health Organization panel has elevated the Zika virus to a public health emergency, but spurned calls to postpone or move the 2016 Olympic Games, which are scheduled to begin in Rio de Janeiro in six weeks. Brazil is hosting the Games during its winter, when the concentration of mosquitoes that spread Zika and other viruses is low. The country is also intensifying its efforts to control mosquitoes around cities and event venues.

Twenty-five years after classifying coffee as a possible carcinogen leading to bladder cancer, the World Health Organization has reversed course, saying today that coffee is not a carcinogen, and has even been seen to reduce the risk of liver and uterine cancers. At the same time, however, they presented other scientific evidence which suggests that drinking anything very hot, over 150 degrees, including water, coffee, tea and other beverages, probably does cause cancer of the esophagus. Still, that might be the best news of the day.

Or maybe this: If you watch any NBA basketball, you are probably familiar with TBS sideline announcer Craig Sager; With his signature flamboyant suits and good-natured interviews between timeouts, Sager has become one of the most beloved figures in the NBA. Sager was diagnosed with acute myeloid leukemia in 2014, and said in March that the cancer was no longer in remission.

The Turner-owned TNT broadcasts the playoffs through the conference finals, but the NBA Finals have been on ABC since 2003. For more than a decade before that, the series aired on NBC. Because he’s worked more than 30 years for Turner Sports, Sager has never worked the championship series. That will change tomorrow, when Sager joins ABC’s broadcast of game six of the NBA Finals between the Golden State Warriors and Cleveland Cavaliers.

Financial Review

More Exciting Than Soccer

Sinclair Noe — April 15, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 28 = 17,897
SPX – 2 = 2080
NAS – 7 = 4938
10 Y – .03 = 1.75%
OIL – 1.07 = 40.43
GOLD + 6.50 = 1235.10

It was a pretty good week on Wall Street, even though it feels like some of the recent gains were the result of a short squeeze. On Thursday, the Dow and S&P 500 closed at their highest levels of the year so far. The S&P 500 has recovered about 14% from the February lows. The S&P has posted gains in 7 of the past 9 weeks. The Dow posted a 1.8% gain for the week, its best since the week ended March 18. The S&P 500 added 1.5% for the week.

The world’s second-largest economy grew 6.7% in Q1, the slowest pace of expansion since the financial crisis. But the figure suggested China’s target range of 6.5%-7% growth for 2016 is possible as long as it continues using its vast stimulus toolbox. Other data also reinforced previous signs the country may be finding traction with better-than-expected growth in retail sales, industrial output, fixed asset investment, export figures, and capital outflows.

The biggest oil meeting in decades takes place on Sunday. Major oil producers will gather in Doha, Qatar on Sunday to discuss a potential oil production freeze. Expectations for a deal are low.  Notably, Iran has said it won’t send its oil minister to the meeting, which could pose a problem as Saudi Arabia has suggested it won’t agree to a deal unless Iran is involved. Russia’s finance minister has said that even if a deal is reached to freeze production, it might not result in higher prices. The 18 nations set to gather in Doha on Sunday to discuss a production freeze have spent $315 billion of their foreign-exchange reserves, about a fifth of their total, since the oil slump started in November 2014.

The other big event for investors to watch this weekend will be political developments in Brazil, where a last minute attempt to block an impeachment vote against President Dilma Rousseff in the Supreme Court has failed. The vote will now go ahead on Sunday, with markets viewing the removal of Rousseff as a positive development for the country and the global economy. The vote is so important in Brazil that soccer matches are being rescheduled and huge outdoor screens to broadcast proceedings have been set up.

One big problem is that some of the most vocal lawmakers pushing to impeach Rousseff are facing serious charges of graft, electoral fraud and human rights abuses. If Rousseff is impeached, the vice president Michel Temer is not expected to take over because he has been accused of involvement in an illegal ethanol-purchasing scheme. The House Speaker Eduardo Cunha, the third in the line of succession, has been charged with accepting millions in bribes. Altogether, 60 percent of the 594 members of Brazil’s Congress face serious charges like bribery, electoral fraud, illegal deforestation, kidnapping and homicide. I would have to agree – this is more exciting than soccer.

In the wake of the Panama Papers scandal, the EU’s five biggest economies have struck a deal to crack down on tax avoidance, agreeing to exchange information on the beneficial owners of companies and trusts. The IMF says tax avoidance is a global risk. At the annual IMF meeting in Washington, Britain’s George Osborne said, “Today we deal another hammer blow against those who hide their illegal tax evasion in the dark corners of the financial system.” The UK, Germany, France, Italy and Spain are now pushing for the rest of the G20 to follow suit.

US manufacturing output declined in March by the most since February 2015. The 0.3 percent drop at factories, which make up 75 percent of production, followed a revised 0.1 percent decrease the prior month. Utility output decreased 1.2 percent after a 3.6 percent slump the previous month. Mining production, which includes oil drilling, decreased 2.9 percent. The Federal Reserve reports total industrial production, including mines and utilities, slumped by a weaker-than-estimated 0.6 percent for a second month.

The University of Michigan’s preliminary consumer sentiment index for this month fell to 89.7, the lowest since September, from 91 in March. Steady employment gains haven’t yet translated into solid wage increases. About a fifth of those surveyed mentioned the election or government policy as likely to have negative implications for future economic growth.

Earnings season kicks into high gear next week; it’s shaping up to be the worst quarter for earnings since 2009. The first quarter, should it come in as expected, would mark a third straight quarterly decline in earnings and a fifth straight fall in revenue. This week saw earnings reports from the big banks, and the results were bad but they could have been worse.

Citigroup reported a big drop in earnings this morning. Citi’s revenue fell 11% year-over-year to $17.6 billion. Meanwhile, net income plunged 27% to $3.5 billion or $1.10 per share. That bottom line beat the $1.05 expected by analysts. Citi’s trading revenue fell to $3.79 billion, the fourth straight year that fixed-income and equities trading operations declined in what is typically the industry’s strongest quarter. This has been a common theme among the big banks (JPMorgan, BofA, and Wells Fargo) that reported earnings this week.

Other common themes include cost cutting to prop up profits (Citi really added to the bottom line by firing a whole lot of people), also all the banks have big problems with energy loans. Citi set aside about $455 million for energy loans in the first quarter; in all, the bank said provisions were $2.05 billion.

One more thing we learned this week is that the big banks are still too big to fail; five of the 8 biggest banks flunked the Federal Reserve test; seven out of 8 did not have “credible” plans for how they would wind themselves down in a crisis without sowing panic or requiring bailouts. Citi passed the test, barely; regulators said their plan had shortcomings.

The Dodd-Frank Act of 2010 told large financial institutions to draw up “living wills”, or plans for dismantling the enterprises if they go bust. The big banks are struggling to comply. Part of the plan calls for the banks to have cash and liquid assets to keep operations operating. That might not be enough to avoid a meltdown. Ultimately, the only way to be sure a bank is not too big to fail, and melt down the economy, is to make the big banks smaller. It’s the difference between eating a bite size piece of steak and trying to swallow the entire cow.

The Federal Communications Commission is working on a new rule that would forbid cable companies from requiring customers rent their set-up boxes directly from their providers. Renting the boxes can run upwards of $240 a year per box, and consumers don’t have a choice between boxes. The price of buying a box outright could easily be less than the fees customers pay over the course of a year.

Among the supporters of the set-top box proposal are technology companies like Google, Amazon and Apple, which are eager to establish a broader foothold in the TV market. The cable industry is opposed, calling it a giveaway to wealthy tech companies. If you’re looking for precedent to breaking up the cable industries lock on set top boxes, look back to a time when Americans rented their phones from Ma Bell.

And set top boxes might not be the only industry facing a shakeup. The Council of Economic Advisers issued a report today saying that competition was declining in many industries and argued that the decrease was having a harmful effect on consumers and workers.

As Yahoo prepares to accept first-round bids for its core Internet division on Monday, potential buyers have found themselves facing one big problem: How do you value a firm with a declining business when the company appears reluctant to share vital financial details? According to the NYT, Yahoo executives have refused to discuss the outlook for 2017 or answer questions about crucial aspects of the business in meetings and phone calls with potential bidders.

General Motors is recalling more than one million newer pickup trucks for a seat belt flaw. GM said the recall of the 2014-15 Chevrolet Silverado and GMC Sierra 1500 pickups is not linked to any crashes or injuries.

Pre-orders for the Tesla Model 3 are approaching 400,000. Tesla plans to expand its lineup following the Model 3, likely including a Tesla pickup truck that’s been talked about before by CEO Elon Musk.

You know all those fees that airlines have added over the last several years? Delta is taking one away. Delta will drop the fee for U.S. consumers who buy tickets over the phone or at a ticket counter to make things simpler for customers. The phone fee was $25 and the fee for a ticket bought at an airport or other ticket counter was $35. So now Delta and Southwest are the only major airlines that do not charge these particular fees.

What has caused Delta to seemingly have a change of heart? Delta says that in-person ticketing gives them a chance to engage with their customers. Yea..., that’s not it. The simple fact is that everybody hates this fee; it made the airline look greedy, very greedy. But the real reason for cutting the fee: airlines are swimming in profits thanks to lower fuel prices.

And whether you fly or drive or find some other means of transportation, the next week might be a good time to get away. The U.S. National Park Service is celebrating its 100th birthday in 2016. And during National Park Week, April 16 through April 24, you can join in on the celebration by enjoying free admission to any of the 58 national parks in the country.