Financial Review

Manufacturing Breaks Bad

Sinclair Noe — September 1, 2016

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

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DOW + 18 = 18,419
SPX – 0.09 = 2170
NAS + 13 = 5227
10 Y un = 1.57%
OIL – 1.18 = 43.52
GOLD + 5.10 = 1314.60

The Institute for Supply Management said its manufacturing index in August fell to 49.4% from 52.6% last month, below expectations for a 52% reading. Any reading below 50% indicates contraction, and the index was below that level for the first time since February.

Today’s ISM report is one of the most important data releases. The ISM index is a leading indicator, which tells us what is going to happen. In other words, it is leading both economic news and stock prices. New orders are down 7.8 points, production is down and employment is contracting faster.

Overall, manufacturing is contracting again. Only six out of 18 industries were able to report growth. Eleven reported contraction. Cyclical industries like machinery and transportation equipment continue to underperform.

The poor ISM report comes on the heels of another weak report. Earlier, the government announced a steeper-than-initially expected decline in worker productivity, in what has been the longest dip in productivity since the 1970s. Nonfarm business productivity fell at a 0.6 percent seasonally adjusted annual rate in the second quarter, from an earlier estimate of a drop of 0.5 percent.

But the Labor Department also reported a surprise jump in labor costs, with the annual rate of unit labor costs rising to 4.3 percent at nonfarm businesses. The initial estimate was a 2 percent pace. Hourly compensation in the second quarter grew at a rate of 1.1 percent on an inflation-adjusted basis, from an earlier estimate that it had declined at a 1.1 percent rate.

The crummy data comes a day before the important August employment report, expected to be a major indicator for whether the Fed could raise rates in September. While some traders speculated the manufacturing report was a one-time blip, the data definitely subdued some talk that the economy was strong enough for the central bank to hike.

The number of Americans who applied for unemployment benefits last week rose 2,000 to 263,000. The average of new jobless claims over the past month, meanwhile, fell by 1,000 and also totaled 263,000. The less volatile four-week average is seen as a more accurate measure of labor-market trends. New claims fell below the key 300,000 threshold in early 2015 and have remained there for 78 straight weeks, the longest stretch since 1970.

The number of announced layoffs by U.S.-based companies fell in August to the lowest level since May. Global outplacement consultant Challenger, Gray, and Christmas reports US employers announced they planned to hand out 32,188 pink slips last month, a 29 percent decline from July.

The August total was also 22 percent below the number of job cuts at this time last year. The computer sector was the biggest job-cutter, with Cisco Systems accounting for most of its 6,103 payroll reductions. The industrial goods sector – which includes the oil patch – was also hard hit, losing 3,073 jobs.

Wal-Mart said it will cut about 7,000 back-office jobs, mostly in accounting and invoicing positions at its U.S. stores, continuing a program it announced in June of cutting such jobs on the West Coast. Wal-Mart will now cut back-office workers in all its approximately 4,600 stores over the next several months. The retailer employs about 1.5 million people in the United States.

US auto sales fell 4.2% in August as some major automakers said a long-expected decline due to softer consumer demand had begun. The top three sellers, GM, Ford, and Toyota reported declines of at least 5%. Of the seven top manufacturers by sales, only Fiat Chrysler Automobiles reported a gain versus a year ago. Auto sales account for about one-fifth of all retail sales. Look for car companies to offer incentives to entice buyers.

A barrel of West Texas Intermediate for October delivery has been trading under the $44 a barrel level, with the commodity dropping about 7.5% this week. Russia’s Energy Ministry said it sees no need for talks on capping production with oil prices around $50 in a statement ahead of OPEC talks in Algiers later this month.

Russia, the world’s biggest energy exporter, was a key negotiator in talks on an oil-output freeze with Saudi Arabia and other OPEC producers in April. That proposal failed after Iran declined to attend the meeting in Doha and Saudi Arabia refused to proceed with the deal without the participation of its Persian Gulf rival.

With gasoline prices rising at the pump as the summer driving season draws to an end, drivers can take solace in the fact that they shelled out less for the fuel this summer than they have in over a decade and that prices will fall back soon as fuel demand drops.

The U.S. national average for a gallon of gasoline is likely to end the summer driving season at about $2.24, and that means drivers enjoyed the cheapest summer at the pump since 2004; and it’s a big drop from Labor Day 2012 when the average price was $3.86 a gallon. Now, with the usual drop in gasoline consumption following the Labor Day holiday, drivers can expect to prices decline as demand softens.

What Brexit effect? British manufacturing staged one of its sharpest rebounds on record in August as factories recovered from the initial shock of June’s vote to leave the European Union. The Markit/CIPS purchasing managers’ index for the sector soared to 53.3 from July’s figure of 48.3. Data over the past couple of weeks has further shown consumer demand holding up in the face of the referendum result.

More than $7 billion was wiped off the market value of Samsung Electronics today after it delayed shipments of its Galaxy Note 7 phone. Samsung announced the delays after several people posted images and videos of charred Galaxy Note 7s online and said their phones had caught on fire. Several South Korean media reports, without citing direct sources, said Samsung will soon announce a plan to recall affected Note 7 phones and replace their batteries as opposed to giving the users a new device.

The collapse of South Korea’s Hanjin Shipping is sending ripples through world supply chains, as manufacturers scramble for freight alternatives to the world’s seventh-biggest shipping line. Hanjin’s bankruptcy is the biggest ever in container shipping history. Hanjin filed for court receivership after its banks decided to end financial support, and ports across the globe have refused entry to its vessels in what is traditionally the industry’s busiest season ahead of the year-end holidays. Another theory is that Hanjin’s ships are staying out of port to avoid being confiscated.

The Securities and Exchange Commission fined RBC Capital Markets for $2.5 million for allegedly making materially false and misleading disclosures in its fairness opinion valuation analysis for a proxy statement for Rural/Metro Corporation’s sale in 2011 to a private equity firm. An SEC investigation found that RBC’s presentation as the lead financial adviser to Rural/Metro, a medical transportation services provider, contained allegedly materially false and misleading statements which made the bid look more attractive.

The investment bank that advised SolarCity on its $2.6 billion sale to Tesla made a “computational error” in its analysis that discounted the value of the solar company by $400 million. Despite the mistake by Lazard, the companies agreed it would not change their view of the deal. SolarCity has until September 14 to actively seek other acquisition proposals, at which time its “go-shop period” ends. The filing also revealed that in recent weeks, 15 institutional investors passed on either acquiring SolarCity or injecting equity into it. The company is having difficulty tapping the public markets amid the proposed merger and is facing a liquidity squeeze.

SpaceX’s Falcon 9 rocket has exploded as part of a test on a launch pad in Cape Canaveral, Florida. The company was scheduled to do a static test-fire of the rocket, which it previously landed safely on a ship in April after it delivered supplies to the International Space Station. So, this would have been the first recycled rocket.

The first step in Facebook’s grand vision to connect the entire world to the internet, or at least connect to Facebook, has gone up in flames. That SpaceX rocket that exploded was carrying a satellite that Facebook planned to use in its internet.org initiative. Facebook had planned to lease some of the bandwidth on the satellite, Amos 6, from its operator, the Israeli company SpaceCom, to beam internet to sub-Saharan Africa.

The satellite was intended to fill in until Facebook’s more ambitious plans for internet access are ready, including developing and launching massive solar-powered drones that use lasers to beam internet to the ground. This is the first time Facebook had planned to use a satellite.

It’s been a rough week for Facebook. Last Friday, it fired the entire editorial staff on its Trending news team, and replaced them with an algorithm, which has since promoted fake news and could potentially be gamed into promoting hate speech. At the same time, CEO Mark Zuckerberg is insisting the company is not a media company, even though many of its 1.7 billion users rely on it to get their news. He also made a voice-activated thermostat for his house that doesn’t respond to his wife’s voice.

The last hurricane to strike Florida was Wilma in 2005; that’s about to change. Hermine will soon hit the northern Gulf coast packing winds around 75 miles per hour, and dumping too much rain, possibly up to 20 inches in some parts of the state. Isolated tornadoes and storm surges as high as 8 feet were also forecast.

Towns, cities and counties along the Gulf Coast have been hastily preparing shelters for people and pets, setting up centers where residents could fill sandbags for personal use and placing electric line repair crews on standby ahead of the storm. Water spilling from rough seas already was inundating roads in some waterfront communities in the Tampa Bay region.

Financial Review

Waiting for the Jobs Report

Sinclair Noe — March 3, 2016

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 44 = 16,943
SPX + 6 = 1993
NAS + 4 = 4707
10 Y – .02 = 1.83%
OIL + .05 = 34.71
GOLD + 24.40 = 1264.90

We have a batch of economic reports, so we’ll run through the data and then break down the implications.

The Institute for Supply Management’s non-manufacturing index dropped 0.1 point to 53.4%. Any reading over 50 signals expansion. ISM’s production gauge rose 3.9 points to 57.8%. Growth in the services sector has been expanding at a slower pace for the past four months, and that is now showing up as contraction in service sector employment. Details from the services survey showed the employment index declined to 49.7 from 52.1 in January, indicating companies last month started cutting staff.

The number of Americans who applied for unemployment benefits rose by 6,000 to 278,000 in the last week of February, but the overall pace of layoffs still hovered near post recession lows. The average of new claims over the past four weeks, meanwhile, fell by 1,750 to 270,250 and hit a three-month low. In a separate report, global out placement consultancy Challenger, Gray & Christmas said U.S.-based companies announced 61,599 job cuts last month, down from 75,114 in January. Layoffs remained concentrated in the energy sector. Tomorrow the Labor Department will publish the monthly non-farm payroll report; look for a net gain of 190,000 to 200,000 jobs.

The productivity of U.S. businesses fell at a 2.2% annual pace in the fourth quarter, a smaller decline than previously estimated 3% decline. For all of 2015, productivity rose a meager 0.7%, just one-third as fast as the post-World War II average. In the fourth quarter, output rose a seasonally adjusted 1% in the final three months of 2015 instead of a 0.1% advance. Hourly compensation for all workers, adjusted for inflation, rose 1.1% in the fourth quarter and 2.8% for the full year. It wasn’t so much an increase in wages as lower oil prices kept a lid on inflation.

Orders to U.S. factories increased in January by the most in seven months, while a key category that tracks business investment plans rose by the largest amount in 19 months. Factory orders rose 1.6 percent in January after two months of declines. It was the biggest jump since June, though it was driven by demand in the volatile category of commercial aircraft. At the same time, orders in a core sector that serves as a proxy for business investment rose 3.4 percent, the sharpest one-month gain since June 2014. Orders for durable goods, products meant to last at least three years, rose a revised 4.7% in January, down from prior estimate of a 4.9% gain. Orders for nondurable goods fell 1.4%.

Stocks spent most of the session today in negative territory, before a bit of buying in the final hour. The economic data was mixed; nothing bad, nothing great; the economy appears to be chugging along; we need to wait for the jobs report tomorrow morning because that is always the big report each month, and one of the few reports that can sway the Federal Reserve. A big gain in tomorrow’s jobs report would definitely put a near-term hike back on the table. The S&P 500 has jumped almost 9% from a 22-month low reached in February, though the gains have come with weak volume, signaling a lack of conviction in the rally.

The flippers are back. RealtyTrac reports the total number of investors completing a flip, 110,008, was the highest since 2007. Even so, the average number of flips per investor, 1.63, was at the lowest since 2008. The average gross profit from flipping homes hit a 10-year high of $55,000 in 2015. That represented a return on investment of 45.8%. RealtyTrac defines flipping as selling a property more than once within a 12-month time period to a buyer other than a family member. Flips made up 5.5% of all sales nationwide. In Arizona, flips made up 7.1% of all sales.

More deflationary pressures in the Eurozone are surfacing, raising the chances ECB President Mario Draghi will increase stimulus at a central bank meeting next week. Markit’s composite Purchasing Managers Index fell to 53 from 53.6 in January – its lowest level in 13 months – while the firm’s measure of output prices across manufacturing and services fell further below the key 50 level. Markit says the slowdown in business activity, slower hiring and price declines “suggest that the region’s recovery is losing momentum.”

Latin America’s largest economy shrank the most in a quarter century last year and no recovery is in sight as shriveling demand and political crisis pummel activity. Brazil’s gross domestic product contracted 1.4 percent in the three months ended in December, after a 1.7 percent drop the previous quarter; for 2015 Brazil’s GDP dropped 3.8 percent. Brazilian courts granted more than 5,500 bankruptcy filings in 2015, the most since 2008.

The prolonged recession has made it tougher for the government to shore up its finances. Consumer and investor confidence levels have rebounded this year from record lows, which would normally suggest that the economy is bottoming but there are no real signs of recovery. The Organization for Economic Cooperation and Development forecasts the Brazilian economy to contract 4 percent this year, while the International Monetary Fund sees a 3.5 percent recession. Both forecast stagnation next year, which would mean no growth until 2018.

Oil prices have bottomed, according to the International Energy Agency. The price rally, however, will be capped in the medium term by a potential increase in the U.S. shale oil production once a rise in oil prices makes it profitable again. But prices are expected to grow throughout 2016 and into 2017, unless US shale producers have stronger than expected survivor skills. But other than that, the IEA says oil has bottomed and the price will probably hit $60 a barrel within the next 12 months.

Count hedge funds as among those licking their chops and loading up on energy companies, on a bet that happy days will be here soon for oil. Meanwhile, Blackwell Global says the recent rally above $30 is “largely a dead-cat bounce. Subsequently, expect crude to challenge the downside in the coming weeks, as the screaming hordes of market pundits stop declaring that crude oil’s bullishness is here to stay.” Which all sounds reasonable enough, or you could submit your own guess.

Former Chesapeake Energy CEO Aubrey McClendon died in a car crash yesterday after being indicted for conspiring to rig bids for leases in the oil and natural gas industry. McClendon slammed into an embankment while traveling at a “high rate of speed,” according to the Oklahoma City Police Department, which also said “he pretty much drove straight into the wall.” Chesapeake shares soared 24% on Wednesday and 25% today – not related to the fatal accident – after the company said it did not expect to face criminal prosecution or fines related to the indictment.

Costco posted an 8.7% decline in second-quarter profit, though the warehouse chain’s comparable-store sales increased. Kroger said its earnings rose 7.9% in the latest quarter, though revenue missed expectations and same-store sales growth slowed.

M&A roundup: Cisco has announced a $320 million deal to buy Leaba Semiconductor, an Israeli company that designs networking chips. Samsonite is close to buying luggage maker Tumi Holdings, in a deal that could be valued at $2 billion. MGM Resorts has reached an agreement to sell its Shops at Crystals mall in Las Vegas to a Simon Property Group partnership for $1.1 billion.

There are also vague rumors that PayPal is considering a $47/share offer from American Express. Yahoo is exploring the sale of $1 billion to $3 billion of patents, property and other “non-core assets.” General Electric’s proposed deal to sell its appliance business to China’s Haier Group for $5.4 billion has received approval from U.S. anti-trust authorities.

IBM has filed a lawsuit against Groupon, alleging that the daily deals website operator builds its business model using patents without authorization. “Groupon has refused to engage in any meaningful discussions about reaching a license agreement to end its infringement of IBM’s patents,” the firm’s complaint said. Big Blue filed a similar lawsuit against Priceline last year, accusing it of patent infringement in running its travel and dining websites.

U.S. carriers are set for a dogfight over newly opened flight rights to Havana, but their interest in other Cuban destinations appears to be lukewarm. Airlines had until the close of business on Wednesday to submit applications to the Department of Transportation that outlined the routes they would like to fly. That came after a February agreement paved the way towards restoring commercial air service between the two countries for the first time in decades.

What did they know and when did they know it? Volkswagen disclosed that former executives Martin Winterkorn and Herbert Diess were briefed internally about diesel emissions issues on U.S. vehicles, months before the firm publicly acknowledged its defeat devices. At issue is whether VW management waited too long to inform investors of potential liabilities that would later cause a massive erosion of the company’s share price and market value.

When a company’s stock price falls off a cliff, it’s hard to rally the troops, but it can be done. Case in point: LinkedIn Chief Executive Jeff Weiner is declining his 2016 annual stock compensation (a reported $14 million) in order to pass it on to workers at the professional social network. LinkedIn’s stock had dropped nearly 38% since its disappointing Q4 results on Feb. 4. Weiner isn’t the only one employing the strategy. Back in October, Twitter CEO Jack Dorsey paid out $200 million in stock to employees.

Financial Review

A Far, Far Better Thing

Sinclair Noe — December 3, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 252 = 17,477
SPX – 29 = 2049
NAS – 85 = 5037
10 YR YLD + .15 = 2.33%
OIL + 1.33 = 41.27
GOLD + 8.40 = 1062.60

The S&P 500 suffered its biggest drop since late September.

The European Central Bank cut its deposit rate commercial banks must pay to store money overnight to minus 0.3% from minus 0.2%. The ECB left its key lending rate unchanged at 0.05% and the rate on its marginal lending facility at 0.3%. They also announced they will extend their bond buying program until March 2017. But the central bank did not increase the monthly spending on bonds beyond the current monthly level of 60 billion euros, or $63 billion.

With inflation at just 0.1%, unemployment still over 10% and bank lending disappointing, many analysts were expecting more aggressive moves. Now, here’s where it got interesting; the dollar index dropped over 2%, at one point the euro was up about 3% but finished trade with modest gains. Early this morning the Financial Times tweeted and reported the ECB was leaving rates unchanged. Oops. But even after the correction, the euro held on to some of the gains.

Even as the ECB announced fresh stimulus, the Federal Reserve is considering tightening monetary policy. Actually, it is more than just a consideration – the Fed has now done everything they can to communicate that a rate hike is coming on December 16^th. Fed Chair Janet Yellen said yesterday she was “looking forward” to a US interest rate increase.

This morning Yellen spoke to the Joint Economic Council in Washington and repeated the idea that it is a far, far better thing to raise rates. Yellen said that a Fed move to start raising rates will be a sign of “how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.”

More Americans applied for unemployment benefits in the last week of November. Initial jobless claims rose 9,000 to a seasonally adjusted 269,000 in the period from Nov. 22 to Nov. 28. Weekly claims dipped below the 300,000 mark in February and are now at the lowest levels in years. The government will issue the monthly employment report for November. Economists expect a gain of about 200,000 new jobs.

Global outplacement firm Challenger, Gray & Christmas reports layoffs fell to a 14-month low in November, but total job cuts for 2015 were on track to hit a six-year high. November payroll reductions fell 39 percent from the previous month to 30,953, the lowest level since September 2014. Still, the report brings year-to-date layoffs to 574,888, setting up 2015 to be the worst year for job cuts since 2009.  Reductions in the energy sector, the hardest hit industry in terms of layoffs this year, fell to a 5-month low of 1,355, so maybe the worst of the bloodletting has passed.

The Institute for Supply Management (ISM) said its index of non-manufacturing activity fell to 55.9 from 59.1 the month before. Any reading above 50 indicates expansion in the service side of the economy. Last month’s reading was extraordinarily strong, but this month’s drop was disappointing. New export orders, new orders, business activity, and employment all showed a big slowdown.

The Commerce Department said new orders for manufactured goods increased 1.5 percent on rising demand for transportation equipment and a range of other goods. Orders in September were revised to show them falling 0.8 percent instead of the previously reported 1.0 percent drop. Despite the increase in orders last month, manufacturing looks weak.

The Obama administration expects to start lifting sanctions on Iran as early as January, after the United Nations’ nuclear watchdog found no credible evidence that Tehran recently engaged in atomic-weapons activity. However, the International Atomic Energy Agency did find that the country had pursued a program in secret until 2009, longer than previously believed. The first batch of sanctions relief would end most U.S., European and U.N. financial and energy curbs and free up around $100 billion in Iranian oil revenue that’s being held overseas.

OPEC meets tomorrow in Vienna. Saudi Arabia has reportedly challenged the oil cartel to cut production by 1 million barrels per day, saying it would back output cuts as long as they were supported by countries both inside and outside the cartel. That will be tricky. Iran has already said it plans to hike its production next year, apparently they like the idea of getting paid for the oil they pump.  Iraq’s oil minister said nothing is decided. And remember that OPEC already has a production target of 30 million barrels a day but they have been pumping 32.2 million barrels a day. Oil prices dipped below $40 a barrel yesterday, but moved higher this morning.

Google is nearly doubling the amount of renewable energy used to power its massive data centers. The long-term commitments cover up to 842 megawatts of power that will flow from six different wind and solar power projects scheduled to be finished within the next two years in the U.S., Chile and Sweden. Google has now signed contracts covering 2 gigawatts of renewable energy, enough to power about 2 million homes; putting the company closer to its goal of having 3.6 gigawatts lined up by 2025. Google timed its announcement to coincide with the U.N. conference in Paris that is exploring ways to reduce the volume of carbon emissions.

Yea, that Paris conference is still going on. COP21, the 21^st conference of parties to the UN’s climate treaty-making body, the Framework Convention on Climate Change (FCCC) is still meeting in Paris, trying to save the world from global warming. One of the more interesting things revealed at the conference involves the role of energy in the inequality equation. The report, released yesterday, found that “the richest 1 per cent of the world’s population produces 175 times as much CO2 per person as the bottom 10 per cent” and the richest 10 per cent produce fully half of all carbon emissions.

The conference will produce some progress, but not enough. Nations are making pledges to reduce emissions but even the most ambitious emission pledges on the table would still result in catastrophic climate change, even assuming that all these pledges are fully implemented. Even best-case scenarios seem to point to an agreement that falls short of an action plan to keep the world under 2 C of warming, the threshold scientists overwhelmingly agree can’t be breached in order to avert catastrophic climate change. What’s more, individual countries’ emissions targets won’t be legally binding.

Eight of the biggest U.S. banks have been downgraded by Standard & Poor’s, following a rule approved by the Fed that will require large institutions to hold a stockpile of debt that can be converted into equity if they falter. The credit rating agency said they “now consider the likelihood that the U.S. government would provide extraordinary support to its banking system to be uncertain.” Firms affected include JPMorgan, BofA, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY Mellon and State Street.

Target has agreed to reimburse MasterCard and other U.S. financial institutions a total of about $39 million to settle claims in connection with its massive data breach – which exposed 40 million payment cards to fraud – during the 2013 holiday season. The settlement follows a $67 million agreement Target struck with Visa in August on behalf of banks and other firms that issue credit and debit cards.

Chipotle is tightening its supplier standards in the wake of an E. coli outbreak last month, putting its longstanding promise to buy food locally in jeopardy. The company has now updated its website by taking down that description and replacing it with a message on long-term supplier relationships. Chipotle began the prior program in 2008 in a bid to support local farms and sustainable agriculture.

European Union regulators confirmed they have opened a full-blown probe into McDonald’s tax affairs in Luxembourg. At the center of the dispute is McDonald’s Luxembourg franchise company, which the EU says has not paid tax since 2009. Yet the company receives hundreds of millions in royalty payments from across Europe and Russia for the right to use the brand and associated service. And it’s not just McDonald’s, other corporate giants figured out the tax dodge as well, including Starbucks, Fiat Chrysler, Amazon, Apple, Valeant, and of course Pfizer. And it’s not just Luxembourg, it is also Ireland and a few islands between France and Great Britain. At the core it is nothing but a tax dodge, a big scam.

Brazil, the largest economy in South America, and the seventh largest economy in the world is in complete disarray. A bid to impeach Brazilian President Dilma Rousseff has been launched by the Speaker of the country’s lower house of Congress, Eduardo Cunha. Despite her re-election last year, Rousseff’s second term has been marred by a corruption scandal involving her own Workers’ Party that has sent her approval rating plummeting and provoked mass protests.

A sweeping corruption investigation into a multimillion-dollar kickback scheme at the state-run oil company Petrobras has embroiled dozens of the country’s leading businessmen and politicians. The President was the chairwoman of Petrobras during many of the years that the alleged corruption took place. And the economy is falling apart: 3 quarters of negative GDP, a collapse of the currency, huge loses in stocks – with some of the biggest loses coming from the economic powerhouse of Brazil – Petrobras.