Financial Review

Let Them Eat Cake

Sinclair Noe — August 18, 2017

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

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DOW – 76 = 21,674
SPX – 4 = 2425
NAS – 5 = 6216
RUT – 1 = 1357
10 Y – .01 = 2.19%
OIL + 1.64 = 48.73
GOLD – 3.30 = 1285.20
BITCOIN + 0.69% = 4187.99 USD
ETHEREUM – 0.20% = 295.59

Stocks drifted lower into the close, wrapping up a rough week. While the day’s losses were small, Friday marked the first time stocks haven’t risen the day after a more than 1 percent drop since Nov. 8.

For the week, the Dow was down 0.8 percent, the S&P 500 was down 0.7 percent and the Nasdaq fell 0.6 percent. With a decline of more than 2 percent for the last two weeks, the S&P marked its weakest two-week period since before Trump was elected on November 8.

The S&P 500 closed roughly 1 percent below its 50-day moving average, the furthest below that key technical measure since mid-April. Today also marked the eighth straight day in which the NYSE and Nasdaq had more stocks making new 52-week lows than highs.

Stocks started the trading session in negative territory then struggled into the green, with a sharp spike on word that Trump had fired chief strategist Steve Bannon; that news sent up a cheer on the trading floor of the New York Stock Exchange but stocks drifted lower into the close.

Even after Bannon’s exit, it’s far from clear Trump will tone down his rhetoric. His first instinct is to fight anyone who challenges him and lash out on Twitter, an approach that has pushed his approval ratings to historic lows for a president in his first year.

Consider Trump’s disastrous response to the violent protests at the University of Virginia last weekend. In firing Bannon, Trump has lost his chief ideologue, the man who channeled his base and advocated for the populist-nationalist policies that helped propel Trump to victory.

But he has gained an unpredictable and potentially troublesome outside ally who has long experience running a media organization, and an even longer list of enemies. Sources close to Bannon say he is likely to go back to Breitbart News, the right-wing website he ran before joining the campaign last year.

Whether this is good or bad or just chatter, it is another bit of chaos in a very bad week for the White House. From the Wall Street perspective, it looks like Gary Cohn and General Kelly won the latest round of palace politics; it remains to be seen if they can translate that into getting the legislative agenda back on track.

Also, today, Carl Icahn ended his role as a special adviser to Trump after facing criticism that his recommendations on policy could help his own investments, creating a potential conflict of interest.

Meanwhile, the fallout from the president’s comments on Charlottesville continues. Following the statements against hate and bigotry from the Joint Chiefs and all the top military leaders, secretary of state Tillerson also distanced himself from the president’s position.

Members of the president’s Arts and Humanities Commission have resigned. “I can’t even believe I have to write this: standing up to Nazis is essential; there are no good Nazis. Or Klansmen, or terrorists.”

That comment, along with a million-dollar donation to the ADL, came from Fox CEO James Murdoch. (Oddly, there was no mention of Murdoch’s comments on Fox News’ site.) Mitt Romney called on president Trump to apologize (can you imagine that and a full eclipse happening in the same week?)

The US has initiated an investigation into China’s theft of US intellectual property (IP) using Section 301 of the Trade Act of 1974. What that boils down to is that the US just fired the first shot in a trade war with China. China sees the use of Section 301 as an act of aggression because it allows the president of the United States to act against the Chinese economy without consulting the World Trade Organization.

China has been warning the Trump administration against bypassing the WTO since January. And even though initiating a 301 investigation is not a violation of the WTO in and of itself, earlier this week, Chinese state media was alive with condemnation of the Trump administration for even considering it.

That isn’t to say that the US doesn’t have a legitimate grievance — experts around the world pretty much agree that China has a problem with stealing company’s trade secrets. But again, it’s how the US is going about doing this that is offensive not only to China, but to US allies watching too. Even without anti-globalist Steve Bannon in the White House, many in the Trump administration will carry on his ideology through policy.

All of this makes even our allies nervous about their dealings with this administration, and according to reports they are prepared to fight fire with fire. China is ready too, of course — and it has quite a lot of fire.

From 2001 to 2016, US imports from China increased by a factor of 3.5, while US exports to China increased by nearly a factor of six. China consumes a ton of products made by Trump’s base. It is the largest market for US soybeans (62% in 2016) and airplanes (25% of Boeing passenger planes in 2016). It the second-largest market for US cotton (14% in 2016), auto (17% in 2016), and semiconductors (15% in 2016).

But never mind them, and never mind any of that. You should also think about what a trade war would do to the cost of things Americans buy. A trade war between US and China will hurt not only Chinese manufacturers, but also upstream suppliers and downstream distributors such as US retailers.

If China retaliates, the price of American goods will go up, and markets that were once open to us may start to close.

Tens of thousands of students who attended Corinthian Colleges, a now-defunct for-profit college chain, could be eligible for student loan relief. The Consumer Financial Protection Bureau as well as several states attorneys general announced a proposed settlement Thursday, which if approved, would require private equity firm, Aequitas Capital Management, to forgive $183.3 million worth of student loans that the firm helped fund for former students of Corinthian Colleges.

About 41,000 students could be eligible for debt relief under the agreement, which is subject to approval by a U.S. District Court judge in Oregon. Corinthian Colleges filed for bankruptcy in 2015, amid accusations the school used inflated job placement and graduation rates to lure students.

In a complaint accompanying the settlement, the CFPB also outlined an alleged loan scheme of which Aequitas was a part. Through that scheme Aequitas funded and purchased private loans with high interest and default rates offered to Corinthian students as a way for the school to stay in line with federal regulations governing for-profit colleges.

For-profit colleges are subject to a regulation known as the 90/10 rule, which requires that they can’t get more than 90% of their revenue from federal financial aid. To comply with the regulation, Corinthian raised its tuition beyond the maximum students could take out through the federal financial aid program.

Oh, this was ugly. Foot Locker were crushed today – down 28%, after the company reported a 6% second-quarter same-store sales decline, and a 4.4% year-over-year decrease in sales, to $1.78 billion. The FactSet consensus was $1.80 billion.

In an earnings statement, Foot Locker Chief Executive Richard Johnson reaffirmed the company’s “strong” position in the premium sneaker market and said the company was hurt by “limited availability of innovative new products in the market.” Johnson went on to say he wasn’t worried about Amazon.com. Umm, you might want to be a little worried.

If you owned Foot Locker, you likely need something to sooth your frazzled nerves and lighter wallet, maybe a nice cup of chicken soup. Chicken Soup for the Soul Entertainment had its IPO today. And it was ugly, down about 9%, but let’s focus on the good stuff. It was a unique IPO.

Much like the Chicken Soup books, the initial public offering was crowdsourced. CSS Entertainment was the largest-ever exchange-listed IPO completed under Regulation A+ (an alternative to a traditional IPO that is favored by smaller companies), as well as the first to list on the Nasdaq Global Market.

This process opened the offering to the public. Whether the price drop can be attributed to the crowd-sourcing or because the crowd-sourcing pushed the offering to the maximum allowed – time will tell. Consider this a learning experience. But finally, something new and egalitarian in a Chicken Soup-y kind of way.

Bing is bigger than you think. Bing claims that fully one-third of searches in the US are powered by Bing, either directly or through Yahoo or AOL (both of which provide results generated by Microsoft (It’s true, I googled it.)

Monday is eclipse day and it will be expensive. The eclipse will happen during the workday, and many workers will likely try to watch it. According to an analysis from Challenger, Gray & Christmas, it will cost employers some $694 million collectively.

The company did not even factor in the employees that might be taking time off to travel to watch the eclipse, if they don’t live in its direct path. That also does not include the cost of those glasses you need if you want to look directly at the sun.

And you do not want to look directly at the sun without ISO approved glasses. It is called solar retinopathy and it can result in blindness, even in just a few seconds so be careful.

Financial Review

Toxic

Sinclair Noe — August 17, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 274 = 21,750
SPX – 38 = 2430
NAS – 123 = 6221
RUT – 24 = 1358
10 Y – .03 = 2.20%
OIL + .23 = 47.01
GOLD + 4.70 = 1288.50
BITCOIN – 0.70% = 4286.30 USD
ETHEREUM + 2.42% = 297.73

All 30 companies in the Dow Industrials finished in negative territory.

Cisco Systems fell 4% after the networking-equipment company late Wednesday reported earnings that missed forecasts and lowered its guidance for next quarter, and Walmart fell 1.6% after its results, which included lower-than-expected sales from its Sam’s Club division.

All 11 of the S&P 500’s sectors closed lower on the session, which has only happened two other times this year.

And the Nasdaq was the biggest percentage loser – down 1.9%. The last time all three major benchmarks finished down 1% or more was May 17.

The Dow is now 1.7% off its closing record, with the S&P 500 and Nasdaq off 2.1% and 3.1% their respective closing highs. Meanwhile, the small-cap oriented Russell 2000 index fell 1.8% to finish at just below 1,359, its first close below its 200-day moving average in 14 months.

The latest deadly use of a vehicle to carry out mass violence occurred Thursday in the Spanish city of Barcelona, where a van mowed down pedestrians on a busy avenue popular with tourists. Many things about the event remain unclear, but it appears that a dozen people have died and about 100 are injured.

ISIS has claimed responsibility and 2 suspects are in custody. Increasingly, cars, trucks, and vans have become weapons of terrorists, from a white supremacist’s deadly attack on protesters in Charlottesville, Va. last weekend to several other vehicle attacks in European cities in recent months.

Airline stocks were among the bigger losers Thursday, with American, Alaska Air and Delta among the 10 worst performers in the S&P 500. The big carriers tend to get hit when people worry about terrorism and the possible impact on global travel.

An exchange traded fund that owns leading companies in Spain also fell after the attack. The iShares MSCI Spain ETF (EWP) was down more than 2%, led by drops in Banco Santander and Telefonica.

Stocks were already having a bad day because of lingering concerns over President Trump’s rift with business leaders. Yesterday, Trump’s Manufacturing Council and the Strategy & Policy Council quit. Today comes word the President’s Advisory Council on Infrastructure, which was still being formed, will not move forward.

The moves marked a most unusual repudiation by American business leaders. The bar for a chief executive of a public corporation to repudiate a United States president is extraordinarily high. Corporate leaders aren’t given their power, prestige, responsibility and nine-figure pay packages to use the corner office as their personal soapbox.

Such a public breakup between a president and business leaders left corporate historians at a loss for precedent; apparently this kind of thing has never happened.

So far, there have been no resignations among White House staff or the administration’s cabinet. However, a rumor this morning that Gary Cohn would resign seemed to spook Wall Street.   Gary Cohn is Trump’s chief economic adviser. Cohn is the former president of Goldman Sachs. Cohn is a calming influence in the administration.

He is also a point man on Trump’s push for tax reform, where his deal making skills will come in handy with Congress. Cohn is now under pressure to quit after the president on Tuesday doubled down on blaming both sides in a white-supremacist rally in Virginia that turned violent and trying to claim that there were many fine people on both sides.

Just a reminder, there are videos of the rally in Charlottesville of protesters carrying torches and Nazi flags and chanting “Jews will not replace us” and “blood and soil”. Temple Beth Israel in Charlottesville was patrolled by armed militia with semi-automatic rifles, and worshippers said it was like they were under siege.

There are several reports today that Cohn was deeply offended by Trump’s remarks. Several former colleagues have urged him to resign before his reputation takes an unrecoverable hit. Many of his former clients abandoned the president’s CEO advisory councils earlier this week because of Trump’s remarks.

Cohn is also considered the front-runner to replace Janet Yellen a chair of the Federal Reserve, when her term expires in February. So, Cohn has a decision to make. Does he try to stick it out or does he cut bait now.

If Cohn leaves, there would be a definite lack of economic talent left in the administration. But it’s not just Cohn, the big issue spooking Wall Street is that if Cohn leaves, it could spark a mass exodus.

Nearly all the nation’s top military leaders unequivocally condemned racism in public messages Wednesday. Five of the country’s top uniformed leaders — of the Army, Navy, Air Force, Marine Corps and National Guard — have all sent tweets critical of “racism,” “hatred” and “extremism.”

The chairman of the Joint Chiefs of Staff, Gen. Joe Dunford was traveling and told reporters in Beijing, “I can absolutely and unambiguously tell you there is no place — no place — for racism and bigotry in the U.S. military or in the United States as a whole.”

Trump unloaded on two Republican senators, Lindsey Graham of South Carolina and Jeff Flake of Arizona. Graham had criticized Trump’s Charlottesville response, prompting Trump to accuse him of telling a “disgusting lie.” Graham said Trump suggested there was a “moral equivalency” between white supremacists and those who protested the rally. Trump has blamed “both sides” for the violence.

Trump called Flake “toxic” and all but endorsed Kelli Ward, who is challenging Flake in a primary. “Great to see that Dr. Kelli Ward is running against Flake,” Trump tweeted. Flake said Wednesday on Twitter, “We can’t claim to be the party of Lincoln if we equivocate in condemning white supremacy.”

It’s possible Trump will further comment when he visits Phoenix on Tuesday for a rally for his 2020 re-election campaign. Although Phoenix Mayor Greg Stanton issued a statement that he was disappointed to learn of Trump’s visit so close to the violent events in Charlottesville.

The mayor called on Trump to delay the visit.  The statement said: “If President Trump is coming to Phoenix to announce a pardon for former Sheriff Joe Arpaio, then it will be clear that his true intent is to inflame emotions and further divide our nation.”

The Labor Department reports initial jobless claims in the period running from Aug. 6 to Aug. 12 declined by 12,000 to 232,000.

Philly Fed’s manufacturing index for August came in at 18.9, compared with a reading of 19.5 in the prior period.

The leading economic index rose 0.3% last month after a 0.6% increase in June, suggesting potentially faster growth in the final six months of 2017.

Industrial production rose in July for the second month in a row. Output climbed 0.2% last month, a touch below expectations. Production at utilities surged 1.6% as Americans cranked up the AC to deal with another sweltering summer.

Mining output also rose 0.5% — the fourth straight increase — reflecting in part frackers pulling more oil and natural gas out of the ground. Yet output among manufacturers slipped 0.1%, the third decline in five months. The drop-off largely stemmed from lower production among auto makers whose sales have cooled off.

Auto production sank 3.5%. Production of business equipment and construction output also declined.

Arizona’s unemployment rate remained unchanged at 5.1% in July. The national unemployment rate declined from 4.4% in June to 4.3% in July. A year ago, the Arizona seasonally adjusted rate was 5.2% and the U.S. rate was 4.9%.

Arizona lost 20,900 Nonfarm jobs in July. The Private Sector lost 9,400 jobs and government lost 11,500. Arizona Nonfarm employment grew by 1.7% (45,000 jobs) over the year in July.

Walmart reported second-quarter earnings and revenue that topped Wall Street estimates, boosted by an increase in foot traffic and by strong online sales. Shares, however, are trading down by about 2%.

America’s largest brick-and-mortar retailer said US comparable-store sales rose 1.8% versus a year ago, making for the 12th straight quarter with positive results. Walmart said food categories delivered their strongest comparable-store sales performance in five years. Walmart raised its guidance slightly.

Alibaba reported yet another winning set of quarterly financials. Revenue was up 56% on-year hitting $7.4 billion, and operating profit more than doubled over the same period to hit $2.88 billion. While investors will likely be pleased, the Chinese government is not.

The Cyberspace Administration of China sent a warning to Alibaba, its music-streaming subsidiary Xiami, and three other companies. The letter accused Taobao, Alibaba’s e-commerce marketplace, of allowing some of its vendors to sell “tools that break computers’ IT systems,” “illegal controlled substances,” “illegal VPN tools,” and “internet accounts.”

It demanded that Alibaba immediately remove such vendors from its site, and called on it to launch a “self-investigation.” Alibaba is almost as valuable as Amazon and closing the gap fast.

Mylan has finalized a $465 million settlement resolving Justice Department claims it overcharged the government for its EpiPen emergency allergy treatment, which became the center of a firestorm over price increases.

The settlement resolved claims that Mylan avoided higher rebates to state Medicaid programs by misclassifying EpiPen as a generic product, even though it was marketed and priced as a brand-name product. Under the deal, Mylan did not admit wrongdoing. It will reclassify EpiPen and pay the rebate applicable to its new classification as of April 1, 2017.

Financial Review

No Moral Equivalency

Sinclair Noe — August 16, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 25 = 22,024
SPX + 3 = 2468
NAS + 12 = 6345
RUT + 0.30 = 1383
10 Y – .04 = 2.23%
OIL + .03 = 46.81
GOLD + 11.70 = 1283.80
BITCOIN – 0.41% = 4407.22 USD
ETHEREUM – 4.55% = 304.68

Fallout from Trump’s news conference yesterday resulted in the collapse of his business councils today. Six CEOs quit Trump’s manufacturing council in recent days: Richard Trumka, leader of the AFL-CIO; Thea Lee, an economist and former deputy chief of staff at the AFL-CIO; Scott Paul, head of the Alliance for American Manufacturing; Kenneth Frazier, Merck CEO; Kevin Plank, Under Armour CEO; Brian Krzanich, Intel CEO

This morning, the list of CEOs grew. Inge Thulin, the CEO of 3M, was the seventh executive to quit Trump’s manufacturing council. Here is part of his statement: “I joined the Manufacturing Jobs Initiative in January to advocate for policies that align with our values and encourage even stronger investment and job growth – in order to make the United States stronger, healthier and more prosperous for all people. After careful consideration, I believe the initiative is no longer an effective vehicle for 3M to advance these goals. As a result, today I am resigning from the Manufacturing Advisory Council.”

Denise Morrison, president and CEO of the Campbell Soup Company, resigned from the manufacturing council. Here’s part of her statement: “Racism and murder are unequivocally reprehensible and are not morally equivalent to anything else that happened in Charlottesville. I believe the President should have been – and still needs to be – unambiguous on that point.”

Jeff Immelt, chairman of GE, Alex Gorsky, CEO of Johnson & Johnson, and the CEO of United Technologies, Gregory Hayes, all announced they would leave the council, citing Trump’s recent statements as their reasoning.

Yesterday, Trump tweeted: “For every CEO that drops out of the Manufacturing Council, I have many to take their place. Grand-standers should not have gone on. JOBS!”

But nobody stepped up to be a replacement.

The strategy forum, which is led by Blackstone Group’s Stephen Schwarzman, held a conference call late Wednesday morning and the majority indicated they would leave the group, so a decision was reached to disband.

In a statement from the strategy and policy forum, the group said it was breaking up amid the controversy. “The debate over forum participation has become a distraction from our well-intentioned and sincere desire to aid vital policy discussions on how to improve the lives of everyday Americans.”

Mary Barra, General Motors CEO, issued a statement saying: “Recent events … require that we come together as a country and reinforce values and ideals that unite us — tolerance, inclusion and diversity — and speak against those which divide us — racism, bigotry and any politics based on ethnicity.”

JPMorgan Chase CEO Jamie Dimon said: “The racist behavior on display by these perpetrators of hate should be condemned and has no place in a country that draws strength from our diversity and humanity.” Dimon is also chairman of Business Round-table.

This afternoon, Trump tweeted: “Rather than putting pressure on the business people of the Manufacturing Council and Strategy & Policy Forum, I am ending both. Thank you all!”

Except he didn’t end anything. You can’t fire these people after they already quit. In practical terms, the end of these groups may not make much difference. After all, Trump has achieved so few of his goals on economic policy that the executives’ absence can’t really hurt. It was never clear exactly what the councils were doing other than providing photo opportunities.

Republican leaders in Congress have little appetite for confronting Trump directly. But his sympathetic statements about the white supremacists and Nazis that marched in Charlottesville, Virginia, embarrasses them just like business leaders, and many spoke out today, or more specifically tweeted.

Arizona Senator John McCain tweeted, “There’s no moral equivalency between racists and Americans standing up to defy hate and bigotry. The President of the United States should say so”

Sen. Jeff Flake, a strong critic of Trump, tweeted, “We can’t accept excuses for white supremacy and acts of domestic terrorism. We must condemn. Period.”

Meanwhile, the 2012 Republican nominee Mitt Romney tweeted: “No, not the same. One side is racist, bigoted, Nazi. The other opposes racism and bigotry. Morally different universes.”

Sen. Lindsey Graham issued a statement: “Through his statements yesterday, President Trump took a step backward by again suggesting there is moral equivalency between the white supremacist neo-Nazis and KKK members who attended the Charlottesville rally and people like Ms. Heyer. I, along with many others, do not endorse this moral equivalency.” He continued: “Many Republicans do not agree with and will fight back against the idea that the Party of Lincoln has a welcome mat out for the David Dukes of the world.”

Former Presidents George H. W. Bush and George W. Bush joined the chorus of lawmakers speaking out to condemn the racist violence, saying: “America must always reject racial bigotry, anti-Semitism, and hatred in all forms. As we pray for Charlottesville, we are reminded of the fundamental truths recorded by that city’s most prominent citizen in the Declaration of Independence: we are all created equal and endowed by our Creator with unalienable rights.”

The New York Times’ Andrew Ross Sorkin reported on CNBC that “a number of people” on Wall Street and at Goldman Sachs have called chief economic advisor Gary Cohn to suggest that he resign from the administration. You also must wonder if Treasury Secretary Steven Mnuchin might be considering longer-term reputational damage. Newly installed Chief of Staff John Kelly looked extremely uncomfortable during Trump’s remarks Tuesday.

The dollar turned lower against most major currencies.

Trump’s Charlottesville uproar overshadowed a GOP tax plan roadshow. Top Republican tax writers went to a national shrine for tax cutters — former President Ronald Reagan’s California ranch — hoping to make a sales pitch for a historic overhaul of the U.S. tax code. Republicans have said they want to spend August — usually a quiet month in Washington — building support for a tax overhaul among constituents at home.

Representative Kevin Brady, the Texas Republican who chairs the House Ways and Means Committee said that despite the distractions, tax writers in the White House, Senate and House remain on schedule to produce a plan that can be voted on in 2017.

And Wall Street largely ignored the problems, except for an early morning Trump tweet against Amazon. The tweet read: “Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt – many jobs being lost!” Trump wrote.

Trump has repeatedly targeted Amazon.com, whose CEO Jeff Bezos ​owns the Washington Post, one of several major media outlets that have been swept up in the president’s ongoing fight with the press. Amazon does collect state sales taxes in Washington, D.C., and 45 states that have such a levy.

The Federal Reserve released minutes of the July 25-26 FOMC meeting. Federal Reserve policymakers appeared increasingly wary about recent weak inflation and some called for halting interest rate hikes until it was clear the trend was transitory but it looks like they are ready to begin reducing the Fed’s $4.5 trillion portfolio of Treasury bonds and mortgage-backed securities.

Last month’s meeting, which concluded with a unanimous decision to leave rates unchanged, was marked by a lengthy discussion about the recent soft inflation readings, the minutes showed. The central bank’s preferred inflation measure dropped to 1.5 percent in June from 1.8 percent in February and has remained below its 2 percent target for more than five years.

The lack of inflation spurred concerns the Fed may have to cool its monetary tightening pace even though the economy is growing moderately and the unemployment rate fell to 4.3 percent in July, matching a 16-year low touched in May.

Meanwhile, in an interview published by the Financial Times, Fed Vice Chairman Stanley Fischer called efforts in Washington to rescind regulations put in place after the 2008 financial crisis “mind boggling.” Fischer told the Financial Times , “It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude, and now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really extremely dangerous and extremely shortsighted.”

In a separate interview on CNBC, Atlanta Federal Reserve President Raphael Bostic said he doesn’t expect the U.S. to achieve the White House goal of 3% growth. The economy has grown around 2% annually since an expansion began in mid-2009.

Housing starts declined 4.8 percent to a seasonally adjusted annual rate of 1.16 million units, hurt by a drop in groundbreaking on single-family projects, The Commerce Department revised June’s sales pace down to 1.21 million units from the previously reported 1.22 million units. Building permits dropped 4.1 percent, with the multi-family segment recording a drop of 11.2 percent. Permits for single-family homes were unchanged.

Urban Outfitters shares were up more than 22% as the company reported earnings that beat estimates, but some analysts say the second-quarter earnings numbers should give investors pause. The chain reported a comparable sales decline of 7.9% and revenue declined from a year ago.

Cisco Systems reported fiscal fourth-quarter revenue and adjusted earnings in line with expectations but predicted another drop in revenue in the next quarter. Cisco dropped in after-hours trade.

Shares of Agilent climbed 4%, after the maker of scientific and medical equipment blew past estimates for its fiscal third quarter and raised guidance for the year.

Financial Review

About Face

Sinclair Noe — August 15, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 5 = 21,998
SPX – 1 = 2464
NAS – 7 = 6333
RUT – 11 = 1383
10 Y + .05 = 2.27%
OIL + .13 = 47.72
GOLD – 10.50 = 1272.10
BITCOIN + 0.72% = 4174.04 USD
ETHEREUM – 1.28% = 286.10

Several members of President Trump’s manufacturing jobs council resigned following what was widely considered an inadequate response from the president to violence in Charlottesville, Va. over the weekend that led to three deaths.

The executives that have resigned include: Ken Frazier – CEO of Merck, Brian Krzanich of Intel, Kevin Plank of Under Armour, and Scott Paul – President of the Alliance for American Manufacturing. That makes 7 CEOs who have resigned from Trump’s councils this year.

The AFL-CIO, a federation of labor unions that represent 12.5 million workers, said it was considering pulling its representative on the committee. AFL-CIO President Richard Trumka said the council “has yet to hold any real meeting,” and “there are real questions” about its effectiveness.

Several other members of the council issued statements denouncing racism and bigotry. Walmart CEO Doug McMillon issued a statement saying the president “missed a critical opportunity to help bring out country together.” McMillon remains on the council for now.

Trump tweeted a response, “For every CEO that drops out of the Manufacturing Council, I have many to take their place.” Although so far there have been no new additions to the council. That was followed by a tone-deaf tweet storm and a press conference in New York, where Trump said, “I think there’s blame on both sides.” Prompting a thank you tweet from David Duke.

CEOs are loath to alienate customers through politics and never want to be the target of a tweet storm from Trump. But corporate leaders who were once eager for a seat at the Trump table are increasingly deciding the costs outweigh the benefits. There is a herd effect. With each CEO’s announcement, it becomes easier for the next CEO to take a stand — and the pressure goes up to do so.

The Congressional Budget Office says ending government payments that help low-income people afford to use their Obamacare plans would raise total federal spending by billions of dollars over the next decade.

Halting the payments to insurers, known as cost-sharing reductions, would boost Obamacare premiums for mid-level Obamacare plans by 20 percent next year, and by about 25 percent in 2020, as insurers raise their charges to make up for the lack of payment.

Since Obamacare provides separate subsidies to individuals to help them cover the cost of premiums, the overall effect would be to boost government spending, to the tune of $194 billion over the next decade. President Donald Trump has threatened to cut off the payments to force Democrats to negotiate changes to the program.

Without the payments, insurers have said they may drop out of the Affordable Care Act’s exchanges or substantially raise premiums. Already, insurers have said uncertainty over how the Trump administration plans to run the law is contributing to large requested premium increases for next year.

Retail sales recorded their biggest increase in seven months in July as consumers boosted purchases of motor vehicles and raised discretionary spending. Retail sales jumped 0.6 percent last month, the largest gain since December 2016. Retail sales for June and May also were revised higher. Retail sales increased 4.2 percent in July on a year-on-year basis.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.8 percent annualized rate in the second quarter after a tepid 1.9 percent pace in the January-March period. That boosted GDP growth to a 2.6 percent rate in the second quarter.

Sales were likely boosted by hefty discounts as auto dealerships try to reduce inventory. Prices for new motor vehicles recorded their biggest drop in nearly eight years in July and have decreased for six straight months.

The retail sales report prompted the Atlanta Fed to raise its third-quarter GDP estimate by two-tenths of a percentage point to a 3.7 percent rate.

Americans are spending more and saving less. The saving rate has dropped to 3.8 percent in the second quarter of this year from a rate of 6.2 percent in the second quarter of 2015. Persistently sluggish wage growth has pushed Americans to dip into their savings to fund spending.

Americans’ debt level notched another record high in the second quarter. According to a Federal Reserve Bank of New York report total U.S. household debt was $12.84 trillion in the three months to June, up $552 billion from a year ago.

The proportion of overall debt that was delinquent, at 4.8 percent, was on par with the previous quarter. However, credit card balances in delinquency “ticked up notably.” Total U.S. indebtedness is about 14 percent above the trough of household deleveraging brought on by the 2007 financial crisis.

Mortgage debt was $8.69 trillion in the second quarter, up $329 billion from last year. Student loan debt was $1.34 trillion, up $85 billion, while auto loan debt came in at $1.19 trillion, up $55 billion.

Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.

Equifax data show that lenders are extending repayment periods and offering longer terms, with many starting to exceed seven years. There may also be loosening by all lenders on other factors, such as down-payment requirements, lack of third party validation of income and employment.

A second report from the New York Fed showed its Empire State general business conditions index climbed 15.4 points to 25.2 in August, the highest level in nearly three years. Manufacturers in the region reported a jump in new orders and said they were taking longer to deliver goods.

US import prices increased in July after two straight monthly declines, driven by rising costs for petroleum products and food, but underlying imported inflation remained muted. The Labor Department reports import prices edged up 0.1 percent last month after an unrevised 0.2 percent drop in June.

Last month’s increase was in line with economists’ expectations and left the 12-month increase at 1.5 percent. The year-on-year increase in import prices has slowed sharply since hitting 4.7 percent in February, which was the biggest advance in five years.

The report also showed export prices rebounded 0.4 percent in July, the biggest gain since December 2016, after falling 0.2 percent in June.

The Commerce Department that business inventories rose 0.5 percent in June after an unrevised 0.3 percent increase in May. Inventories are a key component of gross domestic product. Retail inventories gained 0.6 percent in June. Motor vehicle inventories increased 0.7 percent. Business sales rose 0.3 percent in June.

At June’s sales pace, it would take 1.38 months for businesses to clear shelves, up from 1.37 months in May.

Home Depot reported a better than expected profit, record quarterly sales and an improved outlook for the full year. This proves two things: The company is still Amazon-proof — and the housing market is still one of the brightest spots of the US economy.

Home Depot said that sales were up 6.6% at U.S. stores open at least a year. Net income jumped 9.5 percent to $2.6 billion, or $2.25 per share. Net sales rose 6.2 percent to $28.1 billion, the highest quarterly sales in company history. Home Depot raised its full-year forecasts but concerns over a looming slowdown in the U.S. housing market due to supply constraints pushed shares down 2.6%.

TJX reported better-than-expected quarterly profit and sales and raised its earnings forecast. As traditional retailers struggle in the face of changing consumer tastes and competition from Amazon, TJX has been posting strong sales for several quarters by offering sharp discounts. TJX said its comparable-store sales rose 3 percent in the second quarter.

Shares of General Electric were down 0.9 percent, at their lowest point since October 2015. While the S&P 500 returned more than 35% to investors over the past three years, GE returned less than 9%. A late Monday quarterly report from Berkshire Hathaway showed Warren Buffet sold his stake in GE.

Without the eye-popping returns of a few high-flying technology stocks, the performance of the market would look very different — and not in a good way; 45 days after the end of a quarter, hedge funds must file 13Fs to disclose their holdings. They are selling the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google).

Between the end of 2016 and July 24, the FAANGs gained some 36 percent as a group, compared with 9.39 percent for the S&P 500 Index. Since then, the FAANGs have under-performed, losing 2.63 percent to the S&P 500’s 0.18 percent decline.

Bill Gates has donated $4.6 billion or 64 million Microsoft shares according to a US Securities & Exchange Commission filing. The recipient of the gift was not specified but it is expected that the money will be directed to the Bill and Melinda Gates Foundation he and his wife set up in 2000 with $5bn funding to improve global healthcare and reduce extreme poverty.

The shares donated represent about 5% of his current $90 billion fortune. The gift reduces Gates’s stake in Microsoft to just 1.3% from 24% in 1996. Bill and Melinda Gates have donated $35 billion since 1994. The Gates Foundation has grown to become the world’s largest private charity with $40.3 billion of funds, before the latest gift.

This latest donation is the biggest charitable gift made anywhere in the world so far, this year, overtaking a $3.2 billion contribution by investor Warren Buffett to the Gates foundation last month.

Financial Review

Dancing with the Devil

Sinclair Noe — August 14, 2017

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DOW + 135 = 21,993
SPX + 24 = 2465
NAS + 83 = 6340
RUT + 20 = 1394
10 Y + .03 = 2.22%
OIL – 1.32 = 47.50
GOLD – 7.10 = 1282.60
BITCOIN + 0.92% = 4423.18 USD
ETHEREUM – 3.68% = 291.37

Stock were broadly higher, with the S&P 500 Index gaining the most since April. Volatility was in retreat, as the CBOE Volatility Index fell below 12.5 after topping 16 last Thursday. After a week of market jitters, investors were calmed after South Korea’s president said resolving North Korea’s nuclear ambitions must be done peacefully and U.S. officials played down the risk of an imminent war.

With more than 90 percent of the S&P 500 members having reported second-quarter results, earnings growth is tracking at a 12.2 percent pace year-over-year, much better than the 8.4 percent expected at the start of the quarter. This marks the second straight quarter of double-digit growth – the fastest two quarters of growth since 2011.

More than half of S&P companies topped forecasts, the highest percentage since the second quarter of 2010, although the average upside surprise was 4%, slightly below the long-term average of 5%.

All sectors of the benchmark are on pace to beat projections, except energy, where less than 40 percent of companies topped earnings forecasts. Technology and health care continue to lead upside surprises, with more than 85 percent of tech companies and 75 percent of health companies posting better-than-expected earnings per share. Markets are forward looking.

Of the S&P 500’s 11 primary sectors, forecasts for 2018’s profits have come down for six of them. The average estimate of analysts polled by FactSet see S&P 500 SPX earnings of $141.81 a share in 2018. That’s down 0.2% from the $142.15 a share estimate that was forecast at the end of June.

Forecasts have come down even more for the remainder of the current year. For 2017, analysts see earnings of $130.46 a share for the S&P 500. That’s down 3.5% from the $135.25 that was forecast at the end of April. The S&P has risen 3.5% since that date.

Just a reminder, in the first half of 2016, S&P 500 companies were going through an earnings recession but earnings in the second half of 2016 recovered nicely – those earnings from last year are used as comparison for this year; so, the first half of 2017 had a low hurdle for comparison – the hurdle will now be a bit tougher.

After department stores revealed a string of lackluster earnings last week, Home Depot, one of the sturdiest retailers in America, will report results on Tuesday. The home improvement giant is expected to post strong profits, as it continues to ward off competition from Amazon.

Target posts results on Wednesday. On Thursday, Walmart will report its results. Investors will look to see whether the nation’s biggest retailer can continue to grow its e-commerce and grocery business amid intense competition.

By now you are familiar with the events of the weekend in Charlottesville, Virginia. A man was arrested after driving a car into a crowd of peaceful counter-protestors, causing many injuries and one death; and two officers died when a police helicopter in the area crashed.

Trump said Saturday that “many sides” bore blame for the violence, without directly repudiating racial supremacists. The president faced heavy criticism for not specifically denouncing the white nationalists and neo-Nazis.

Today, under increasing pressure, Trump denounced the Ku Klux Klan, white supremacists and neo-Nazis, a move that came after the CEO of Merck resigned from Trump’s council of manufacturing executives, saying “America’s leaders must honor our fundamental values” by rejecting expressions of hatred, bigotry and group supremacy.

Trump responded angrily less than an hour later on Twitter, suggesting the CEO, Ken Frazier, should use the extra time to focus on lowering “rip-off drug prices.”

The president has not proposed policies to lower drug prices, but has rather suggested further deregulation of industry generally, as well as weakening purchasing pools like Medicare that could potentially negotiate better prices with the pharmaceutical industry.

Later, Under Armour CEO Kevin Plank quit the group “to focus my efforts on inspiring every person that they can do anything through the power of sport which promotes unity, diversity and inclusion,” he said in a statement.

Intel CEO Brian Krzanich resigned “to call attention to the serious harm our divided political climate is causing to critical issues,” he said in a statement. “I resigned because I want to make progress, while many in Washington seem more concerned with attacking anyone who disagrees with them,” Krzanich added. “We should honor ― not attack ― those who have stood up for equality and other cherished American values.”

Trump created two CEO advisory groups early in his presidency. Blackstone Group CEO Steve Schwarzman leads one described as a strategy and policy forum, and Dow Chemical’s Andrew Liveris organized a manufacturing initiative.

After an initial burst of activity and press attention, the councils have fizzled with neither meeting since April. Earlier this year, Elon Musk of Tesla and Walt Disney CEO Bob Iger quit the strategy and policy panel after Trump said he would withdraw from the Paris climate pact. Former Uber CEO Travis Kalanick quit in February after Trump’s executive order on immigration.

Scottsdale-based GoDaddy, the web hosting company, closed down the domain for Daily Stormer, a neo-Nazi and white supremacy website after the site posted an article mocking Heather Heyer, the 32-year-old woman who was killed in Charlottesville.

The company had been asked in July why it did not act against the website, after Daily Stormer had published an article promising to “track down” the relatives of CNN staffers. At the time, a GoDaddy spokesperson cited the First Amendment in defending his company’s business with the organization.

The website tried to transfer the domain to Google but Google cancelled the registration.

On Sunday, Trump said he may pardon former Arizona sheriff Joe Arpaio, who was found guilty two weeks ago of criminal contempt for defying a state judge’s order to stop targeting suspected undocumented immigrants for traffic stops.

Arpaio was convicted by federal Judge Susan Bolton of misdemeanor contempt of court for willfully disregarding an Arizona judge’s order to stop the anti-immigrant traffic enforcement. He is expected to be sentenced on Oct. 5. The former Maricopa County sheriff was an ardent Trump backer who also backed his birther views, arguing as recently as December that ex-President Obama’s Hawaii birth certificate was a fake.

In an interview with The Associated Press, William Dudley, president of the Federal Reserve Bank of New York, said he thinks the Fed has adequately prepared investors for a reduction in the Fed’s $4.5 trillion balance sheet.

With the economy now much healthier, the Fed is ready to begin selling some of those bonds. Dudley also said that he would favor a third increase this year in the Fed’s benchmark short-term rate if the economy remained strong. On Wednesday, the Federal Open Market Committee will issue minutes from a July policy meeting that may hold clues on the next rate hike.

As negotiators prepare for the start of round one of NAFTA negotiations on Wednesday, Trump administration officials are taking a careful stance on the task of modernizing the 23-year-old pact. White House chief economic adviser Gary Cohn said in a statement on Saturday, “NAFTA needs to be reformed to help protect American workers and create more jobs at home. We should keep the parts that work, especially for much of American agriculture, but fix the parts that don’t.”

His remarks hinted that there would be limited renegotiation of NAFTA. Trump is about to find out how hard it is to get an agreement that satisfies not only those workers who feel ‘shafted by NAFTA’ but also the powerful business interests currently benefiting from billions of dollars in cross-border sales.

Even if negotiators from all three nations can come to consensus quickly on a new deal in the coming months, Trump still must get the agreement through Congress, which past votes on trade issues have shown is no easy task.”

Apple and insurance company Aetna held talks late last week to bring Apple’s fitness-tracking smartwatch to Aetna’s 23 million members. Aetna, which currently offers an Apple Watch to its 50,000 employees as part of a wellness program, is negotiating to offer free or discounted watches to members.

Google is paying Apple up to $3 billion a year to remain the default search engine on iPhones and iPads, up from $1 billion just three years ago, and Google’s licensing fees make up a large bulk of Apple’s services business. For what it’s worth.

US shale drillers will keep posting strong gains in August and September. The Energy Information Administration projected output in several key oil producing regions will grow by 117,000 barrels a day to 6.15 million barrels a day in September. The region’s output is seen topping 6 million barrels a day in August. The forecast for this month is significantly higher than a prior estimate

Vanguard manages about $4 trillion and is often the top shareholder in big US corporations through its massive index funds – giving it a major voice in setting corporate agendas. And now Vanguard wants companies to disclose how climate change could affect their business and asset valuations.

A spokesperson for Vanguard said the request for more info “is not a matter of ideology, it’s a matter of economics. To the extent there are significant risks to a company’s long-term value proposition, we want to make sure there is long-term disclosure of those risks to the market.”

The Arizona Regional Multiple Listing Service (ARMLS) reports overall residential sales in Greater Phoenix area for July were up 3.0% year-over-year.  Active inventory is now down 8.9% year-over-year. With flat inventory in 2016, prices were up 4.8%. This is the ninth consecutive month with a YoY decrease in inventory, and prices are rising a little faster this year (2.5% through May or 6.2% annual rate).