Financial Review

Let Them Eat Cake

Sinclair Noe — August 18, 2017

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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

War on Drugs Again

Sinclair Noe — May 12, 2017

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Financial Review by Sinclair Noe for 05-12-2017
DOW – 22 = 20,896
SPX – 3 = 2390
NAS + 5 = 6121
RUT – 7 = 1382
10Y – .07 = 2.34%
OIL – .01 = 47.82
GOLD + 2.90 = 1228.70

The Dow industrials and S&P 500 both snapped a streak of three weeks of gains Friday, closing lower for the session and week, while the Nasdaq finished higher for a fourth week of gains. For the week, the Dow dropped 0.5%, the S&P 500 ended the week down 0.4%. The Nasdaq posted a weekly gain of 0.3%.

After months of bashing China for its trade practices, the Trump administration said it had agreed with Beijing on a broad range of measures aimed at improving the access of American beef producers, electronic-payments providers and natural-gas exporters, among others.

The U.S. has been lobbying for China to open its market to American beef for years — it was banned in China in 2003 after a mad cow disease scare. The perception among some businessmen in the country has been that the Chinese have been sitting on the beef issue until the U.S. agreed to buy cooked poultry products made in China.

Other measures include credit card companies are trying to move into Chinese electronic payment platforms, Credit ratings agencies are looking to expand their presence in China, and the big agriculture firms will try to get genetically modified seeds to be reviewed by Chinese Ag officials – no sales yet, just consideration.

General Electric’s chief executive, Jeffrey Immelt today praised Mexico as a big part of its future growth and said the company is “very supportive” of the North American Free Trade Agreement (NAFTA).

GE plans to double its purchases from Mexican suppliers next year, according to a statement from the office of Mexican President Enrique Pena Nieto. “We’re optimistic about Mexico,” Immelt told Mexican officials at the inauguration of an expansion of GE’s operations in Monterrey. “We’re very supportive of NAFTA.”

General Electric announced that it won a contract to supply two new gigawatts of power in Mexico and had also signed a separate $120 million, multi-year deal to provide service to gas and steam turbines in Mexican power plants.

Consumer prices rebounded as expected in April as the cost of gasoline rose. The consumer price index, a basket of consumer goods that reflects price changes at the retail level, rose 0.2% from March. Compared to the prior year, CPI rose by 2.2%. Higher gasoline and heating gas costs helped lift the index. Used cars, clothes, and medical care all declined from March.

When the volatile costs of food and energy are excluded, core CPI increased by 0.1% month-on-month, and by 1.9% year-on-year, a 19-month low. Good to know for everybody who doesn’t consume energy or eat food.

Inventories at U.S. businesses continued to pile up in March. Business inventories rose 0.2% in March, the Commerce Department said Friday. This is the fifth straight month of inventory gains. Business sales were flat in March. The inventory-to-sales ratio, an indication of demand, remained steady at 1.35 in March.

Consumer sentiment brightened in an early May reading as Americans turned more bullish on their income expectations. The University of Michigan’s confidence gauge jumped to 97.7 from 97.0 in April. The survey’s tracker of current conditions was unchanged at 112.7, but the expectations gauge rose more than a point, to 88.1 from 87.0.

Consumer spending intentions were mixed: plans to buy household durables were the strongest in a decade, while plans to buy a vehicle were at a three-year low. Americans’ views are still sharply divided by political affiliation

The American consumer is alive and well. Sales at US retailers rose in April, and March sales were stronger than originally estimated. Retail sales increased 0.4% and were 4.5% higher compared to a year ago. A 0.2% monthly decline for March was revised up to show a 0.1% increase.

Sales have risen in three of the first four months of 2017. Sales at gasoline stations were 12.3% higher in April than a year ago, as the cost of oil strengthened. With motor vehicles and gas stripped out, sales were up 0.3%, after a 0.4% increase in March.

J.C. Penney said in its earnings report said “adjusted” net income was 6 cents a share. On the surface, that appeared to be a big positive surprise, because analysts were expecting a loss of 21 cents per share.

But the company snuck into its report that the “adjusted” number for the latest quarter “includes the sale of operating assets,” (specifically the sale of one of its distribution centers) which totaled $117 million. Strip that out because it is a nonrecurring item, and the result was a first quarter loss. Same-store sales declined 3.5%.

Investors weren’t fooled, and the stock plummeted 14% to a record low close of $4.55.

Dick’s Sporting Goods disclosed an accounting error. In a filing with the SEC, Dick’s said a computation error caused it to overstate earnings in its fourth quarter and full-year results by $23.4 million. Down 4.5% today.

Nordstrom dropped 10.8% after weak quarterly same-store sales. Macy’s fell 3%, bringing its loss to more than 19% in the past two sessions following its dismal quarterly report.

Amazon is now the second largest U.S. apparel retailer, behind only Wal-Mart, with Amazon taking share from department stores and Target as it rises in prominence. Nearly half of 1,000 adults surveyed in Morgan Stanley’s latest Alphawise survey (46%) reported having bought clothing from Amazon in the past year.

About the same percentage (47%) said they expected to buy more clothes from Amazon and fewer clothes from other retailers in the next 12 months. Traditional retailer should be very nervous. When online sales hit 20% of all purchases in each retail category, a surge in Amazon growth is sure to follow.

The 20% level is a threshold indicating Amazon is going to displace a legacy retailer. Twenty percent is when Amazon steps on the gas … when consumer behavior is changing. This pattern has held true for Amazon since the very first sector CEO Jeff Bezos disrupted, books, which passed the 20% mark between 2007 and 2008.

Amazon’s rapid expansion into a “store for everything” continued as online sales passed 20% for consumer electronics between 2010 and 2011, and cloud services, which Amazon dominated from the moment it launched Amazon Web Services in 2006, each time, 20% sector penetration proved the tipping point.

It’s the scandal that won’t go away. Attorneys for victims of Wells Fargo fake account scam are now saying that the bank may have been responsible for more unauthorized accounts than previously thought.

In a legal filing, plaintiffs’ attorneys in a class action lawsuit say: “Based on public information, negotiations, and confirmatory discovery, the parties estimate the number of unauthorized accounts for the period 2002-2017 is approximately 3.5 million. This number may well be over-inclusive, but provides a reasonable basis on which to estimate a maximum recovery.”

A huge cyber attack leveraging hacking tools widely believed to have been developed by the U.S. National Security Agency is spreading …, well, like a virus. Ransomware is scrambling data on computers and causing major IT disruptions.

In England, the virus hit health care facilities. Routine appointments had been canceled and ambulances were being diverted. Hospitals and surgeries across England were forced to turn away patients. People in affected areas were being advised to seek medical care only in emergencies. Scottish health boards were also hit.

Telecommunications giant Telefonica was among many targets in Spain, though it said the attack was limited to some computers on an internal network and had not affected clients or services. Sweden’s Civil Contingencies Agencies put out a warning saying that “a large-scale ransomware campaign is being carried out in several countries.

FedEx said on Friday it was experiencing issues with some of its Microsoft Windows systems. At last count, the worm has infected computers in 99 countries and it is still growing.  It is believed that a Russian hacking group known as Shadow Brokers pilfered the worm and other hacking tools from the National Security Agency’s servers.

The actual ransomware is a worm called WannaCry. If you see that file, do not click.

Attorney General Jeff Sessions made it official. The federal government will now reboot its war on drugs. The official word came down in the form of memos from Sessions that ordered federal prosecutors to cease and desist on the soft approach former Attorney General Eric Holder took toward prosecuting petty drug offenders.

Now prosecutors must demand the harshest sentence, must use the threat to pile on sentence enhancements to browbeat drug offenders into copping a guilty plea, and they must itemize the drugs an offender uses to insure they are slapped with the minimum mandatory sentence. Sessions isn’t just talking about cracking down on the use of the hard stuff, he is directing law enforcement to get tough on pot.

Sessions’ “tough on crime” attitude, which he has espoused since the beginning of his tenure, is being widely compared to the 1970s “War on Drugs” that wreaked havoc on minority communities in previous decades. That effort really ramped up in the late 1980s with the introduction of mandatory minimums for drug crimes, and peaked with the Clinton-era 1994 crime bill that established further harsh sentences and funneled billions into the nation’s prisons.

Reactions from criminal-justice reform circles have been unanimous, from lawmakers and law enforcement leaders to advocacy groups and criminologists. Prosecutors and law-enforcement leaders reacted with dismay to Sessions’ memo. Law Enforcement Leaders to Reduce Crime and Incarceration, an organization of nearly 200 current and former police chiefs, sheriffs, and prosecutors, called the move an “ineffective way to protect public safety.”