Financial Review

Oh Canada

Sinclair Noe — April 25, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 232 = 20,996
SPX + 14 = 2388
NAS + 41 = 6,025
RUT + 13 = 1411
10 Y + .05 = 2.33%
OIL + .13 = 49.36
GOLD – 12.00 = 1265.00

This has been a very strong start to the week. The Dow Industrial Average has added about 460 points in the past two sessions and traded above 21,000. The S&P 500 has gained about 40 points. Both the Dow and the S&P are now back above their 50-day moving averages.

The Nasdaq Composite broke through 6,000 for a record high. To put this in perspective, the Nasdaq broke above the 5,000 milestone on March 9, 2000 – 17 years ago. Simple math tells you that the Nasdaq has returned just over 1% per year, on average, for the past 17 years. Of course, there was nothing average about the past 17 years.

The week started with somewhat positive news about the French elections, which translated to a risk-on trade for global markets; combined with easing geopolitical tensions; plus, the hope for some sort of tax cut measure to be announced tomorrow.

The threat of a US government shutdown this weekend appeared to recede after President Trump backed away from a demand that Congress include funding for his planned border wall with Mexico in a spending bill. However, even if the fight over wall funding is over, Republicans and Democrats still have some difficult issues to resolve as they face a Friday night deadline.

The big driver in the 2-day rally has been earnings, coming in much stronger than estimates. With half of the Dow 30 Industrial companies reporting earnings, with 11 beating earnings expectations, according to FactSet. That 73% beat rate is above the 5-year average of 68% for S&P 500 companies.

I know that is a little of an apples-to-oranges comparison, but still, it has been a good earnings reporting season so far.  The shares of the Dow companies that have revealed results have gained a combined total of $21.80 in price since the reports were released through Tuesday afternoon, with 10 winners rising a combined $36.33 and five losers falling $14.46.

The combined price gains are adding about 149 points to the Dow, which is a price-weighted index. That would represent about 36% of the Dow’s 417-point gain since earnings season started. The stocks of the five Dow companies that reported results today were adding about 125 points to the Dow’s price. Caterpillar and McDonald’s combined to add 100 points to the Dow today.

McDonald’s reported first-quarter earnings and sales that topped analysts’ most bullish estimates amid declining visits to restaurants industry-wide. McDonald’s cut prices and offered a smaller Big mac and a bigger Big Mac, plus they are doing well with all-day breakfast – that helped lift sales in the US by 1.7%. Global sales at stores open for at least one year — so-called comparable store sales — rose by 4%. Earnings and revenue beat estimates.

Caterpillar announced higher-than-expected earnings and revenue. In a press release, noted strong cost cutting measures, while downplaying guidance, writing: “While Caterpillar had strong first-quarter performance and is seeing signs of recovery in several of the industries it serves, geopolitical and market uncertainty along with volatility in commodity prices continue to present risks for the rest of the year.”

Coca-Cola reported a smaller-than-expected quarterly profit due to higher costs related to refranchising its North America bottling operations. Global soda sales fell 1 percent in the first quarter. Coke missed earnings estimates but beat revenue estimates.

AT&T’s quarterly revenue missed estimates on lower equipment sales, as customers held onto their phones longer and did not buy new replacement phones. AT&T lost 61,000 wireless subscribers who pay a monthly bill. Earnings also missed estimates. AT&T, which is in the process of acquiring Time Warner, also said it would no longer give a full-year revenue forecast due to the unpredictability of wireless handset sales.

3M, which makes Scotch tape and Post-it notes, raised its 2017 profit forecast and reported better-than-expected quarterly results, helped by growth across its major businesses. 3M beat earnings and revenue estimates.

Chipotle Mexican Grill reports same store sales rose almost 18 percent in the first quarter.  Sales by that measure had previously declined for five straight quarters following an E. coli outbreak and other food-poisoning incidents that began in 2015. Chipotle is still grappling with higher labor costs and a tight market for restaurant employees.

The chain raised menu prices at about 440 of its 2,200 locations earlier this month to cope with escalating expenses. Still, they managed to beat revenue and earnings estimates. Chipotle opened 57 new restaurants during the quarter, and it reiterated plans to add as many as 210 this year.

Panera Bread plans to hire 10,000 new employees by the end of the year as they expand their delivery services. Some 75 percent of the new hires will be delivery drivers, while the remaining 25 percent will be in-cafe jobs. Panera has already rolled out delivery to 15 percent of its system, including 20 percent of its company-owned locations.

By the end of 2017, it hopes to expand delivery to 35 percent to 40 percent of system-wide locations. The delivery option is expected to add about $250,000 in revenue per restaurant. Panera is in the process of being acquired by privately held JAB Holding in a deal valued at about $7.5 billion.

Earnings season kicked off with the big banks and today Wells Fargo and Citigroup held their annual shareholders’ meetings. It did not go well. Wells’ meeting ran nearly three hours, was repeatedly interrupted by angry shareholders seeking answers about how and why thousands of bank employees could open 2.1 million fake accounts in customers’ names without their permission.

Several shareholders were physically escorted out of the meeting. Proxy adviser Institutional Shareholder Services (ISS) argued the Wells Fargo directors failed in their oversight duties. All directors were re-elected but several, including Chairman Stephen Sanger, barely had a majority of votes. Hardly a show of confidence, and an indicator that we could see a shakeup in the board soon.

Citigroup is one of four lead banks in a group of 17 which have provided project financing for the Dakota Access Pipeline. The pipeline crosses land of the Standing Rock Sioux whose members are concerned about possible ground water contamination if the pipeline breaks.

Citigroup’s shareholder meeting was disrupted by protesters, prompting a rare apology from Chairman Mike O’Neill, who said, “We wish we could have a do-over on this.” CEO Mike Corbat said Citigroup had not given enough early consideration to the concerns of the indigenous people.

The Trump administration announced a 20% tariff on lumber imported from Canada, to be applied retroactively. The trade agreement that governed imports of Canadian lumber expired at the end of 2016, and prices have been on the rise since then. The National Association of Home Builders said higher input costs had already added almost $3,600 to the price of a new home, and the tariff will add $1236 to the price of the average single family home.

The NAHB also says the proposed tariff could cost as many as 8,241 jobs and over $350 million in taxes and other revenues for U.S. governments in 2017 alone. The US lumber industry alleges Canadian wood is heavily subsidized and imports are harming U.S. mills and workers. Canada is the world’s largest softwood lumber exporter, and the U.S. is its biggest market.

Canadian lumber companies called the tariff unfair and Canadian prime minister Justin Trudeau vowed to fight back. International tribunals have considered the issue of whether Canada provides unfair subsidies to lumber exports and ruled that it does not. Log costs are lower in some parts of the US than in some regions of Canada.

The US does not produce enough lumber to meet domestic demand. Homebuilders such as Lennar, Pulte, and DRHorton all dropped today. May lumber futures dropped $10.00 at $385.10, go figure.

Meanwhile, on the southern border, Mexico and the US have been fighting for years over dolphin safe tuna. Mexico says its fisherman play by the rules. The US government disagrees. Today, the World Trade Organization ruled in Mexico’s favor, allowing it to impose trade sanctions worth $163 million a year against the US. The WTO says that’s how much money Mexico has lost from the US unfairly penalizing Mexican tuna.

A US judge has blocked President Trump’s executive order that sought to withhold federal funds from sanctuary cities. The ruling said Trump’s order targeted broad categories of federal funding for sanctuary governments and that plaintiffs challenging the order were likely to succeed in proving it unconstitutional.

The Conference Board said its consumer confidence index fell to 120.3 this month from 124.9 in March, which was the highest reading since December 2000. The index in April was the second highest reading since 2000. Consumers’ assessment of labor market conditions was slightly less favorable than in March. That measure closely correlates to the unemployment rate in the Labor Department’s employment report.

House prices continued to show no signs of slowing, hitting their highest in nearly three years. The S&P/Case-Shiller 20-city index rose 5.9% in the three-month period ending in February compared to the same period a year ago, an acceleration from its 5.7% yearly increase in January. This is the highest rate since July 2014. The 20-city index was up 0.4% for the month, or a 0.7% gain when seasonally adjusted. Phoenix saw a 0.4% gain in the last month, and 5.3% over the past year.

The Commerce Department said new home sales jumped 5.8 percent to a seasonally adjusted annual rate of 621,00 units last month, the highest level since July 2016. New home sales were up 15.6 percent compared to March 2016. They have now increased for three straight months.

Financial Review

Sleepwalking Higher

Sinclair Noe — September 7, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 11 = 18,526
SPX -0.32 = 2186
NAS + 8 = 5283
10 Y – .01 = 1.54%
OIL + 1.34 = 46.80
GOLD – 4.40 = 1346.00

World stocks hit their highest in more than a year and the dollar fell against the yen. Emerging market shares led the charge, touching their strongest levels since July 2015. European shares reversed early losses. The Stoxx 600 index edged up 0.1 percent towards eight-month highs hit on Monday, led by a rise of almost 1 percent in oil and gas shares.

Euro zone government bond yields fell as some investors bet the weak U.S. data, which followed weaker-than-expected jobs numbers on Friday, would pressure the European Central Bank to ease monetary policy further. The ECB meets tomorrow. While US markets were mixed, the Nasdaq Composite hit another record high close.

In a follow-up to last Friday’s Jobs Report, the Labor Department released the JOLT survey, or Job Openings and Labor Turnover, which provides detail on the labor market. Job openings jumped to 5.87 million openings, an all-time high, while hires increased to 5.23 million from 5.17 million in June. The number of people quitting jobs voluntarily was flat at 2.98 million, but that’s still up substantially from the depths of the recession, signaling more worker confidence in the ability to find another job.

The Fed published its Beige Book, an anecdotal look at economic conditions around the country, designed to provide guidance two weeks ahead of the next FOMC policy meeting. Overall, the Beige Book had the same modestly positive tone seen in the last few surveys. The latest report gave no hint of a second-half surge in growth or any reason for urgency to raise interest rates. Six Fed districts reported tight labor markets but overall “wage pressures remained fairly modest.” Three districts reported businesses are cautious ahead of the elections.

It “makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later,” San Francisco Fed President John Williams announced late Tuesday. He also said the economy was in “good shape,” predicting unemployment, now at 4.9%, to fall to 4.5% in 2017 and inflation to rise to the Fed’s 2% target in the next year or two.

Richmond Fed President Jeffrey Lacker and Kansas City Fed President Esther George testified at a congressional hearing this morning. Lacker said, “It looks like the case for a rate increase is going to be strong in September.” George said during the hearing she believes the US labor market is at or near full strength. We keep hearing from Fed officials that a September hike is possible but nobody seems to believe what we hear, in part because the data doesn’t seem to support a hike.

British manufacturing fell sharply in the wake of Brexit. Data from the Office for National Statistics showed manufacturing production fell 0.9% in July, missing expectations of a 0.4% decline. While the reading was disappointing, it should be noted that production fell 0.2% in June and 0.6% in May.

Today is an Apple Event Day. I know you’re all excited, so here are the details: the iPhone 7 has two camera lenses (wide angle and telephoto), it does not have a headphone jack but it will ship with a headphone adapter, they also introduced their own wireless headphone, it is water resistant – so go ahead and toss your $649 phone into 50 meters of water without trepidation.

If nothing else, the iPhone 7 packs a punch. With 256 gigabytes of storage for its most powerful version, Apple’s new iPhone has 64 times the amount of space as the company’s original smartphone nine years ago. Increased storage is a critical piece in convincing consumers to upgrade, as anyone with a 12 gig iPhone 5 can attest.  They also unveiled an iPhone 7 Plus for people who don’t want a phone that can fit in their pocket; plus, an Apple Watch 2 for some reason.

Separately, Ireland’s parliament today debated the government’s decision to appeal the €13-billion-euro tax ruling against Apple by the European Commission. They will collect the tax but they will hold the revenue in escrow while they appeal the decision.

South Korea’s Hanjin Shipping has won a temporary order from a U.S. judge extending bankruptcy protections so its vessels can dock at American ports without fear creditors will try to seize its ships. The world’s seventh-largest container carrier and its clients are scrambling to move an estimated $14 billion worth of cargo off ships that are no longer operating normally in the wake of its collapse last week.

More than half of Hanjin’s ships have been blocked from docking at ports and denied service from lashing firms on fears they will not be paid while some vessels have been seized by creditors. With expectations high that Hanjin will eventually be liquidated, there is little clarity on just how the problem of cargo stranded ahead of the peak-year end shopping season will be resolved.

Poland is seeking formal U.S. approval to buy eight Patriot missile defense systems from Raytheon, marking a key move toward closing the estimated $5 billion deal. If cleared, the country will become the 6th NATO Patriot country and the 14th Patriot partner nation. Raytheon has agreed to perform at least half the value of the work in Poland.

Bill Ackman’s Pershing Square hedge fund has taken a 9.9% stake in Chipotle Mexican Grill, the once high-flying company battered by food-safety issues. Pershing Square says the stock was undervalued and attractive. Chipotle shares have dropped about 40% over the past year. Ackman also left the board of Canadian Pacific on Tuesday, marking the end of a four-year tenure that helped overhaul the ailing railroad company.

Apache Corp. stock was among the top gainers today after the oil and gas company revealed an “immense” oil and gas reserve in west Texas. Apache estimated that its more than 300,000 contiguous acres in the region hold about 3 billion barrels of oil and 75 trillion cubic feet of natural gas. It called the field Alpine High.

New York has opened a probe into whether Mylan broke antitrust law under its EpiPen4Schools program, which gives many schools the devices for free, but may have barred institutions from buying rival products for a year. Meanwhile, new reports suggest Mylan pays no more than $30 per EpiPen, while some patients are forced to pay a little over $600 for a two-pack of the lifesaving medication.

Department of Justice prosecutors are considering criminal charges against HSBC related to conduct on its foreign-exchange desk, possibly upending an earlier deal that let the bank avoid prosecution. The new investigation could lead to a step that has often been threatened but rarely taken: prosecutors tearing up a deferred-prosecution agreement if a company fails to comply with the reform plan laid out by the Justice Department. HSBC is essentially on probation: It admitted in 2012 that it helped Mexican drug cartels launder money and did business with Iran and other sanctioned nations.

To avoid charges, it signed the so-called DPA, which required it to improve its internal controls and submit to an outside monitor. If HSBC is found to have broken the terms of the deferred prosecution, then the bank could find itself pulled back into the money laundering and sanctions case that it thought it had put behind it four years ago; prosecutors could invoke a section of the deal that says HSBC could be held responsible for the conduct it admitted to in 2012.

Prosecutors will consider many factors before deciding whether to file a criminal charge against the bank in the currency case, including the severity of the conduct on the foreign-exchange desk and the extent to which the bank moved to address it. A significant argument against charging the bank is that the foreign-exchange conduct on which the charge would be based appeared to be a one-time event that has not been linked to a wider pattern of behavior. Also, the conduct on the foreign-exchange desk predated the 2012 agreement.

Last year, the Justice Department voided a similar deferred prosecution agreement with UBS Group after the bank acknowledged unlawful conduct on its foreign-exchange desk. In 2012, UBS signed a non-prosecution agreement related to accusations that it and other banks attempted to rig benchmark Libor interest rates that affected trillions of dollars of derivatives and loans. But UBS was granted immunity because it self-reported the forex rigging, so…

The nation’s largest investment bank is barring its top employees from contributing to certain political campaigns. The new rules, which went into effect last week, prohibit partners at Goldman Sachs from donating to politicians running for state or local office, or to state officials who are seeking federal office. That applies to Indiana Gov. Mike Pence, Trump’s running mate, which means that the Goldman Sachs partners can’t contribute to the Republican ticket.

The policy, which was spelled out in a memo obtained by The Associated Press, is meant to remove any implication of a “pay for play” scandal. Four years ago, the bank paid $12 million to settle charges that a Boston-based banker had a bond underwriting business in the state while contributing funds to and working for the campaign of Massachusetts gubernatorial candidate Tim Cahill.

The memo specifically highlights the Trump-Pence ticket – and Super PACs supporting the Republicans – as a campaign to which the partners at the New York-based firm can’t donate. But the rules do not apply to the Democratic ticket, since neither Hillary Clinton nor her running mate, Sen. Tim Kaine, are currently state officeholders, though Kaine is a former governor. The new rules apply to 467 Goldman partners and not the approximately 30,000 other employees.

Financial Review

Addiction to Oil

Sinclair Noe — April 25, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 26 = 17,977
SPX – 3 = 2087
NAS – 10 = 4895
10 Y + .02 = 1.90%
OIL + .26 = 42.90
GOLD + 5.70 = 1238.90

The Federal Reserve FOMC meets this week to determine monetary policy; they are not expected to raise interest rates this week, however they might set the stage for a rate hike in June. Earlier this month, Fed Chair Janet Yellen said the U.S. economy was on a solid course with some hints of inflation, so the Federal Reserve was on track for further interest rate hikes.

First quarter GDP, to be released on Thursday, is expected to slump to a paltry 0.7% annual rate from a 1.4% rate in the last three months of 2015. It might be tough for the Fed to sound hawkish if it is followed by a weak GDP report.

Traders are also keeping an eye on the outcome of a Bank of Japan meeting on Thursday, with expectations that Japan could push deeper into negative interest rate territory.

Investors have been assessing first-quarter earnings, FactSet just released its latest update of earnings season stats for S&P 500 companies. And the numbers are pretty bad; 76% of companies have beaten analysts’ estimates, but the aggregate earnings decline is -8.9%. That’s actually worse than the -8.6% decline analysts expected on March 31.

This will mark the fourth straight quarter of declining year-over-year earnings, which hasn’t happened since 2009. Throughout this bull market, companies have managed to squeak past very low expectations. Now, we can’t meet lousy expectations.

An avalanche of first-quarter earnings reports is on tap, with 186 companies in the S&P 500 slated to report results. The big news in earnings will be tomorrow, when Apple reports. Apple is expected to report a year-over-year decline in revenue for the first time since 2003. Along with the revenue decline, many are predicting that iPhone sales will fall year-over-year for the first time in the device’s history.

New U.S. single-family home sales fell in March, but the decline was concentrated in the West region. The Commerce Department said new home sales decreased 1.5 percent to a seasonally adjusted annual rate of 511,000 units. Sales were up in the Midwest and the South, and flat in the Northeast, but sales plunged 23.6 percent in the West, reversing February’s 21.7 percent jump; which leads me to believe we’re dealing with some statistical noise in the report.

While the inventory of new homes on the market rose in March to the highest since September 2009, new housing stock remains less than half of what it was at the height of the housing bubble. At March’s sales pace it would take 5.8 months to clear the supply of houses on the market. That was the most since last September and was up from 5.6 months in February.

Saudi Arabia unveiled “Saudi Vision 2030,” a plan to overhaul the kingdom’s economy in order to reduce its massive reliance on oil revenues, which account for 80% of its income but are taking a battering amidst the plunge in crude prices. Prince Mohammed bin Salman said the kingdom will try to break its “addiction to oil” by creating the world’s largest sovereign-wealth fund with over $2 trillion in diversified assets and to sell under 5% in state oil monopoly Saudi Aramco in an IPO.

The existing state-controlled Public Investment Fund will be transformed into a giant sovereign wealth fund to manage the kingdom’s petrodollars. Instead of direct subsidies, Saudis will receive payments as a form of benefit, while the government will attempt to cut unemployment to 7 percent from 11.6 percent by an unspecified date.

While volatility in the oil market may be pushing the Saudis to reform, low oil prices are also cutting the resources they can use to manage the change. And if the Saudis are willing to sell, who will step up to buy? Although the Saudi stock market opened up to direct foreign investment last June, total foreign ownership of the market remains tiny at less than 1 percent.

With prices so low, it hardly seems like a good time for an oil IPO. Perhaps even more important than the price of oil is the political component. The Saudis are not known for openness and transparency; this plan will surely draw opposition both from within the kingdom and from outside investors who will likely demand to see change before investment.

Oil was pretty strong last week in the face of a lot of bad news, including no agreement in Doha to freeze output, so don’t count out a repeat performance this week, especially since oil managed to crawl off the lows today. Crude oil has been the driving force behind equities since the February 11 low.

You may recall a few years back, the US tried to break its addiction to oil; the result was the shale oil revolution, which helped to ease our dependence on foreign oil, even if it didn’t break our addiction. Imagine what could happen if the US actually tried to break the addiction by starting a renewable energy revolution. Today’s announcement from the Saudis tells us that they are imagining that scenario.

China’s debt load is at a record high. The Financial Times reports China’s debt total climbed to 237% of GDP in the first quarter, an all-time high. Data from the Bank of International Settlements shows China’s debt load is far greater than emerging markets as a whole, which carry debt at an average of 175% of GDP. According to the FT, China’s debt has exploded since 2007, when it was 148% of GDP.

Gannett, the publisher of USA Today, said it offered to buy Tribune Publishing Co but the owner of the Los Angeles Times refused to begin “constructive” talks. Gannett said it made an offer to buy Tribune Publishing on April 12 for $815 million, including the assumption of $390 million of debt. Tribune Publishing said in a statement that it had told Gannett it would engage financial and legal advisers to review the proposal and its “numerous contingencies.”

The Justice Department gave antitrust approval to Charter Communications’ proposed purchase of Time Warner Cable and Bright House networks, which would create the second-largest U.S. broadband provider and third-largest video provider. The DOJ says online video will provide competition, and one condition to the deal is that Charter must agree to refrain from telling its content providers that they cannot also sell shows online.

The Federal Communications Commission must also approve the deal, and the agency’s chairman said he, too, is looking to protect competition. It was not immediately clear when the FCC would decide. Charter has valued the deal at $56 billion for Time Warner Cable, excluding debt, and $10 billion for Bright House Networks.

Ball is selling its beverage-can assets. Ball will sell 17 can factories and other facilities to European-based packaging company Ardagh for $3.42 billion. Ardagh will sell $2.85 billion of bonds to help fund the deal. Apollo Global Management, Blackstone Group LP and Madison Dearborn Partners were said to be other interested bidders.

Goldman Sachs has entered online banking. The investment bank is now allowing ordinary citizens to open a bank account. Goldman’s digital savings account offers a rate of 1.05%, and can be opened for as little as $1. The bank accounts are available after Goldman acquired about 150,000 retail customers through its GE Capital deal that closed last week.

Xerox reported a 4.2 percent fall in quarterly revenue, hurt by a strong dollar and lower sales of printers and copiers. Net income attributable to the company fell to $34 million, or 3 cents per share, in the first quarter ended March 31, from $225 million, or 19 cents per share, a year earlier. Revenue fell to $4.2 billion from $4.4 billion.

Halliburton is delaying earnings. The oil services provider announced it’s taking a $2.1 billion charge for the first quarter after cutting more than 600,000 jobs and taking a write off. Additionally, Halliburton’s earnings will be delayed from April 25 to May 3 in order to account for the Baker Hughes deal which is expected to close before the end of the month.

It looks like Chipotle’s free burrito strategy might be working: a survey shows that 41% of respondents who received a free burrito coupon visited Chipotle 3.8-times over the prior 30 days, compared to 1.4-visits for the 59% who didn’t receive a coupon. Brand perception was also higher in the coupon group. Meanwhile, analysts at Credit Suisse found that Google searches for food-safety issues related to Chipotle have dropped sharply since the beginning of the year. We’ll see how the free food strategy is working when Chipotle reports earnings tomorrow after the bell.

Philips is leaning towards holding an IPO of its lighting unit – its original line of business – rather than selling the operations. The divestment of the lighting operations will leave the company to focus on healthcare technology. Philips’ also reported better-than-expected earnings; adjusted earnings before interest, taxes and amortization climbed 14% to $420 million.

Carlyle has joined up with former Barclays CEO Bob Diamond to bid for the U.K. bank’s 62% holding in its African operations. Barclays Africa Group is listed in Johannesburg with a market capitalization of $8.5 billion, putting the value of the stake at $5.27 billion. Barclays is selling the unit due to increasing regulatory pressures.

Google is building a startup incubator called Area 120 in which teams of employees will be able to submit business plans to join the initiative. Those accepted will work on their projects full-time for a few months, after which they’ll be able to pitch Google on creating a new company that the parent firm would take a stake in. Area 120 is an attempt to prevent entrepreneurial employees from leaving Google entirely to found their own businesses.

Financial Review

Honey for Bears

Sinclair Noe — February 8, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 177 = 16,027
SPX – 26 = 1853
NAS – 79 = 4283
10 Y – .11 = 1.74%
OIL – .80 = 30.09
GOLD + 15.50 = 1190.00

This was just an ugly session from the start. The Dow opened about 200 points down and then trickled lower; at one point down more than 300 points. The S&P 500 index broke down through the key level of support at 1860 that I warned you about in January and again last week, taking out the August 2015 lows and the October 2014 lows.

The S&P 500 not only took out support from January, but now we look to minor support at 1815, and then, well there isn’t really any support. In other words, the charts look very dangerous here.

And if you prefer fundamentals over technicals; this is what FactSet had to say in its recent report: “For Q4 2015, the blended earnings decline is -3.8%. If the index reports a decline in earnings for Q4, it will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since Q1 2009 through Q3 2009.”

The difference this time versus 2009 is that valuations are much higher. FactSet data show expectations for first-quarter per-share earnings have collapsed to a decline of 5.5% as of today. Back in September, that forecast was for growth of 4.8%. By the end of December, it had fallen to growth of just 0.8%.

Chinese stock markets are closed for trade all week to celebrate the Lunar New Year, providing little direction for European stocks at the open. However, data out over the weekend showed China’s foreign-exchange reserves fell to the lowest level in more than three years last month, in another sign of capital flight as the yuan weakens.

European stocks opened lower, extending last week’s losses. The Stoxx Europe 600 index had its lowest close in more than 15 months; banks in the Stoxx Europe 600 Index have dropped about 39 percent since a peak in July. Their slump this year is the worst of any other industry group.

Oil prices kicked off the week in the red. Data on oil demand in the world’s two largest markets, the U.S. and China, has taken a sharp turn lower. U.S. demand for oil products in January fell 3.9% compared with January 2015. In China, although overall oil demand was flat in December and an improvement on November’s outright decline, it still represented the second weakest reading for the year.

Meanwhile, hopes about an agreement between producers within and outside of the Organization of the Petroleum Exporting Countries to cut output and support prices have also faded in recent days. A meeting between Saudi Arabia and Venezuela on Sunday ended without any plans for a production cut. Iran plans to sell 300,000 barrels of crude oil a day to European customers now that Western sanctions are lifted. And within the next few months, Iran wants to ramp up production to 500,000 barrels a day, with the remainder going to Asia.

Chesapeake Energy, the natural gas driller that’s been cutting jobs and investor payouts to conserve dwindling cash flows, lost more than half it stock market value today after a report that it hired a restructuring law firm. The company’s bonds led losses among high-yield debt. Chesapeake’s notes due March 2016 (about $500 million in bonds) tumbled to a record to 74.5 cents, from 95 cents last week, while its bonds maturing in 2017 fell to an all-time low at 34 cents.

Exchange-traded funds that hold US junk bonds slid to their lowest levels in almost seven years. BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund and SPDR Barclays High Yield Bond ETF both fell to the lowest levels since 2009. In high yield, energy, communications and health care fared the worst. Banks and insurers in Europe led a surge in the cost of insuring corporate bonds to the highest levels since 2013.

European financial firms are taking a beating amid fears of “a chronic profitability crisis that makes it impossible for banks to build up barely-adequate capital bases. None of the fresh wave of selling stems from new news, but the list of negatives is long. Fears surrounding non-performing loans and other deep-rooted issues in the Italian banking sector have driven nerves, while a slew of weak earnings from large banks such as Credit Suisse and Deutsche Bank have added to concerns. The worst of the lot is Deutsche Bank, Germany’s biggest, down about 10% today, and down 40% year-to-date, as its credit default swaps spiked to their highest levels since 2012.

Bank credit default swaps, or contracts that offer protection against the risk of a bond defaulting, have also surged in price, indicating intensifying fears for financial groups’ credit. Deutsche bank’s 5-year senior CDS has jumped 11bps today to a three-and-a-half-year high of 212bps, up from 134bps just over a week ago. The cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015, rising to 438 basis points, a four-year high, from 187. That is just a very, very big selloff.

And what makes it crazier still, is that it looks like Deutsche Bank has more than sufficient reserves set aside for its debt and the interest on its debt, exclusive of operating results. But for now that doesn’t matter; share price has dropped, which increases expectations for more turmoil, which pushes the cost of hedging, which frightens shareholders, who then sell, pushing prices even lower. If it all sounds a bit over-done, it is, but it still demands we pay attention.

And the situation is not unique to Deutsche Bank, which is just one of the extreme examples. Basically all the banks are seeing their credit default swaps trading at the highs of the year. And here in the US, the large cap financials are down almost 12% year-to-date. That means there has been some panic selling. Today, the mega-banks, including Bank of America, Citi, and Wells Fargo all moved to new lows intraday or at the close.

The KBW Bank Index, which consists of 24 banks, is approaching 2008 and 2011 lows relative to the S&P 500. So, the question of the day is: Are the large cap financials cheap or is the rest of the market still overpriced? We may need more time to answer that one, but for now the big banks distress is honey for the bears.

If Congress does not act soon, Puerto Rican officials say major defaults are likely this spring. They are trying to make their case for a law that would allow a broad restructuring of the territory’s multibillion-dollar debt. The officials also said they knew that any legislative help would come at a stiff price: Puerto Rico would have to submit to a federal control board, something viewed by some on the island as colonialist-style interference.

Argentina has offered to pay about $6.5 billion in cash to U.S. holdouts that refused debt restructurings after its 2001 default, implying a haircut of about 25% on the amount bondholders say they are owed. If accepted by all the holdouts, which are led by billionaire Paul Singer’s Elliott Management, the deal would clear the way for Argentina’s return to the international capital markets.

Washington is vowing to ensure the United Nations Security Council imposes serious consequences on North Korea after it launched a space rocket in a purported satellite program widely considered to be a cover for developing ICBMs. The latest launch, which follows North Korea’s Jan. 6 nuclear test, may kick off a rapid buildup of American missile defenses in Asia.

Apollo Education Group, the parent company of the University of Phoenix, will be taken private as it is acquired by a group of investors for $1.1 billion. The investors will pay $9.50 in cash per share, which is 30% above the company’s trailing 30-day volume weighted average stock price. Tony Miller, chief executive of The Vistria Group, one of the investors, will become chairman of the board for the Apollo Education Group once the transaction is completed. The other investors included Apollo Global Management, LLC and Najafi Companies.

The agreement arrives weeks after the company reported a decline in revenue and another round of layoffs at the for-profit college. Phoenix, like other for-profit schools, has been battered by poor enrollment, government investigations and heightened federal regulation.

Chipotle closed its more than 2,000 restaurants today for a few hours to address employees about the food-borne illnesses that have led to lawsuits and a federal investigation. Chipotle used the event to review new food safety protocols and explain the steps the company is taking to improve food safety.

Ford is planning to build a new assembly plant in Mexico to sharply increase output from the country, representing the latest shift of investment abroad by a Detroit automaker following the signing of a costly new labor deal. Ford expects to add 500,000 units of annual Mexican capacity starting in 2018 (more than double what it built in 2015), by constructing a new assembly complex in San Luis Potosí and expanding an existing factory near Mexico City.

You don’t see this every day…Credit Suisse CEO Tidjane Thiam has asked the company’s board to reduce his bonus, days after the Swiss bank reported a fourth-quarter multibillion-dollar loss that sent its share price tumbling. Thiam, who joined the bank in July, did not indicate the size of the cutback, but said his was the largest bonus reduction within the management team.

Financial Review

Groundhog Day EP

Sinclair Noe — February 2, 2016

Podcast: Play in new window | Download (Duration: 20:26 — 9.4MB)

Subscribe: iTunes | Android | RSS

DOW – 295 = 16,153
SPX – 36 = 1903
NAS – 103 = 4516
10 Y – .10 = 1.86%
OIL – 1.74 = 29.88
GOLD + 1.00 = 1130.00

A big move for stocks and bonds today. While a 295 point drop, or 1.8%, in the Dow will attract some headlines, we also saw a less flashy move in bonds, with the yield on 10-year Treasuries drop 10 basis points, to 1.86% – that’s a 5.2% drop. After hitting resistance levels from October, yields continued dropping to lows last seen in April.

Stocks moved lower again, following the trail of oil prices, which dropped 5.5% today to close below $30 a barrel. Not a big surprise because the trend has been lower, and a trend in place is more likely to continue than it is to reverse. We are definitely in a downtrend. The S&P 500 is now right at 10% below its May record, which means correction territory, not a bear market, although many stocks in the S&P are in bear market territory –  specifically the energy stocks.

The rally last week looks like not much more than end-of-month reshuffling, which happened at the same time the Bank of Japan surprised the markets with negative interest rates, but the BOJ can’t announce negative interest rates every day.

Right now, any rally tends to be short and sharp. In other words, last week’s rally was not enough to reverse the trend. That means we can expect the S&P 500 to re-test the recent closing low of 1859, set on January 20. There should be a strong floor, or support, right around 1860 to 1870. Any breakdown from those levels and it is Katy bar the door, or maybe Katy short the Spiders.

While earnings growth for the S&P 500-stock index is forecast to come in negative, year-over-year, and earnings growth for the MSCI Europe has been stagnant for an astonishing 48 months, the picture brightens considerably once energy is taken away. Excluding the sector, year-on-year earnings growth in both the US and Europe reach 5 percent and 4 percent, respectively.

When you hear that earnings season is terrible, or that corporate earnings are collapsing; the reality is that commodity sector earnings are collapsing and the rest of the market is still seeing moderate growth. And while the breakdown in the commodity sector has the potential to drag down the broader market, particularly as we see asset write-downs and credit defaults; for now, the benefits of lower oil are acting as a counter balance to the negatives.

This is a very busy week for earnings reports, and today featured results of some of the Big Oil companies.

Exxon Mobil, the largest oil company by market cap, reported a 58% drop in quarterly profit and said it would cut spending this year by one-quarter, to around $23 billion.  Capital outlays that peaked at $42.5 billion in 2013 have been reduced by 45%. That represents the leanest spending plan since 2007. Still, the cutbacks have not really served to reduce production yet.

Exxon said its oil and gas output rose 4.8% in the fourth quarter as it pumped more crude oil. Fourth-quarter net income fell to $2.7 billion, or 67 cents a share, from $6.5 billion, or $1.56, a year earlier. The per-share result was 4 cents higher than estimates. Exxon is the only super-major oil company so far to report better-than-expected fourth-quarter results.

One area where Exxon will make big cuts is in its share buyback program.  Exxon has spent more on share buybacks than any other company in the past 10 years, $210 billion. It far surpasses second-place Microsoft Corp, which has bought back $125 billion in that time. For the first time in 15 years, Exxon will only buy back shares to offset dilution as opposed to return cash to shareholders. Exxon will still use some buybacks for employee benefit plans and options programs.

Some investors worry that oil companies will not spend enough on research and development and new tech, either to sustain growth in their core businesses, or to open options in alternative energy sources for a world in which oil and gas consumption is constrained by climate policy or high prices.

Last September, the Rockefeller Brothers Fund, founded by the sons of the great oilman John D Rockefeller, said it planned to sell its holdings in fossil fuel companies, in part because the family believed renewable energy was the business of the future. The fund suggested the successors to John D’s Standard Oil were failing to grasp the opportunities that he would have seized. And even basic oil exploration and drilling has gone high tech, requiring massive computing power to analyze geophysical data from seismic surveys.

Last year Exxon spent just over $1 billion on R&D, or about 0.2% of total revenue, and just a fraction of what it spent on share buybacks. In 2008, Exxon spent $847 million on R&D but $35 billion on share buybacks. All of which raises the question of what Exxon will do if oil prices remain low.

For now, Exxon posted a profit for the quarter, down but still a profit. And lower oil prices lead to lower feed-stock costs, and as a result the margins in the refining segment have improved and should provide some tailwind. Exxon has managed to maintain a steady share price in the face of lower oil prices, but now they won’t be playing that game with share buybacks. Others might not be so lucky.

BP has reported its worst annual loss in 20 years (even weaker than its 2010 results that included the costs of destroying the Gulf of Mexico). For 2015 as a whole, the company announced a loss of $6.5 billion, and a loss of $3.3 billion in the fourth quarter. BP repeated a commitment it made last month to cut 4,000 jobs this year in its exploration and production unit, and that’s in addition to 3,000 workers from its marketing and refining business by the end of 2017.

PetroChina said last week it expects 2015 profit to fall at least 60 percent. Chevron on Friday reported its first quarterly loss since 2002, while Royal Dutch Shell Plc said last month that fourth-quarter profit is likely to drop at least 42 percent.

Standard & Poor’s has lowered its credit rating on Royal Dutch Shell and placed BP, Eni, Repsol, Statoil and Total on ratings watch with potential negative implications.

Dow Chemical blew past fourth-quarter profit and sales estimates. The company said it had net earnings of $3.5 billion in the fourth quarter, up from $734 million in the year earlier period. Lower oil prices meant higher profits for Dow’s plastics unit. Also today, Dow Chemical CEO Andrew Liveris said he would retire by mid-2017, following the merger of the company with fellow chemical and seeds producer DuPont.

United Parcel Service reported better-than-expected earnings in the most recent quarter as growth in international package delivery drove profitability. UPS also offered upbeat earnings guidance for the current year. For the quarter, UPS posted earnings of $1.33 billion, or $1.48 a share, up from $453 million, or 49 cents a share, a year earlier. In the domestic segment, profit rose an adjusted 18%. Daily shipments ticked up 2.4%, helped by strong demand from e-commerce shippers. UPS benefitted from lower fuel costs, but that was offset in part by acquisition costs of Coyote Logistics, as well as headwind from a stronger dollar on international operations.

Pfizer reported better-than-expected results for its fourth quarter thanks to last year’s acquisition of Hospira and strong sales of new drugs, but the pharmaceutical giant offered soft guidance for 2016. The guidance excludes any impact from its inversion deal with Allergan, which would move Pfizer’s headquarters to Ireland.

Michael Kors Holdings reported fiscal third-quarter profit and sales that beat expectations. Despite their beat, Kors’ comparable sales declined 0.9 percent; not as bad as expected, and that was good for a 24% gain today. The handbag bubble seems to have popped: For a variety of reasons, Americans just aren’t buying purses and bags like they used to. Michael Kors and other affordable US luxury brands, such as Coach and Kate Spade, have been hurting, especially as Americans show less willingness to pay full price for their bags. But the company said it found sales in a couple of places, including new store openings, and most notably, online.

Automakers reported January sales today. General Motors, Fiat Chrysler and Nissan reported surprise sales gains instead of the predicted declines, while drops at Ford, Toyota, and Honda were narrower than projected. The annualized selling rate adjusted for seasonal trends came in at a better-than-expected 17.6 million. Volkswagen reported sales dropped 15%.

The clock is ticking for Volkswagen to submit a repair plan covering 80,000 U.S. diesel SUVs and larger cars with emission levels over allowable levels. The California Air Resources Board set a deadline of February 2 for VW to come up with a remedy. Last month, California rejected VW’s proposal to fix 482,000 2.0 liter cars, calling it “substantially deficient.”

After the closing bell, reports from Yahoo and Chipotle.

Yahoo reported a 15% drop in adjusted quarterly revenue as it struggles to keep its share of online search and display advertising. Yahoo’s revenue fell to $1 billion from $1.18 billion. The company reported a loss of $4.43 billion, or $4.70 per share, in the quarter, compared with a net income of $166.3 million, or 17 cents per share, a year earlier. Excluding items, Yahoo earned 13 cents per share, in line with analysts’ average expectations.

Yahoo said it was exploring strategic alternatives in addition to the continued pursuit of the reverse spin-off of its Internet business. The company also said it would cut about 15 percent of its workforce and close offices in five locations. The company said it would simplify its product portfolio and that it had begun to explore divesting non-strategic assets.

Chipotle Mexican Grill reported a decline in quarterly revenue for the first time in its history as a public company, as a string of illness outbreaks linked to its restaurants contributed to a 44% drop in fourth-quarter profit.

Chipotle also said it was served with a subpoena on Jan. 28, widening the scope of a federal probe into an outbreak of foodborne disease disclosed in January. The new subpoena requires Chipotle to produce documents related to companywide food safety dating back to January 2013. Yesterday, the CDC said the two E. coli outbreaks that sickened 60 customers appeared to be over.

Chipotle said revenue fell 6.8% to $997.5 million, narrowly missing the $1 billion estimate. It is the company’s first decline in quarterly sales since going public in 2006.  Chipotle reported a profit of $67 million, or $2.17 a share, down from $121 million, or $3.84 a share, a year earlier.

Yesterday, the World Health Organization declared the Zika outbreak to be a global emergency. Zika also turned out to be bad for a car company in India.  Last year Tata Motors introduced a new hatchback; they touted the car as the next big thing, a good looking zippy car. And that’s how they came up with a name for the car; they shortened and combined zippy and car: Z-I and C-A, Zica. Spelled differently but pronounced the same as the virus. They will introduce a new name for the car in about a week.

On a more serious note, Sanofi has launched a project to develop a vaccine against the Zika virus in the most decisive commitment yet by a major vaccine producer to fight the disease linked to multiple birth defects in Brazil. The French drug maker said its Sanofi Pasteur vaccines division would use its expertise in developing vaccines for similar viruses such as yellow fever, Japanese encephalitis and, most recently, dengue. The closest vaccine prospect so far may be from a consortium including US biotech company Inovio Pharmaceuticals, which could potentially have a vaccine ready for limited emergency use before year-end.

Health authorities in Dallas, Texas said today that a local resident has contracted the Zika virus—the first confirmed case to be transmitted within the United States since the current outbreak began.

Yesterday’s settlements by Barclays and Credit Suisse for misrepresenting their private stock trading sites are unlikely to be the last as regulators continue to pursue abuses in electronic trading. According to the research firm Tabb Group, about 42% of the average daily trade volume is handled in the “dark,” meaning information about trades isn’t publicly known before they are executed. While the pools have existed for decades, they have become more popular in recent years due to the increase in high-frequency trading.

Lumber Liquidators has been ordered by the Department of Justice to pay $10 million for violations of the Lacey Act – a law for the protection of plants, fish and wildlife. The company told U.S. officials the timber for its wood flooring came from Germany rather than the actual source — the habitats of endangered Siberian tigers in Southeast Asia. Lumber Liquidators is also under a separate investigation into charges that its laminate products from China contain excessive levels of formaldehyde.

Yesterday we told you that Alphabet reported better than expected earnings and the stock moved higher in after-hours trade, pushing the market capitalization past Apple, to make Alphabet the most valuable company in the world.

Just in case you were wondering about the other corporate giants, here’s a rundown of the Top 10: Alphabet (formerly Google), Apple, Microsoft, Facebook, Berkshire Hathaway, Exxon Mobil, Johnson & Johnson, General Electric, Amazon.com, and Wells Fargo. It’s not until you get to the 11^th spot on the list that you find a foreign company, Nestle, valued at a mere $236 billion.

Financial Review

Bon Appetit

Sinclair Noe — January 6, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 252 = 16,906
SPX – 26 = 1990
NAS – 55 = 4835
10 Y – .07 =  2.18%
OIL – 1.98 = 33.99
GOLD + 16.30 = 1094.80

Sometimes the world can be a messy place. Global markets get discombobulated. That has been the case in the first few trading days of the year. Saudi Arabia and Iran are about as friendly as cats and dogs, China’s economic growth is grinding slower, and then, in left field, North Korea drops a bomb, or at least tests a bomb, maybe.

North Korea announced that scientists had successfully detonated a hydrogen bomb. The U.S. Geological Survey reported that a magnitude 5.1 earthquake was triggered near North Korea’s nuclear test site in the northeast of the country, but could not confirm that it was related to an H-bomb test.

China’s central bank set the yuan’s reference rate at an unexpectedly weak level, a reminder of the shock depreciation in August that sparked a wave of financial-market turmoil. Chinese media said that last summer’s selling ban on major shareholders would remain in place until the government publishes new rules on such sales.  The Shanghai Composite Index jumped 2.3 percent. Emerging-market stocks dropped to a six-year low and developing-nation currencies declined versus the dollar, while shares in Europe resumed losses after closing higher on Tuesday. Investors are continuing to replace risky assets with safe havens such as Japanese yen, U.S. Treasuries, German Bunds and gold.

Surely this was not what the Federal Reserve was expecting in December when they raised interest rates above zero for the first time in nearly a decade. Today, we found out more about what the Fed was thinking with the publication of the FOMC meeting minutes. The official account emphasized the expectation of Fed officials that “economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate” over the next year. And that is the plan if everything goes well. The minutes indicate that some officials are worried the Fed is once again overestimating the health of the economy.

And even though the vote to hike rates was unanimous, there were some nervous and reticent voters. The Fed is expected to raise interest rates by about one percentage point over the next year, an expectation based on the predictions of Fed officials in their December economic forecasts, and confirmed today by Federal Reserve Vice Chairman Stanley Fischer. In an interview on CNBC, Fischer said that four rate hikes by the U.S. central bank this year is close to his expectations, but added that global uncertainty could still veer this path off course.

Fed officials generally expect the strength of the domestic economy, propelled by increased consumer spending, to outweigh the weakness of the global economy. We had confirmation of this line of reasoning today in the ISM non-manufacturing survey. The Institute for Supply Management’s non-manufacturing index, which covers almost 90 percent of the economy, came in at 55.3 last month. While the level is down from November’s 55.9 and the weakest since April 2014, readings greater than 50 signal growth. In other words, the domestic economy is still chugging along, but the rest of the world is weighing on things.

And the Fed minutes included economic forecasts that sound good. The medium-term projection for real GDP growth was revised up slightly, on balance, from the previous forecast, primarily because of the recently passed Bipartisan Budget. The forecast for inflation was revised down slightly in the near term in response to recent data for consumer prices and the further decline in the price of crude oil but they feel confident they will hit their 2% inflation target by next year.

Even after stripping out volatile food and energy components, prices rose just 1.3 percent in the 12 months through November, according to the Fed’s preferred measure for core inflation. The thinking is that oil prices will start to move higher later this year. Also, the longstanding pattern is that inflation rises as unemployment declines.

Most of the news on the labor market has been good. Private-sector employment gains ramped up last month. ADP reports employers added 257,000 jobs in December. This is the strongest gain since December 2014. The ADP report is used as an early indicator of the Labor Department’s employment report, which will be released Friday and covers government jobs in addition to those in the private sector. The past two years have shown some of the best job growth since the 1990s.

The good news on employment has not translated into higher wages and that means there has been no inflationary pressures from all the job gains. Under normal circumstances, the Fed’s forecast of higher inflation might pan out, but the global economy is weak and that is having a deflationary impact.

In a separate report today, the nation’s trade deficit dropped 5% in November to the smallest amount in a year, but not because the economy is much improved: U.S. exports fell slightly, hitting the lowest level since the start of 2012, and imports dropped even faster. The trade gap declined to a seasonally adjusted $42.4 billion from $44.6 billion in October. U.S. exports slipped 0.9% to $182 billion in November. Imports fell a sharper 1.7% to $224 billion. The lower deficit in November was largely the result of falling imports of electronic goods as well as lower prices for crude oil and other commodities.

Still, the Fed was willing to hike rates despite tangible evidence. The question is how long they will continue to raise rates absent some signs of inflation. Financial markets expect only two quarter-point increases this year, according to pricing in federal funds futures. Fed vice chair Stanley Fischer said today, “We make our own analysis and our analysis says that the market is under-estimating where we’re going to be.” Maybe. Or perhaps the Fed is over-estimating where the economy is going to be.

Brent crude slipped to a fresh 11-year low overnight, while WTI dropped below $34 per barrel. Oil prices came under pressure as the World Bank predicted China’s troubles will spill over to emerging markets, which will face the decline in commodity prices. In addition to the economic concerns and geopolitical issues, the market remains overwhelmed with a global glut of oil. Saudi Arabia, the largest producer in OPEC, has refused to cut production. And many US producers have kept oil wells flowing despite the crushing financial blow of low prices.

Taken together, it’s a formula for a prolonged period of low prices.  Today, the Energy Information Agency reported gasoline inventories last week surged the most since 1993. Gasoline stocks rose 10.6 million barrels in the week ending Jan. 1 compared with expectations for a 2.3 million-barrel gain. That sent futures to the lowest since 2009.

As fuel prices fall, three of the largest U.S. airlines said they will charge customers more. Delta Air Lines increased prices on flights by up to $4 one-way and Southwest Airlines followed suit. American Airlines also raised domestic fares to match its rivals. While U.S. airlines regularly adjust their fares, hiking prices for nearly all domestic flights is less common and an industry-wide match even less so, and then to do a rate hike with fuel prices dropping – well, thank you, thank you very  much.

U.S. regulators have grown so concerned that traders are using high-speed computers to manipulate markets that they’re planning a new tactic to clamp down on the practice. The Financial Industry Regulatory Authority said it plans to issue report cards this year that will grade firms on how much spoofing flows through their order books, and expects brokers to use the assessments to root out misconduct.

Shares of Apple slid 2.5% on Tuesday following a report that suggested the tech giant may significantly slash its iPhone 6S and 6S Plus output. Japanese news outlet Nikkei reported Apple is expected to reduce production on its flagship device by about 30% between January and March. Apple suppliers Cirrus Logic, Skyworks, Qorvo, Avago, and InvenSense also tumbled on the news.

Puerto Rico’s latest default means a $10.3 million hit for Ambac Financial, which insures some of the debt the island’s infrastructure authority PRIFA failed to disburse on Monday. The payment on its own is small for Ambac, but with more than $2 billion total par exposure to Puerto Rican debt, the company could be in trouble if defaults continue.

Chipotle Mexican Grill has been served with a grand jury subpoena as part of a criminal investigation related to a norovirus outbreak at a California restaurant. The disclosure came as the chain projected a double-digit decline in sales after several outbreaks linked to food-borne illnesses. The company will formally report its financial results on Feb. 2, but today Chipotle warned investors that it expected a drop of 14.6 percent in same-store sales for its fourth quarter. For the full month of December, same-store restaurant sales were down 30 percent.

The norovirus outbreak happened in Simi Valley, California in August followed by another outbreak near Boston College in December, and that is in addition to E. Coli outbreaks in several states. All told, more than 500 people were sickened after eating in a Chipotle restaurant in the last half of 2015. Bon appetit.

Twitter is building a feature that will allow for posts much longer than its standard 140 characters, and is currently considering a 10,000-character limit. An end-of-first quarter launch is targeted. Apparently the idea that brevity would engender a respect for eloquence just hasn’t panned out.

Financial Review

Slip Sliding Away

Sinclair Noe — December 9, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 75 = 17,492
SPX – 15 – 2047
NAS – 75 = 5022
10 YR YLD – .03 = 2.21%
OIL – .28 = 37.24
GOLD – 2.10 = 1073.50

Stocks started the day in positive territory but then slipped, and the decline coincided with a drop in oil prices, which also went from positive to negative. Oil prices have buckled following the breakdown of OPEC talks last week. We have a price war breaking out between Saudi Arabia and Iran and US shale producers. At the same time, we have Russia, Venezuela, and Brazil all desperate for oil revenues.

But it’s not just oil; iron ore is moving in lockstep with oil, dropping to a 10-year low; Codelco, the Saudi Arabia of copper is refusing to cut output, betting it can outlast rivals and win market share. The major commodity indices have dropped to lows last seen in 1998.  While plummeting commodity prices can be a warning sign that the world economy is heading into recession, the latest sell-off has a different character. The slump is chiefly due to excess production, and amounts to a positive supply shock that should boost global recovery.

Dow Chemical and DuPont are in talks to combine, in what would be one of the largest deals of the year. Each company has a market value of about $60 billion and the combination would create the second-biggest chemical company in the world, after BASF, with more than $92 billion in annual sales. They are also talking about breaking up the merged company into three businesses – agricultural chemicals, specialty products, and materials like plastics. For the past year, both companies have been pressured by activist investors unhappy with their financial performance.

Yahoo will abandon its plans to spin off its $31 billion stake in Alibaba. Instead it will look at other options, like selling its core operations or spinning off its stake in Yahoo Japan. The decision is a repudiation of the strategy taken by Marissa Mayer, who was hired to turn the internet company around. She had planned to spin off the 15 percent stake in Alibaba and focus on the core business of selling advertising. But investors, led by the hedge fund Starboard Value, argued that the risk of capital gains tax was too great.

General Electric is in advanced talks to buy the drill-bits and drilling-services divisions of Halliburton, which is divesting assets to win antitrust approval for its takeover of Baker Hughes. GE is also exploring bids for other assets that Halliburton is seeking to unload, including parts of Baker Hughes’ operations.

Freeport-McMoRan said it will suspend its dividend and further reduce its capital spending. Freeport-McMoRan, the U.S.’s biggest miner and a major copper producer, said ending its annual dividend of 20 cents a share would save $240 million a year. The moves come as the company has been in turmoil as falling energy prices have exposed a disastrous investment in oil and gas drilling. A number of other miners have recently cut their dividends in a bid to improve liquidity.

As widely expected, Kinder Morgan has cut its 2016 quarterly dividend to $0.125/share from the current $0.51, marking the company’s first-ever dividend cut. The company said the move will enable it to use a significant portion of its cash flow to fund the equity portion of its expansion capital requirements, eliminate any need to access the equity market for the foreseeable future, and maintain a solid investment grade credit rating.

China cut the yuan’s reference rate to the weakest since 2011, fueling speculation that the central bank is trying to release pent-up depreciation pressure before a potential rate increase by the Federal Reserve. There are signs that the People’s Bank of China has started guiding the yuan lower before the Fed acts. An index of emerging-market currencies dropped to a record low yesterday on fears a Fed rate hike will spur capital outflows. Traders now put the odds of a Fed liftoff next week at 80 percent.

Puerto Rico Governor Alejandro Garcia Padilla is visiting Washington today to again ask for help as the U.S. commonwealth seeks to recover from a nearly decade-long recession. While the U.S. Treasury and some lawmakers have supported legislative fixes for Puerto Rico, the efforts have not gained momentum.

Brazil’s Congress delivered a blow to President Dilma Rousseff by picking members of a special committee that were opposed by her supporters. Rousseff is being accused of tampering with the national budget to illegally disguise poor fiscal performance. The special committee will now gather evidence against the president and hear her defense in the first phase of the impeachment process.

The bill for last month’s catastrophic Samarco dam failure in Brazil could be growing by the day, as the joint venture between Vale and BHP Billiton struggles to formulate an emergency plan demanded by local prosecutors in case of additional accidents. The disaster unleashed an avalanche of mud that killed at least 15 people, destroyed villages downstream, and polluted hundreds of miles of waterways in the Rio Doce basin.

Some of the world’s largest companies, including Unilever, Total, Bank of America, Patagonia and Ikea, announced their commitment on Tuesday to cutting carbon emissions and participating in practices that would support sustainable energy. The pledges came at The New York Times Energy for Tomorrow conference, being held in concurrence with the international climate talks outside Paris.

Secretary of State John Kerry announced Wednesday that the United States would double, to about $860 million a year, its grant-based support for vulnerable countries that need to adapt to climate change by 2020. In his first big speech at the United Nations global climate conference in Paris, Kerry talked about the need to pay attention to climate science and act in the interest of future generations. Throughout the Paris climate talks, developing nations have been asking for more money as world leaders work toward a new global climate agreement.

Pep Boys gave Bridgestone three days to top Carl Icahn’s $863 million takeover offer, saying its board had determined that the billionaire investor’s bid is superior to their earlier agreement.

Alphabet is making its biggest bet yet on spreading connectivity across the nation. On top of 20 other metro areas, Google Fiber now plans to come to Los Angeles and Chicago – the second and third-largest U.S. cities by population – if they pass a long review. The latest announcement follows the Alphabet restructuring, which puts Fiber in a separate division from core Google.

Apple has suspended plans to offer an online TV service, and will focus for now on helping media companies directly sell content via the App Store. Apple isn’t completely giving up on providing a live TV service, but notes its original plan to sell skinny bundles, or packages of about channels for $30-$40/month has “run into resistance from media companies that want more money for their programming”, or were unwillingly to un-bundle content.

For Apple, the idea was to create TV programming similar to iTunes, where you just buy the songs you want, not the entire album. If Apple gets its way, it means the traditional pay TV package, which averages around 100 channels, will get shrunk by nearly 80 percent. And while TV executives will say that they understand that consumers don’t want to pay for channels they don’t watch, all of them will argue that their channels are must-haves.

A class-action lawsuit in California that has the potential undermine Uber just got a whole lot bigger. The case was certified as class action in September but today a 9^th circuit judge expanded the scope of that class action. The suit challenges whether Uber drivers are independent contractors, as the company claims, or employees, which would entitle them to a host of benefits such as health insurance and require Uber to pay on-the-job expenses like gas and maintenance that drivers currently pay themselves.

Today’s ruling says that Uber drivers can take part in the California class action over their employment status even if they didn’t opt out of Uber’s arbitration clause. Chen also ruled that drivers in the class will be able to pursue expense reimbursement claims. Basically, that means the case is going to be much bigger.

According to a new study by the NPD Group, the all-day breakfast initiative at McDonald’s is bringing in new customers. The research firm found that 33% of all customers who ordered breakfast items past the normal cut-off time did not visit the restaurant chain in the thirty days before the launch.

Last month, Chipotle closed 43 restaurants in Washington and Oregon after health authorities linked an E. coli outbreak to six restaurants in the area. Since the initial problem, illnesses linked to the chain have been reported in seven more states. On Monday, 30 students at Boston College fell ill after eating at a local Chipotle, leading the company to close yet another restaurant; On Tuesday, the number grew to at least 80 students.

Although Boston health officials believe the food-borne illness is norovirus -not E. Coli – and is isolated to a single location, they won’t know for sure until test results are available in a few days. Norovirus is a highly contagious virus. It’s the leading cause of outbreaks from contaminated food in the US, making about 20 million people sick a year. Today comes word that more than 120 Boston College students may be ill from food at Chipotle.

German Chancellor Angela Merkel has been named Time’s Person of the Year, praised by the magazine for her leadership on everything from Syrian refugees to the Greek debt crisis. Time also cited Merkel’s strong response to “Vladimir Putin’s creeping theft of Ukraine.”