Financial Review

And It’s Back

Sinclair Noe — November 16, 2017

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

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DOW + 187 = 23,458
SPX + 21 = 2585
NAS + 87 = 6793
RUT + 22 = 1486
10 Y + .03 = 2.36%
OIL – .16 = 55.17
GOLD + .70 = 1279.30

Cryptocurrency

• Number of Currencies: 905
• Total Market Cap: $225,401,252,418
• 24H Volume: $11,650,534,328

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	7,874.3	$131.56B	$5.00B	43.18%	1	+8.26%	+9.30%
	Ethereum	ETH	329.30	$31.59B	$784.75M	6.77%	0.04184	-0.48%	+2.37%
	Bitcoin Cash	BCH	900.81	$15.21B	$1.98B	17.07%	0.114825	-23.91%	+36.44%
	Ripple	XRP	0.22450	$8.75B	$1.00B	8.67%	0.00002874	+7.52%	+3.69%
	Litecoin	LTC	70.980	$3.77B	$318.04M	2.75%	0.00887902	+12.13%	+7.47%
	Dash	DASH	419.57	$3.21B	$96.41M	0.83%	0.0530133	-0.34%	+27.02%
	IOTA	MIOTA	0.84219	$2.37B	$135.08M	1.17%	0.0001082	+7.02%	+54.52%
	NEO	NEO	28.700	$1.89B	$40.65M	0.35%	0.00367968	-2.02%	-8.87%
	Monero	XMR	120.02	$1.84B	$73.94M	0.64%	0.0152058	-0.80%	+0.57%
	NEM	XEM	0.20351	$1.78B	$15.98M	0.14%	0.00002515	+0.60%	-7.95%

If you have been following the on-again, off-again path of the tax cut plan on Capitol Hill, it is becoming clear that a tax cut is not fully priced into stocks. Yesterday – bad news about the plan as the Senate linked another Obamacare repeal effort to the tax plan and the first Republican senator defected.

Today – the House passed their initial version of the Tax Cuts and Jobs Act. That certainly wasn’t the only factor contributing to the bounce back in stocks, but it was noteworthy.

Cisco Systems leapt 6.2 percent, its biggest move since February 2016, after the internet gear maker reported a bigger profit than analysts expected and said revenue should grow in its next quarter after two years of declines.

Wal-Mart jumped over 10 percent after the retail giant reported strong third-quarter results and raised its annual profit outlook. Walmart, which has been challenging Amazon by adding products, partners and perks, saw online sales jump 50% in its most recent quarter. Food sales were strong as well, which means that Amazon’s purchase of Whole Foods makes even more sense.

Walmart’s moves to revamp its stores and hone its customer service appear to be paying off as sales at U.S. stores open at least a year — a key industry measure of financial performance — rose 2.7%. Traffic, which has been dipping at many retailers as more consumers shop online, climbed 1.5%.  Walmart shares posted their biggest gain since May 2016.

Procter & Gamble was up 1.3 percent after activist investor Nelson Peltz said an independent count showed he won election to the consumer products company’s board.

Cisco, P&G, and Wal-mart are components of the Dow Industrial Average, so…

Technology sector stocks, which have done far better than the rest of the market this year, accounted for some of the biggest gains in early trading. Data storage company NetApp led the sector, picking up about 15% on a strong earnings report.

The House of Representatives passed tax legislation by a partisan vote of 227-205. That does not mean we have a new tax code. Now, the legislation moves over to the Senate, which has its own, different version. The Senate might vote next week. And because the Senate slides into the driver’s seat, the House was able to pass a badly flawed bill surely would not have passed on its own merits.

But now, Republican representatives can go home and tell their base and their donors that they voted for the tax bill, without having to accept the responsibility of the bill inflicting damage on their constituents.

A new congressional analysis found that the Senate’s revised tax bill would raise taxes on lower-income Americans within a few years. The Joint Committee on Taxation projected that Americans earning $30,000 or less would see their taxes increase beginning in 2021, if the Senate bill becomes law. The committee also projected that Americans earning $75,000 or less would face large tax increases in 2027, after the individual tax cuts expire.

The updated analysis stems from the Senate’s last-minute inclusion of a provision that would repeal the Affordable Care Act’s requirement that most people buy health insurance.

The repeal would lead many lower-income Americans to choose not to buy insurance, and thus not claim tax subsidies that currently help them defray the costs of health coverage. For those that remain, their insurance premiums would go up, probably by 10% or more – wiping out any tax savings and resulting in a net loss.

And because of a 2010 budget law, the bill would trigger automatic cuts to Medicare and other important programs that low-income and middle-class Americans depend on. Medicare used to be considered the “third rail” – you don’t cut Medicare without incurring significant blowback. So, who benefits from the tax plan? The rich and corporations.

Few voters seem fooled. Just 25 percent approved of the tax plan in a recent Quinnipiac poll, while 52 percent said they disapproved of it. Even some Republican lawmakers are beginning to catch on that this tax-cut plan is politically radioactive. The Senate bill is already teetering, with one Republican senator opposed and others voicing concerns. The GOP bill can lose no more than two senators to advance.

Thirteen Republican representatives voted against the bill today, all but one from states that have high income and property taxes. The House bill included a compromise on state and local tax deductions. The Senate bill does not accept the House compromise on state and local tax deductions, or SALT; it eliminates the break entirely, which could cause an exodus of Republican votes in the House if that were to be in the final bill.

And the House bill does not repeal Obamacare’s individual mandate, which the Senate added to its proposal earlier this week.

Wall Street dropped the past couple of days as the tax bill hit a couple of obstacles. Wall Street cheered today as the House passed a bill, but it looks like most of the tax plan has been priced into the market already and the risk of legislation failing seems far greater than the reward of legislation passing. If positive news continues, we could see another bull run from the recent dip, but this is also a good time for caution.

House passage of the tax bill has another – likely unintended – consequence. It might kill off any chance for infrastructure spending. The House bill ends tax breaks for private activity bonds, a key part of public-private partnerships in projects ranging from roads to low-income housing. The administration has said it wants to leverage those partnerships to reduce the direct cost of the president’s building plan”

The National Association of Home Builders’ monthly confidence gauge rose two points to 70 in November. That was the second-highest reading since the housing bubble of 2005. The sub-index that tracks current sales conditions also rose two points, to 77, but the gauge of sales over the next six months dipped one point to 77.

The home-builder lobby has been critical of recent developments in the tax reform debate, arguing that reform will quash demand for new homes. The group warned the bill proposed by House Republicans “eviscerates existing housing tax benefits by drastically reducing the number of home owners who can take advantage of mortgage interest and property tax incentives.”

Arizona released data on nonfarm employment for October. The state unemployment rate dropped from 4.7% in September to 4.5% in October. The state added 18,700 jobs for the month. Arizona Nonfarm employment grew by 1.2% (32,000 jobs) over the year in October. The Private Sector accounted for 32,200 jobs (1.4%). Government employment decreased by 200 jobs in October.

San Francisco Fed President John Williams says global central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy, warning that to fight the next recession, as with the last, they would need to do more than just cut interest rates.

With many major economies facing slower growth and thus lower interest rates even when unemployment is low, central banks will need to find ways to stimulate their economies that work even when many other countries are also trying to boost their growth.

Williams says strategies that central banks should consider including not only the bond-buying and forward guidance used widely in the last recession, but also negative interest rates that was used in some non-U.S. countries, as well as untried tools including so-called price-level targeting or nominal-income targeting. Central banks may also want to consider setting a higher inflation target.

Meanwhile, Federal Reserve Governor Lael Brainard said today that traditional lenders should demand that online financial companies protect consumer privacy and money interests Banks often pay tech companies for the information they gather on borrowers.

For that reason, those lenders can set high standards in consumer protection and privacy. Brainard said, “Banks have a stake in ensuring that their vendors and third-party service providers act appropriately, that consumers are protected and treated fairly, and that the banks’ reputations aren’t exposed to unnecessary risk”

Sandell Asset Management proposed to take Barnes & Noble private with the help of current shareholders and $500 million in debt financing in a deal that valued the company at more than $650 million, or over $9 per share. But the bookstore chain said the offer did not appear to be bona fide and seemed unlikely to happen.

Casino operator Caesars Entertainment said it would buy privately owned casino and horse racing company Centaur Holdings LLC for $1.7 billion in cash to expand in Indiana.

Emerson Electric raised its cash-and-stock offer to acquire Rockwell Automation to $29 billion, ratcheting up pressure on its smaller peer to engage in deal talks.

Tesla short sellers finally made some money this month. They’ve raked in $890 million in mark-to-market profits since the start of the fourth quarter, according to data compiled by the financial-analytics firm S3 Partners. At least until today.

Tesla bounced back, a little, enough to shake out at least a few short-sellers. In a couple of hours, Elon Musk will unveil a new Tesla a self-driving big rig semi-trailer (electric, of course). The Tesla semi was anything but a 10-4-good-buddy move for Tesla.

While many observers expected a pickup truck to join the carmaker’s lineup of all-electric cars, the big rig was a surprise. Musk tweeted, that the truck would “blow your mind clear out of your skull and into an alternate dimension.” Which seems like a totally fine and not at all hyperbolic way to manage expectations.

Financial Review

Cake and Panic

Sinclair Noe — May 17, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW – 372 = 20,606
SPX – 43 = 2357
NAS – 158 = 6011
RUT – 38 = 1355
10 Y – .11 = 2.22%
OIL + .30 = 48.96
GOLD + 24.20 = 1261.90

Today marks the 225^th anniversary of the New York Stock Exchange. On the floor of the exchange, they celebrated with cake and panic. Stocks started the session with triple digit losses on the Dow, and then drifted lower throughout the day.

It was the worst loss on Wall Street since September, while the Nasdaq Composite Index plunged 2.6 percent for its steepest drop since June 24.

The dollar fell by nearly 2 percent against the yen to its lowest level since April and hit a six-month low against the Swiss franc. The dollar index, which tracks the U.S. currency against six peers, fell 0.6 percent to its lowest level since Nov. 9, surrendering all its “Trump bump” gains.

The VIX, the volatility index jumped nearly 5 points, or 46%. The 10-year Treasury yield sank to 2.22 percent in its steepest decline since July. The spread between 10-year and two-year yields narrowed to the flattest since before Trump’s election.

Today’s drop in markets comes after Tuesday evening saw the second damaging story for President Donald Trump in as many days. The New York Times reported  that Trump asked former FBI director James Comey to end an inquiry into ties former national security advisor Michael Flynn had to Russia.

And Comey documented the meeting in a memo. The Comey memo caused alarm on Capitol Hill and raised questions about whether Trump attempted to interfere with a federal investigation, something that might constitute obstruction of justice and could potentially be invoked to impeach Trump.

And this report came just a day after The Washington Post reported Trump revealed “highly classified” information to Russia’s foreign minister. Last week, Trump fired Comey, even as the FBI was investigating possible ties between Trump’s campaign and Russia.

The market reacting negatively to Trump-related headlines is a definite change from what we’ve become accustomed to in recent months. After the market’s violent election night reaction, stocks have moved up and to the right unabated, with the political chaos in Washington seeming to have little impact on financial markets.

The difference might be that several Republican leaders are now starting to say it may be time for an independent commission or special prosecutor. House Speaker Paul Ryan held a press conference this morning; he did not call for a special prosecutor, but he said, “we have an obligation to carry out our oversight regardless of which party is in the White House.”

And just as important as what Ryan said, was what he didn’t say. Ryan did not attack former FBI Director Comey, a marked change from last week. And Ryan did not attack the media.

In a letter to acting FBI Director Andrew McCabe on Tuesday, the Republican chairman of a House oversight committee, Jason Chaffetz, set a May 24 deadline for the FBI to produce all relevant material relating to any communications between Comey and Trump. Ryan backed Chaffetz’s request.

The Senate Intelligence Committee sent two letters to former FBI Director James Comey and Acting FBI Director Andrew McCabe requesting their cooperation in the committee’s ongoing investigation into Russia’s election interference. The senators have requested that Comey appear before the committee “in both open and closed sessions.”

Senator John McCain, who has called for the creation of a special bipartisan congressional panel to investigate the Russia matter, compared the controversies enveloping Trump to the Watergate scandal that forced Republican President Richard Nixon to resign in 1974. This is not to say that Republicans have deserted Trump – far from it, but there are some cracks in the wall.

Speaker Ryan insisted the Republican legislative agenda was not becoming paralyzed, but that might be wishful thinking. There is no way this controversy will help efforts to repeal and replace Obamacare, it will not aid tax reform or infrastructure efforts. That does not mean the agenda can’t move forward, just that it will be tougher.

Apple stock was down 3.3% today. Apple stock was up 34% this year on anticipation that the next iPhone could spur a “super cycle” of sales as well as hopes that federal tax reform could enable Apple to bring home some of its $240 billion in cash and marketable securities that are held outside the United States at lower tax rates.

Apple has suggested that if the company were able to repatriate some of its overseas holdings at a lower tax rate, it would return some of the money to its shareholders.

Trump leaves Friday on a 10-day trip to Saudi Arabi, Israel, and the Vatican. Today Trump told graduates of the Coast Guard Academy that he has been treated worse than any politician “in history”, although Mrs. Lincoln probably would have disagreed.

It took nearly a decade, but debt has made a comeback. Americans have now borrowed more money than they did at the height of the credit bubble in 2008, just as the global financial system began to fall apart. The Federal Reserve Bank of New York says total household debt had reached a new peak — $12.7 trillion, exceeding its peak in the third quarter of 2008.

Student loans account for 10.6 percent of that total, up from 3.3 percent in 2003, Student borrowers today owe $1.3 trillion, more than double the $611 billion nearly nine years ago. About one in 10 student borrowers is behind on the loans — the highest delinquency rate of any type of loan tracked by the report.

While mortgage balances still make up much of household debt, they are a smaller share of total obligations and have fallen back to 2003 levels. Auto loans totaled about $1.1 trillion, or 9 percent, of all household debt. Defaults have been creeping up in auto loans.

Credit card balances shrunk by $15 billion to $764 billion, but there has been a recent uptick in delinquencies on these payments. The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also speaks to growing optimism among banks and other lenders about economic growth.

Debt can fuel consumer spending, which accounts for about 70 percent of all economic activity in the United States. But debt can be risky. The good news is that the economy is stronger than it has been in some time. Consumers were delinquent on 4.8% of total debt, a marked improvement from the 11.9% of debt that was at least 30 days late at the end of 2009.

Cisco Systems, the world’s largest networking gear maker, reported its sixth straight drop in quarterly revenue, largely due to declines in its router business. The company’s net income rose to $2.5 billion, or 50 cents per share, from $2.3 billion, or 46 cents per share, a year earlier. Revenue fell 0.5 percent to $11.9 billion.

Target reported better-than-expected first-quarter earnings and revenue. Target reported adjusted earnings per share of $1.21, beating estimates of 91 cents. Sales, at $16.0 billion, were ahead of estimates for $15.6 billion, though they were down from $16.2 billion last year. E-commerce sales climbed 22%. Same-store sales were down 1.3%.

Shares of Ascena Retail Group fell more than 30 percent in after-hours trading as the owner of Ann Taylor, Loft, Lane Bryant and other brands said it adjusted its second-half outlook to reflect worse-than-expected business conditions. In what’s been a rough earnings season for retailers, Ascena expects third-quarter comparable store sales to decline 8 percent and for full-year comparable sales to decline between 6 percent and 7 percent.

I/O is Google’s annual developer conference. And they had some interesting announcements. There are now about 2 billion active devices based on the company’s Android software. The big headline: Google Assistant is coming to the iPhone. It’s no longer stuck on Android.

Google is also expanding its third-party support for Assistant. Before, third parties could build “actions” for the Assistant in the Google Home speaker. Now they’ll work wherever Assistant is, including Android phones and the iPhone. Google Home, the company’s connected speaker, will soon let you call any number in the US or Canada from the speaker for free.

A new product, Google Lens has some of the most impressive new features. You can scan just about anything with your phone’s camera and have Assistant analyze its contents. For example, if you take a photo of a concert venue, you can listen to an artist’s music, buy tickets, and more. Or for the amateur botanists, take a picture of a flower, and Google will tell you what it is.

Google’s Daydream virtual-reality platform now supports standalone headsets, not just ones that need to be powered by smartphones. Perhaps the most ambitious program is Google.ai, or artificial intelligence. Put away your machine learning degrees — artificial intelligence is now at the stage where it’s ready to replicate and improve on itself.

Googlers have designed AIs that are capable of “learning to learn,” which they hope to use on every single product across the Google portfolio, including its cloud business. Google announced a new generation of its custom AI chips today, the second version of its Tensor Processing Units.

Google’s TPU represents a next generation of chip, one custom-built for the task of handling AI, and twice as fast. The new hardware will be available for developers on Google’s cloud service and for companies that want to add artificial intelligence to their operations when renting processing power.

Financial Review

Pandora’s Box

Sinclair Noe — August 17, 2016

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

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DOW + 21 = 18,573
SPX + 4 = 2182
NAS + 1 = 5228
10 Y – .02 = 1.55%
OIL + .29 = 46.87
GOLD + 2.60 = 1349.40

The Federal Reserve released minutes from their July FOMC meeting. In July, with the Brexit vote over and market turmoil subsiding, the Fed seemed somewhat more open to the possibility of resuming rate hikes. Economic data has been mixed; we had a very weak report on second quarter gross domestic product and we had a very strong July jobs report. A key official, New York Fed President William Dudley,  said yesterday that a rate hike in September was possible – even if markets aren’t convinced that it’s probable.

Apparently the news of a possible rate hike in September was enough to spook the equity markets a little bit. Is a Rate Hike in September two months before an election, with this economic backdrop, possible? Doubtful. The bond market isn’t buying it. Ten-year yields have hardly budged. The currency market didn’t even shrug.

Here’s what the Fed said, quoted from the minutes: “Some other participants viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that the recent progress in reaching the Committee’s inflation objective would continue, even with further steps to gradually remove monetary policy accommodation. Given their economic outlook, they judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting.”

Sorry, but that is just a bit too vague to be taken seriously. If the Fed wants to raise rates in September, they need to pound the table and state very clearly that they intend to hike rates. Taken as a whole, then, Chair Janet Yellen is keeping the hawks at bay and the Fed on a course of loose monetary policy, including the current 0.25-0.5 percent range. That’s even despite some clamoring from those wanting to hike. And despite some initial chatter about “some” wanting a rate hike, following the release of the minutes the market quickly adjusted its sights.

Stocks closed higher; treasuries pared losses. Two-year Treasuries, the most sensitive to policy expectations, halted a back-to-back decline. The dollar was basically flat. The greenback has slumped more than 5 percent this year as Fed policy makers have yet to see signs that inflation is moving toward their 2 percent goal. That means the Fed is less likely to diverge from the paths of the Bank of Japan and European Central Bank, which are boosting monetary stimulus as they seek to spur flagging growth.

The minutes once again portray a Fed that can’t seem to find direction or purpose; not confident in holding steady but not ready to embrace new approaches. Fed chairwoman Janet Yellen is scheduled to speak at next week’s annual economic symposium in Jackson Hole, Wyoming. Let’s hope she actually says something.

Time now for a quick lesson in basic economics. Adverse selection is a phenomenon wherein the insurer is confronted with the probability of loss due to risk not factored in at the time of sale. This occurs in the event of an asymmetrical flow of information between the insurer and the insured. Asymmetrical information refers to a situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality. Or another way of saying it; in any given deal, somebody has the upper hand.

In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance. Or in the case of health insurance, it is a situation where “uninsured people with pre-existing conditions often face tens or even hundreds of thousands of dollars in out-of-pocket medical costs annually. If insurers charged everyone the same rate, buying coverage would be far more attractive financially for people with chronic illnesses than for healthy people.

And as healthy policyholders began dropping out of the insured pool, it would become increasingly composed of sick people, forcing insurers to raise their rates. …. But higher rates make insurance even less attractive for healthy people, causing even more of them to drop out. Before long, coverage would become too expensive for almost everyone.”

Yesterday, Aetna announced that it will withdraw from 11 of the 15 state Affordable Care Act exchanges where it sells marketplace plans; leaving some counties with only one option for healthcare, and in Pinal County – no options. Aetna cited mushrooming financial losses and structural problems with the exchange markets as causes for its retreat.

There might be more to the story. A few months ago, Aetna was looking to expand its presence in the ACA exchanges and Aetna also wanted to acquire Humana. In a letter to the US Department of Justice, Aetna CEO Mark Bertolini outlined the company’s plans to roll back much of its Obamacare business if the DOJ blocked a proposed merger with rival Humana. A company spokesman denied that participation in the exchanges was a bargaining chip in its negotiations with the DOJ, saying the decision was driven by losses.

So is this about losses or a merger battle? Is this a confessional, or extortion? It may in fact be true that Aetna can’t envision a way to make a profit in the exchanges without merging with Humana, even if it is true that its losses didn’t prevent it from seeing its earnings increase 20% in 2015.

Aetna executives and attorneys surely knew that government anti-trust lawyers would see the letter as thinly veiled extortion, even if their concerns were entirely sincere. At any rate, Aetna may have opened Pandora’s Box.

A recent report from the Kaiser Family Foundation shows that as many as two states and 650 counties are on track to have just one insurer on the Affordable Care Act exchanges next year. The entire states of Alaska and Alabama will be faced with just one choice in 2017, as well as large swaths of Kentucky, Tennessee, Mississippi, Arizona and Oklahoma. The effects of health insurance company pullouts will be to leave people uninsured.

That’s unfortunate, because it turns out that making health care available to people actually makes them healthier. A new study, published Monday in JAMA Internal Medicine, offers another way of looking at the issue. Low-income people in Arkansas and Kentucky, which expanded Medicaid insurance to everyone below a certain income threshold, appear to be healthier than their peers in Texas, which did not expand. One “solution” to health insurance behemoths threatening to pull out of the ACA exchanges would be to allow them to merge. A second “solution” is to let them hike premiums to ridiculous levels. The third solution is the Pandora’s Box, also known as the public option.

Britain’s job market is shrugging off Brexit, for now. Data from the Office for National Statistics showed that the number of people claiming jobless benefits in the UK unexpectedly fell in July. Additionally, the UK’s unemployment rate held at a record-low 4.9%. Analysts in the coming months will continue to watch the unemployment level as one of the key indicators of how the Brexit vote is affecting the U.K. economy.

Subprime credit-card lending is making a comeback. TransUnion’s Second Quarter 2016 Industry Insights Report shows that 11% of the 10 million new customers entering the credit-card marketplace in the past year were subprime borrowers. Additionally, the data suggests subprime borrowers are seeing the biggest increase in balances, up 14% versus a year ago. Still, TransUnion’s financial services business unit, says delinquency levels are not “alarming.”

Cisco Systems is readying for job cuts. The company is expected to eliminate 14,000 jobs, or about 20% of its labor force, beginning in the next few weeks. Microsoft, HP, and Intel have all announced big jobs cuts within the past year or so.

Target reported disappointing Q2 earnings and management placed part of the blame squarely on Apple. Comparable store sales at Target overall fell by 1.1%, but Target executives noted that electronic sales decreased by double digits and “accounted for 70 basis points [0.7%] of overall comp decline.”

Even more notably, Target specifically pointed out that Apple product sales were down by “more than 20%” year-over-year and were to blame for a third of the overall plunge of electronic sales at Target. Apple’s growth has been running into a bit of trouble recently, as the astounding success of the iPhone 6 has made for tough comparisons; and many customers are probably sitting on the sidelines before the launch of the iPhone 7.

The iPhone 7 might be coming soon. That’s according to a leaked photo spotted by 9to5Mac of “reset hours” at AT&T stores for September. The website speculates that the photo shows September 9 as the date AT&T will begin advertising the iPhone 7 and September 23 as the day when the phone will go on sale.

The Treasury Department issued rules this year that thwarted several tax inversions, but one large deal that managed to get through was the $16 billion acquisition of Tyco by Johnson Controls. The last hurdle for the transaction is a vote today by both sets of shareholders. Johnson Controls shareholders are set to vote in Dallas, while Tyco’s shareholders will do so in Dublin.

Financial Review

That’s Her Story

Sinclair Noe — February 10, 2016

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

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DOW – 99 = 15,914
SPX – 0.35 = 1851
NAS + 14 = 4283
10 Y – .02 = 1.70%
OIL – .64 = 27.30
GOLD + 8.00 = 1197.80

Fed Chair Janet Yellen delivered her semi-annual Humphrey-Hawkins testimony in Washington today in her first major appearance since the Fed’s rate hike last December. In prepared testimony, Yellen said there are good reasons to believe the United States will stay on a path of moderate growth that will allow the Fed to pursue “gradual” adjustments to monetary policy.

Family incomes and wealth are rising, domestic spending “has continued to advance,” and business investment outside the oil sector accelerated in the second half of the year, she said. Yellen said she expects the labor market to continue to improve and inflation eventually rise towards the Fed’s target despite a recent drop in inflation expectations.

Yellen said that financial conditions “have become less supportive to growth.” If these conditions persist, they could weigh on the economy. In addition, Yellen said there are “downside risks” largely stemming from uncertainty about the health of the Chinese economy. “Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.”

The Fed chairwoman did not come out and say anything about the U.S. central bank’s own forecast, made in December, that it would raise interest rates four times in 2016. She stressed the Fed was not in automatic tightening mode. Yellen said, “Monetary policy is by no means on a preset course.”

With Wall Street off to an ugly start to the New Year, there has been some speculation the Fed might have to reverse course and cut rates; Yellen addressed this in her Q&A session, saying: “I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don’t think it is going to be necessary to cut rates.” Rather, she said she expected continued US growth would allow the Fed to pursue its plan of “gradual” rate hikes.

To boil it down for you, Yellen essentially said that we won’t see a rate hike in March and we won’t see 4 rate hikes in 2016. Tomorrow, Yellen will repeat the story before the Senate.

Treasury 10-year note yields fell two basis points, or 0.02 percentage point, to 1.70%. Two-year note yields rose one basis point to 0.70%. The difference between two- and 10-year note yields fell to the lowest on an intraday basis since January 2008; just 100 basis points. A shrinking gap is known as a flattening yield curve.

The decline in longer term yields probably doesn’t signal the expectation that short term rates might go even lower, but rather, it signals that bond market participants are seeing the possibility of rates going higher as diminishing. The upside, which in this case is a healthy economy with a healthy demand for money, is being perceived as less likely.

A possible side effect is that low rates equate to cheap money. Now that doesn’t mean that interest rates are dropping everywhere; corporate bond rates have not been dropping, largely because quality has been dropping. And don’t expect to see lower rates on credit cards in the foreseeable future; but mortgage rates are cheap.

Calculatedriskblog reports mortgage applications increased 9.3 percent from one week earlier; purchase applications are up 25% year-over-year; and refinancing applications increased 16% from the previous week. The average contract interest rate for a 30-year fixed rate conforming mortgage dropped to 3.91%, the lowest level since April 2015.

We had a similar flight to safety causing Treasury bond rates to plunge during the Euro-crises of 2012 and early 2013. Those low rates gave rise to the biggest increases in housing construction and jobs during the entire US expansion.

Japanese stocks extended a heavy selloff today, the Nikkei dropped 2.3%, closing in the red for six of the past seven sessions, despite a festive atmosphere across East Asia for the Lunar New Year holiday. Japanese Prime Minister Shinzo Abe defended BOJ Governor Haruhiko Kuroda’s handling of the economy, and said it was up to the central bank to decide what policy instruments to use.

The Supreme Court temporarily blocked the administration’s effort to combat global warming by regulating emissions from coal-fired power plants. The order was not the last word on the case, which is most likely to return to the Supreme Court after an appeals court considers an expedited challenge from 29 states and dozens of corporations and industry groups.

But the Supreme Court’s willingness to issue a stay while the case proceeds was an early hint that the program could face a skeptical reception from the justices. The 5-to-4 vote was unprecedented; the Supreme Court had never before granted a request to halt a regulation before review by a federal appeals court.

The challenged regulation, which was issued last summer by the Environmental Protection Agency, requires states to make major cuts to greenhouse gas pollution created by electric power plants, the nation’s largest source of such emissions. The plan could transform the nation’s electricity system, cutting emissions from existing power plants by a third by 2030, from a 2005 baseline, by closing hundreds of heavily polluting coal-fired plants and increasing production of renewable, clean energy.

Though the first emission reduction obligations do not take effect until 2022, the states said they had already started to spend money and shift resources; and any judicial review will be completed well before 2022.

The Treasury Department reports the federal government ran a budget surplus of $55 billion in January, compared with a deficit of $18 billion in the same month a year ago. Including the monthly surplus, the government is running deficit of $160 billion for the fiscal year to date. That’s 17% less than the first four months of the last fiscal year, which ended in September.

Deficit hawks shouldn’t get too excited by the lower year-to-date number, however. The Congressional Budget Office is projecting a deficit of $544 billion for fiscal 2016, which would be more than $100 billion above the shortfall for 2015. The CBO pegged that expected bigger deficit partly on some tax breaks being made permanent.

China has confirmed its first case of the Zika virus in a man who recently traveled to Venezuela. The World Health Organization declared Zika a public health threat on Feb. 1, and raised the possibility that there could be up to 4 million cases of the virus in the Americas alone.

Deutsche Bank shares recovered about 5% today, leading a surge in European bank shares. Deutsche Bank is considering a bond buyback to help ease investor concerns about its debt. The stock remains down over 30 percent since the start of 2016.

HSBC has been sued by the families of U.S. citizens murdered by drug gangs in Mexico, claiming the bank let cartels launder billions of dollars to operate their business. HSBC already paid nearly $2 billion in penalties in December 2012 to resolve charges that it failed to stop hundreds of millions of dollars in drug money from flowing through the bank from Mexico.

Just last week, the Justice Department announced that it had reached a $470 million settlement with HSBC related to mortgage lending and foreclosure fraud that led to the economic collapse of 2008.

MetLife, the same insurance behemoth that advertises how it is a huge international powerhouse, now says that it really isn’t so big after all, and to prove it, they sued the US government over whether regulators can designate non-banking firms as “too big to fail.” Today, the case went to trial.

Non-bank firms designated systemically important must hold more capital and comply with rules intended to stave off the need for a federal bailout should they fail. The rules have yet to be finalized. Last month, MetLife said it plans to split up due to the “regulatory environment” and pressure is mounting on other firms to also shrink and shed the “too big to fail” designation.


A significant barrier to Google’s plan to put driverless cars on the roads has been removed, after the NHTSA supported its interpretation that a robot could meet the legal definition of a driver. Do they get a driver’s license?

Google has also filed for another potential use of its artificial intelligence system in a patent award that described an “autonomous delivery platform” for trucks. The driverless transport vehicle would carry several lockers that could only be opened by the recipient of a package, using a PIN code or credit card.

Time Warner reported a bigger-than-expected drop in quarterly revenue as subscription revenue for its cable channel HBO and Turner television network disappointed. Time Warner dropped about 4% on the day.

Cisco Systems reported its second-quarter earnings rose to $3.1 billion from $2.4 billion in the same quarter last year. Revenue was flat at $11.9 billion. Cisco beat estimates on the top and bottom line. Shares moved higher in after-hours.

Whole Foods Market said profit declined in its latest quarter, same store sales were down and gross margin continued to deteriorate, but they still topped estimates. Shares moved higher in after-hours.

Twitter said it had 320 million average monthly active users in the quarter, lagging a forecast for 323 million users from RBC Capital Markets. Revenue rose 48% to $710 million in the quarter. Twitter posted earnings of 16 cents per share, versus estimates of 12 cents. But the takeaway is that user growth stalled. Shares moved lower in after-hours.

Tesla reports it will be cash flow positive in 2016, and will turn a profit. Just not today. Tesla posted a loss of $320 million, its 11th straight quarterly loss. But good times are right around the bend. Tesla shares moved higher in after-hours.

Financial Review

Red Lines

 Sinclair Noe — May 5, 2015

 

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

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DOW – 142 = 17,928
SPX – 25 = 2089
NAS – 77 = 4939
10 YR YLD + .04 = 2.18%
OIL + 1.81 = 60.74
GOLD + 5.20 = 1194.00
SILV + .14 = 16.61

The Commerce Department said the trade deficit jumped 43.1 percent to $51 billion in March, its highest level in nearly 6-1/2 years, as imports rebounded strongly after being held down by a labor dispute at West Coast ports. The now-settled labor dispute at the West Coast ports significantly slowed imports and exports at the start of the year. The higher deficit will subtract from first quarter GDP estimates.

The pace of growth in the US services sector rose to a five-month high in April, lifted by a surge in business activity that offset a sharp decline in exports. The Institute for Supply Management said its services index rose to 57.8 last month from 56.5 in March. The April reading was the highest since November. A reading above 50 indicates expansion in the sector. Strengthening consumer spending after a frigid winter on the back of gains in employment and still-low gasoline prices will propel services, which account for almost 90 percent of the economy as tracked by ISM. The ISM services report showed the employment gauge rose to 56.7, the strongest since October; that would seem to bode well for the Friday Jobs Report.

The new fixed-income haven is, of all things, the market for junk bonds. With government securities in Germany to Japan and Ireland yielding less than nothing, money is pouring into exchange-traded funds that buy speculative-grade debt, traditionally the riskiest of fixed-income assets. So far this year, about $9 billion has flowed into the funds globally, a significant chunk for the $44 billion market in junk-debt ETFs. Bond markets around the world are being distorted as central banks step up cheap-money policies to bolster growth and prevent deflation. According to data from Bloomberg, about $2.36 trillion of government bonds globally have negative yields. One of the bond market’s brightest luminaries, Jeffrey Gundlach, says you’re better off in junk because the only money to be made on German bunds is from betting against them; that would certainly be a good bet today.

The European Commission raised its euro-area growth forecast today as dwindling fears of deflation and monetary stimulus help the economy overcome pressure from the continuing crisis in Greece. While GDP in the 19-nation bloc is now forecast to increase 1.5% this year (up from a prediction of 1.3% in February), the European Commission slashed Greece’s economic growth outlook to 0.5% in 2015, down from an earlier 2.5% estimate. Other GDP forecasts for 2015: Germany +1.9%; France +1.1%; Italy +0.6%.

The Financial Times reports that the International Monetary Fund fears Greece’s debt burden is becoming unsustainable again, and it has warned it may withhold bailout money unless the Eurozone agrees to debt relief. Representatives of Greece’s anti-austerity government met today with their European counterparts as the negotiations between Athens and Eurozone lenders continue. Greece faces an $832 million debt repayment to the IMF next week, but there are fears it will run out of cash, possibly run out of cash within the next 7 days, unless it reaches a deal with creditors to unlock the next tranche of bailout money.

Now, I know we’ve been talking about Greece for some time but it now looks like negotiations are starting to break down. Bloomberg reports a Greek government official says no deal will be possible until the European Commission and the International Monetary Fund agree to a common set of demands; and there are too many red lines and creditors need to better coordinate their message. So far no response from the IMF and the European Commission. But plenty of response in the bond markets: yield on German 10 year bunds up 06 basis points to 0.51% (less than 2 weeks ago the 10 year bund had a yield of 0.05% – so it really is a meltdown), Italian bonds up 27 bp to 1.80%, Spain up 28 bp to 1.77%, France up 09 bp to 0.81%, and Portugal up 30 bp to 2.36%. Of course when the yield goes up that means prices are going down. Whatever the cost of compromise, Euro bonds just lost that in the bond markets today; and it should serve as a hint of what’s to come.

This has always been Greece’s most powerful bargaining chip.  As long as the Troika believes the Greeks are trying to strike a deal, they have tried to force austerity and unreasonable conditions on the Greeks. When the Greeks say they won’t put up with it anymore, the rest of the Eurozone realizes that a Greek default would hurt everyone else. We still don’t know how this will end, but we know we are going closer.

A new Federal Reserve survey show banks are expecting an increase in energy sector defaults. Banks in the US are cutting credit lines to energy companies and forcing firms to cough up more collateral to guard against fallout. US oil and gas companies went deep into debt during the energy boom. Those loans looked like a good bet while U.S. oil prices were around $100 a barrel. But after peaking in June, oil prices tumbled, dropping below $50 earlier this year, and today they moved above $60 a barrel for the first time this year. Still, it isn’t easy for the bankers to cut off the loans, because they are already in deep. The collapse in oil prices has forced drillers to turn to debt markets to keep their operations going. There has been $86 billion in new debt issued so far in 2015, a 10 percent increase over last year.

The Bank for International Settlements concluded in a March 2015 report that outstanding debt in the oil and gas sector has reached $2.5 trillion, a massive increase over the $1 trillion in debt in 2006. All of that debt could put extra pressure on companies to continue to produce flat out, as cash flows are critical to meet debt payments. Ironically, however, the incentive to continue to produce as much as possible could merely exacerbate the period of depressed oil prices. BIS finds that if a broader sell off in oil debt starts to take place, it would bleed over into broader corporate bond markets. And since oil debt makes up a big slice of corporate debt, there are fears (the extent to which is up for debate) that the oil price collapse could have “system-wide” effects.

Cisco Systems is set to launch a converged cable access platform, enabling cable operators to offer download speeds of one gigabit a second or more. The new system, unveiled today, will “enable cable operators to achieve savings that could exceed 40% of capital and operating expenses over five years.”  Yesterday, Cisco named company veteran Chuck Robbins as its new CEO. Robbins will replace John Chambers on July 26.

Panera Bread Company committed itself to removing at least 150 artificial sweeteners, colors, flavors and preservatives from its menu by the end of next year. The sandwich-and-salad chain, which has nearly 1,900 restaurants in the U.S. and Canada, has been working on the plans since 2012, and already has already cut many artificial ingredients. The decision marks the latest move by a major food company to respond to a consumer shift toward foods seen as simpler and more healthful. Chipotle declared last week it had mostly removed GMO ingredients from its supply chain, while Nestle said in February it would remove artificial flavors and colors from its candy bars.

Global annual spending on cancer drugs in 2014 hit $100 billion for the first time, largely due to rising drug prices and increased incidence of cancer. The IMS report says: “Earlier diagnosis, longer treatment duration and increased effectiveness of drug therapies are contributing to rising levels of spending on medicines for cancer.” The figures raise even more questions of affordability as the pharmaceuticals industry prepares to launch a fresh generation of treatments that promise to push costs even higher.

Last week, Lake Mead broke records, falling to about 1,079 feet, lows not seen since the lake was created in the 1930s. The lake is at only 38 percent of its capacity, and officials warn that the water level will continue to fall throughout the summer, with projections showing an estimated elevation of 1,073 feet by September. Projections show the lake returning to 1,080 feet by the start of next year, but if the water does not rise above 1,075 feet by January, officials will be forced to reduce the amount of the water delivered to Arizona and Nevada. And researchers fear that the drought conditions could linger for years, sharply reducing the snowpack in the north that replenishes the river. As water levels fall, it gets more difficult for the dam’s turbines to produce electricity.

Engineers at the dam are installing turbines that could extend the ability of the dam to produce power, even if the water levels fall to 950 feet, but that’s a worst case scenario. To address the decreasing water supply to communities in the region, engineers are also working on a much deeper intake point, the Third Straw, ensuring that a thirsty Las Vegas will be able to suck water from the bottom of the lake even as the surface level falls. The lake still has water; it isn’t a mud hole, but as the water level falls, it points to big changes in how we use water in the West.