Financial Review

Decision Day

Sinclair Noe — July 26, 2017

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

DOW + 97 = 21,711
SPX + 0.7 = 2477
NAS + 10 = 6422
RUT – 8 = 1442
10 Y – .05 = 2.28%
OIL – .08 = 48.67
GOLD + 10.50 = 1261.10
BITCOIN + 0.70% = 2568.14 USD
ETHEREUM – 2.22% = 197.74

The major U.S. stock indexes set all-time highs again.

The Federal Reserve Federal Open Market Committee wrapped up its two-day meeting on monetary policy. They left interest rates unchanged and in a statement, said they would begin running off their $4.5 trillion balance sheet “relatively soon”.

The Fed’s language was not dovish, but perhaps a bit less hawkish. That pushed Treasuries higher. The Euro jumped to a 2-1/2 year high against the dollar. The next scheduled FOMC meeting is September 19-20, and there is a good chance the Fed will announce the onset of the balance-sheet reduction after the September meeting, effective on the first of October.

The Fed has raised interest rates 4 times since they began removing emergency policy in December 2015, and project another increase before the end of this year – most likely at the December meeting. As the Fed starts selling securities from their balance sheet, they will start small and gradually increase the sales, which should allow markets to adjust, at least in theory.

The FOMC said it’s “monitoring inflation developments closely.” There isn’t much inflation to monitor right now, the PCE gauge is running at about 1.4%, and seems to be stuck in a rut, despite the Fed’s targets. At this point in the economic cycle, with the unemployment rate at a 16-year low, you would expect to see wages increasing, which would push prices higher.

But prices aren’t going up, and that raises questions about the real strength of the labor market and the economy. Whatever it is, it is a symptom of an economy that just keeps slogging along but can’t really take off.

Get ready for “vote-a-rama”, where Senate GOP leaders will throw everything they have that resembles a health care bill at the wall to see what sticks. Today they voted on a straight repeal of Obamacare – that vote failed (which was expected), there will be a voting frenzy for senators on a series of amendments.

Next up, votes on various amendments to repeal bits and pieces of Obamacare, or what is known as a skinny repeal that would throw the issue to a Senate-House of Representatives negotiating committee. Republicans hope the they can find some amendments which pass and can then be cobbled into some sort of bill which repeals a portion of Obamacare, in some way, shape, or form.

This morning President Trump tweeted that he would ban transgendered people from serving in the military. Who knows whether Trump will follow up his tweets with an actual order. That would normally come from the Pentagon, which was reportedly surprised by the announcement. If there is an actual order, the matter will quickly move to the courts.

New single-family home sales increased in June as purchases in the West surged 12.5 percent to a near 10-year high, but downward revisions to the sales pace for the prior three months pointed to a housing market that is struggling to gain momentum. The Commerce Department said new home sales gained 0.8 percent to a seasonally adjusted annual rate of 610,000 units last month. The sales pace for March, April and May was revised lower. Sales rose 9.1 percent on a year-on-year basis.

Copper rose again, closing at the highest price in two years and bringing its year-to-date gain to 14 percent. While some of the rally has been fueled by the usual fundamentals –  a stronger Chinese economy and labor disputes at mines –  the latest lurch higher may be caused by momentum and a short squeeze. The way that prices have been gaping higher in a straight line up suggests that somebody had some painful options positions to cover.

Earnings reporting season continues to take center stage on Wall Street and most of the news is good. Consider though, that we’re comparing second quarter 2017 to second quarter 2016, when earnings were in a recession. Are corporate earnings genuinely wonderful? It may depend on your perspective.

For example, after-tax corporate profits have grown at an annualized pace of less than 1% over the last five years. You won’t find many five-year periods that have been as anemic as that. You might assert that the only thing of importance is earnings acceleration since the fourth quarter of 2016.

After the closing bell, Facebook reported better than expected profit and revenue. Instagram, the company’s photo-sharing app, helped second-quarter sales climb 45 percent to $9.3 billion. Net income rose to $3.9 billion, or $1.32 a share, from $2.3 billion, or 78 cents, a year earlier.

There are now 2.01 billion monthly active users, and two-thirds of the monthly users are on Facebook every day. Shares dipped roughly 4% in after-hours trading over apparent confusion related to the company’s recent switch to reporting GAAP numbers. But the confusion was soon sorted out and Facebook shares are up about 1%.

PayPal reported a better-than-expected quarterly profit. The company’s shares were up 2.4 percent in trading after the bell.

General Dynamics posted higher-than-expected quarterly profits driven by increased sales in the unit that makes tanks, but projected slightly lower aerospace sales. Its stock fell 4.4 percent

Boeing swung to a net profit of $1.76 billion, or $2.89 a share, from a loss of $234 million, or 37 cents a share, in the same period a year ago. Boeing raised its 2017 adjusted EPS outlook. The stock shot up more than 8%, its largest percentage gain since August 2009, to a record high of $230.43.

Coca-Cola earned $1.3 billion in the last quarter, slightly better than estimates. Revenue came in at $9.7 billion, beating estimates. Sales of sodas and non-soda drinks improved. Then they announced changes to Coke Zero, which will soon be Coke Zero Sugar, and that’s when I sort of stopped caring.

Shares of Buffalo Wild Wings fell nearly 10 percent in extended trading after the company reported sizable misses in its earnings and revenue.

Whole Foods Market reported third quarter earnings that beat estimates. Revenue was flat. The company said its same-store sales fell 1.9 percent in the quarter, not as bad as expected. Amazon reports earnings tomorrow.

Ford Motor reported higher-than-expected second-quarter profits, and in the next breath warned of a rougher ride for the rest of the year. Ford said full-year pre-tax profit, automotive operating margins and cash flow would be lower than 2016 results, sending the company’s shares down 2.1 percent. Ford reported second-quarter net income of $2.04 billion, or 51 cents per share, up from nearly $2 billion, or 49 cents per share, a year earlier.

Britain will ban the sale of new gas and diesel cars by 2040. The UK joins France, which recently announce it would go electric by 2040. The mayors of Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centers by 2025. Electric cars currently account for less than 5 percent of new car registrations in Britain. The shift to electric will require a substantial build-out in charging stations, and for auto manufacturers – who have already started the move to electric.

In Europe, so called ‘green cars’ benefit from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions. Britain’s move will accelerate the decline of diesel and gas cars. Turning away from oil will add to discussions about whether the world is reaching peak oil demand and how additional electric power can be generated.

It also raises questions about leadership; right now, European auto manufacturers are leading both industry and government in the move to electric; Japanese car-makers are strong electric competitors, and the US is lagging. Also, the ability to generate electricity, especially distributed generation of clean energy will be a huge and growing area.

Soon, it will just be an economically easy move for consumers, as improved technology lowers costs. For example, a $1,000 car battery today is expected to cost just $73 within the next 12 years. Given the rate of improvement in battery and electric-vehicle technology over the last 10 years, by 2040 small-combustion engines in private cars could well have disappeared without any government intervention.

Financial Review

Oh Canada

Sinclair Noe — April 25, 2017

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

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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

Like It Never Happened

Sinclair Noe — June 29, 2016

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

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DOW + 284 = 17,694
SPX + 34 = 2070
NAS + 87 = 4779
10 Y + .04 = 1.51%
OIL – .30 = 49.58
GOLD + 6.80 = 1319.30

Stocks rallied for a second day, and it was a global rally. The dollar weakened. The yield on 10-year Treasuries rose four basis points to 1.51 percent after falling Monday to the lowest in almost four years. The MSCI All-Country World Index had its biggest two-day gain since August. The S&P 500 moved from negative year to date to slightly positive. The Dow Jones Industrial Average stretched its rebound to 553 points since Monday’s close.

Britain’s FTSE 100 Index erased its post-Brexit losses with a 6.3 percent surge over two days. The Stoxx Europe 600 Index climbed 3.1 percent. The gauge has recovered 4.7 percent after tumbling 11 percent over two days. It is still heading for a second consecutive quarterly decline. Emerging-market shares climbed. Maybe cooler heads prevailed; maybe it is a short squeeze. Goldman’s basket of the most shorted shares in the Russell 3000 Index rose the most since 2009. Doesn’t matter. Prices moved higher.

And so this raises the question of whether all the fear over Brexit was justified, or if this is just the calm before the storm. The fall in the pound sterling is a blessing for the British economy, and a headache for the Eurozone. The exchange rate is acting as a shock-absorber. The FTSE 100 index of equities in London is back to where it was on the eve of the vote, compared to falls of roughly 6% in Germany and France, 10% in Spain, 11% in Italy, 13% in Ireland, and 14% in Greece.

The UK was stripped of its AAA credit rating but there has been no sign of systemic meltdown. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.

US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.” Nobody seemed to heed his words at the EU’s summit in Brussels, but the situation still carries the potential for significant economic damage, even if it plays out in slower motion.

European Union leaders wrapped up a two-day conference in Brussels and called for an orderly British withdrawal from the bloc to minimize instability. They also spelled out conditions for a new relationship with a departing Britain, warning that if British business wants to continue to enjoy the seamless single market after its departure, it would also have to accept that EU citizens can continue to enter Britain.

Francois Hollande, the French President, has warned London that it will no longer be the center of euro-denominated clearing following the Brexit vote, dealing a blow to one of the City’s biggest markets and casting further doubt on the London Stock Exchange’s merger plans. Mr. Hollande, speaking after a tense meeting of European Union leaders last night, said: “The UK has said it doesn’t want any more freedom of movement. Now it won’t have access to the single market anymore.”

Scottish minister Nicola Sturgeon, spoke before the European Commission in Brussels, trying to make the case for Scotland to stay in the EU. In last week’s referendum, Scottish voters backed staying in the EU by a nearly 2-1 majority. Mrs. Sturgeon argued that Scotland must not be dragged out of the EU against its will. She wants to negotiate directly with Brussels to protect membership rights of Scots and is open to a new independence referendum, splitting from the UK, if that is the only way to keep Scotland in the bloc. Sturgeon drew a mixed response from EU leaders. Spanish Prime Minister Rajoy said flatly, “If the United Kingdom leaves, Scotland leaves.”

Moody’s has cut its outlook on the British banking system from stable to negative following last week’s referendum, saying: “We expect lower economic growth and heightened uncertainty over the U.K.’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions.”

The Federal Reserve delivered a report card on the largest banks in their annual stress tests. US units of Deutsche Bank and Banco Santander were the only firms to fail the tests in 2015, and they failed the tests again this year. The Fed gave Morgan Stanley only a conditional pass, saying that the bank also had to resolve weaknesses in its processes. Morgan Stanley has until Dec. 29 to resubmit its capital plan for approval. The stress test results, known as CCAR (or Comprehensive Capital Analysis and Review), are particularly important because they determine how much capital big U.S. banks can put toward dividends, stock buybacks, acquisitions or investments.

General Electric has won approval to drop its designation as a too-big-to-fail financial institution, capping a transformation that has included the sale of almost all of its lending business. The Financial Stability Oversight Council determined that GE no longer poses a threat to U.S. financial stability. The decision marks the first time a company has been granted formal release by the council.

The Commerce Department reports consumer spending increased 0.4 percent last month, on increased demand for automobiles and other goods. Consumer spending in April was revised up to show it advancing 1.1 percent instead of the previously reported 1.0 percent jump. Consumer spending rose at a 1.5 percent annual rate in the first quarter, holding down gross domestic product growth to a 1.1 percent pace. Personal income rose 0.2 percent after advancing 0.5 percent in April. Wages and salaries gained 0.2 percent. Savings slipped to $730.6 billion last month from $753.7 billion in April.

A gauge of pending home sales slid 3.7% in May, a step back following several months of strong sales. The National Association of Realtors’ index fell to 110.8 in May from a downwardly-revised 115.0 in April. Even with that revision, April figures were the highest since February 2006 – but May marked the first year-over-year decline since August 2014.

The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Last week the NAR reported sales of previously-owned homes rose to the highest level in more than nine years in May. So, it appears demand is still strong but there is a shortage of inventory.

Congress has been thinking about doing something about the debt problem in Puerto Rico. Of course, Congress hasn’t actually done anything yet. They did table further debate on a bill, which means a vote could come later this evening or tomorrow on a measure to allow Puerto Rico to restructure its total debt and establish an oversight board to impose big cuts in spending. And it probably doesn’t matter.

Puerto Rico will default on more than $1 billion in general obligation bonds on Friday. The default will mark the first time the U.S. territory has failed to pay what it owes on general-obligation debt, a $13 billion swath that its constitution says has the top claim to the government’s funds. Puerto Rico had already defaulted on debt issued by three agencies, but creditors were left with little recourse because the securities were backed by weaker legal safeguards.

Governor Garcia Padilla previously said the commonwealth couldn’t raise enough to cover what’s owed to bondholders even if he shut down the government. The island has about $2 billion in principal and interest payments due Friday, and total debt of around $70 billion. Without the ability to file for bankruptcy protection as cities including Detroit have done, Puerto Rico pushed Congress to give it legal tools to force creditors to the bargaining table and prevent an onslaught of lawsuits. Instead, it looks like they will be headed to court.

Energy Transfer Equity has terminated its merger agreement with Williams Cos. after a court ruled that it can walk away from the deal since it was unable to deliver a required tax opinion by June 28. Williams published a statement saying it is committed to completing the merger and will “enforce its rights” under the terms of its agreement. The deal had been valued at nearly $33 billion when it was signed last year.

Toyota announced another massive recall. The Japanese carmaker said it needed to recall 2.8 million cars over a possible fault in emissions control units, after it announced on Tuesday that 1.4 million Prius and Lexus models had to be brought in to have their air bag inflators fixed.

Coca-Cola expects to pull some of its beverages from Vermont stores this week as the state imposes a new law requiring all products made with genetically modified organisms to include warning labels. Although its top beverages will stay on shelves, including Coca-Cola, Diet Coke and Coke Zero, some smaller brands or configurations may temporarily disappear. Kellogg, Campbell Soup and Mars previously announced they would comply with the Vermont law and begin labeling their products for GMOs.

Nike’s futures sales disappointed. Nike reported adjusted earnings per share of $0.49, beating the consensus by a penny. Revenue rose 6% to $8.2 billion but was a bit shy of estimates. The closely followed worldwide futures orders jumped 11%, missing the 13% increase that analysts were anticipating.

Financial Review

CoCo Pop

Sinclair Noe — February 9, 2016

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

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DOW – 12 = 16,014
SPX – 1 = 1852
NAS – 14 = 4268
10 Y – .01 = 1.73%
OIL – 1.41 = 28.28
GOLD – .20 = 1189.80

Japanese stocks crashed 5.4%, making for the biggest daily drop since June 2013. The sell-off has the Nikkei hovering near a 16-month low. The weakness in stocks caused safe-haven buying of the yen, which strengthened to 114.21 per dollar, its strongest level since November 2014.

Japan also became the first G-7 country to see the yield on its 10-year debt fall below zero, finishing at a record-low -0.035%, but the Swiss 10-year note is already at negative -0.37%, and the German 10-year bund is barely positive at 0.2%.

More than $7 trillion of government bonds offered yields below zero globally as of Monday. Bond prices are indicating a hint of panic. What plunging rates tell us is that markets are expecting very weak economies and possibly deflation for years to come, if not full-blown crisis.

Today, Wall Street tried a couple of half-hearted attempts to rally or maybe to sell-off; nothing went very far. The trend is still down; the severity of the downtrend depends on where you look. The Nasdaq Composite is down 17.9% from its July 20, 2015, closing peak of 5,218.86. The drop is far worse than the descent suffered by the Standard & Poor’s 500 stock index, which is down 13% from its May peak.

The general definition of a bear market is a decline of 20% or more from a prior record peak. The Nasdaq is down 14% this year, compared to a drop of about half that for the Dow Industrials. When you’re in a bull market the Nasdaq is going to outperform to the upside. But once it starts coming under attack you’re going to see it go down a lot more than the rest of the market.

Many tech stocks have already succumbed to a bear market, including Amazon, Apple, Cisco, Netflix and Tesla. Biotech stocks are also getting crushed, with the closely-watched iShares Nasdaq Biotechnology ETF down 26% so far in 2016.

Certainly, losers are not confined to the Nasdaq; think energy and financials. KBW Bank Shares are down about 20% this year. When investors sell bank shares or bet against the banks in credit markets, it can be a signal that a period of financial turbulence has entered a new, potentially more serious phase. It suggests that banks are becoming more vulnerable to the market volatility and any underlying economic weaknesses. Some of the big US banks have been hammered: Citigroup has lost more than a quarter of its price since the start of the year, same for Bank of America.

Markets have been nervously watching Deutsche Bank bonds, with CreditSights saying the bank may struggle to pay coupons on some of its riskiest securities next year, if financial results miss expectations. Deutsche Bank shares dropped 9% yesterday; however, this morning the share price is holding steady after the bank issued a statement saying it has the cash to meet coupon payments, and may even buy back some of its own debt.

Deutsche Bank’s CEO said today the bank is “rock solid”, which sounds good but it also sounds eerily similar to pronouncements from Bear Stearns in the days before it collapsed. The problem for Deutsche is CoCo bonds, or contingent convertibles, debt that can be converted into equity in the event of nonpayment; think of it as a bail-in.  Before I sound alarmist, remember central banks have become adept at keeping megabanks on life support.

The banks have a problem, several actually. They made loans to energy companies that could result in big losses. European banks lent to other commodities players, not just energy concerns, and many were active in lending in emerging markets (Deutsche Bank, the most under-capitalized of the megabanks, is almost certainly exposed to all these trades, and its stock has been swooning accordingly).

And that’s before you get to the fact that many banks already had corporate loans they had not written down sufficiently and those books can only be getting worse given low growth and borderline deflation in Europe.

The International Energy Agency says there is even more oil coming to market than they estimated.  Supply may exceed consumption by an average of 1.75 million barrels-per-day in the first half of 2016, compared with an estimate of 1.5 million last month, and the excess could swell if OPEC members increase production. The IEA report says: “With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term.”

In other energy news: Responding to an earlier report that has cut the share price in half, Chesapeake Energy declared it “has no plans to pursue bankruptcy,” but is looking at its restructuring options “to maximize value for all shareholders.” Meanwhile, Cheniere Energy is closing its newly formed crude oil trading desk, just two months after the company’s board fired the CEO and promised to increase its focus on core businesses.

The Labor Department’s Job Openings and Labor Turnover Summary, or JOLT, shows job openings rose 5% to 5.6 million in December, the second-highest ever recorded, behind only July 2015, when it touched 5.7 million. Hires rose to 5.36 million from 5.25 million. That shows that employers and workers are matching up. When openings are much higher than hires, it may signal workers don’t have the skills employers need.

The number of Americans leaving jobs voluntarily rose 7% to 3.1 million in December. That was the highest “quits” rate since December 2006, and it shows worker confidence in the ability to find another job is picking up. Job switching is an important source of an individual’s wage growth. In addition to firms having to compete with better wages as the labor market tightens, the bump in wages reflects the presumed productivity enhancements of better matching workers with available jobs.

Janet Yellen goes to Congress tomorrow to deliver the Fed’s semiannual monetary policy report to the House Financial Services Committee on Wednesday and Senate Banking Committee on Thursday. Yellen’s prepared testimony will be released tomorrow morning and then she will subject herself to questioning from the politicians.

Despite the Fed’s constant drumbeats for transparency, Yellen will probably not make any major announcements about monetary policy; rather, look for acknowledgment that the Fed is monitoring global economic and financial developments, and maybe a hint that the Fed is not rushing to more rate hikes.

Meanwhile the San Francisco Fed has just published research showing that an economic expansion doesn’t just die of old age. Glenn Rudebusch, director of research at the San Francisco Fed and author of the study said, “The current recovery is no more likely to end simply because it’s approaching its seventh birthday.” In other words, an 80-month old expansion has the same chance of ending as a 40-month-old expansion.

Coca-Cola reported net income of $1.23 billion, or 28 cents a share, in the fourth quarter, up from $770 million, or 17 cents a share, in the year-earlier period. The results were a penny better than estimates.

Wendy’s reported fourth-quarter profit that beat expectations as it continues to see benefits from operating fewer of its restaurants itself. The company also said it anticipates same-store sales growth around 3%, slightly above what analysts were expecting, while its earnings forecast was in-line with analyst projections.

Sears Holdings warned that its fourth-quarter revenue would fall short of expectations. Based on the disappointing performance during the holiday shopping season, Sears said it will speed up the shuttering of unprofitable stores and look to further reduce costs. The company has recently flagged 50 stores for closure in the coming months and suggested today that it may raise that number.

In other earnings news: 21st Century Fox dropped in after reporting a downbeat full-year outlook. Toymaker Hasbro reported earnings topped estimates. Yelp dropped 11% yesterday after reporting heavy spending and announcing their CFO was leaving.

Disney reported its best earnings ever. Earnings jumped to $2.88 billion, or $1.73 a share, from $2.18 billion, or $1.27 a share, in the same quarter last year. Revenue grew 14%. Top line and bottom line beat estimates. Disney dropped almost 2% in after-hours trade because they don’t have another Star Wars movie ready for release in February I suppose.

SolarCity swung to an adjusted loss of $232 million in the fourth quarter, or $2.37 a share, compared with an adjusted per-share loss $1.47 in the year-ago period. Revenue reached $115 million in the quarter, up from $72 million a year ago.

But installations in the current quarter will drop almost 80% as they close operations in Nevada. SolarCity and other residential solar installers pulled out of Nevada as utility regulators there imposed new rules that made solar less attractive in the state. SolarCity down about 25% in after-hours trade.

Viacom is adding a new phase to a fledgling partnership with Snapchat, allowing it to sell advertising on the mobile app’s behalf. Under the deal, Viacom will have exclusive third-party rights to directly sell advertising surrounding Snapchat’s owned and operated content, and will add two new channels to Snapchat Discover, the media-centric story section of the popular service.

So what happened at Chipotle’s all-employee meeting? Co-Chief Executives Steve Ells and Montgomery Moran laid out plans to improve restaurant safety, such as central processing and increased testing of ingredients, while discouraging sick workers from coming to the restaurant by offering paid sick leave.

Chipotle also said it would spend about $10M to help local suppliers adhere to the company’s new safety measures. CMG shares have lost nearly a third of their value and sales have plunged about 30% since November, following reports of E. Coli sickness and two separate norovirus outbreaks.

Fiat Chrysler fell to a 52-week low yesterday after the NHTSA released documents that suggested that some of its vehicles can roll away when a driver thinks the transmission has been set to park. The probe into three Fiat Chrysler models affects about 856,000 cars; 121 incidents have led to crashes, with 30 leading to injuries.

CBS fell short of setting a new U.S. television-watching record as its Sunday night broadcast of the 50th Super Bowl averaged 111.9M viewers. The Broncos’ win over the Panthers ranked third in U.S. TV program history, behind last year’s NBC broadcast of the game, which drew 114.4M watchers and the 2014 Super Bowl on Fox, with an audience of 112.2M. Online streams of the game through CBS and the NFL averaged 1.4M viewers per minute.

Can you name the person with the most registered patents? If you guessed Thomas Edison, you are close but no cigar. Edison registered 1,093 patents. Artur Fischer registered 1,100. The German born Fischer passed away last week at the age of 96. He invented such things as the synchronous camera flash and the drywall anchor, plus hundreds of other gadgets and gizmos.

He started as a locksmith who spent much of his time tinkering.  In 1948, he founded his own company, the Fischer Group, which today has 42 international subsidiaries, employs 4,000 people worldwide and sells its 14,000 products in more than 100 countries.

Financial Review

The Day of Futures Past

Sinclair Noe — October 21, 2015

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

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DOW – 48 = 17,168
SPX – 11 = 2018
NAS – 40 = 4840
10 YR YLD – .04 = 2.03%
OIL – 1.08 = 45.21
GOLD – 9.10 = 1167.70
SILV – .22 = 15.78

Oil futures settled at their lowest level in nearly three weeks. OPEC is holding a special meeting in Vienna with cartel members and non-members Russia and Mexico to discuss ways to prop up oil prices. Don’t hold your breath. Meanwhile, the U.S. Energy Information Administration reported a much bigger than expected increase of eight million barrels in crude supplies for the past week.

The European Commission has ruled that Starbucks and Fiat Chrysler’s tax deals with the Netherlands and Luxembourg are illegal state aid, ordering the respective governments to recover as much as $34 million from each. The ruling follows an EU investigation launched in June 2014. It looked into whether the two companies were given so-called sweetheart tax deals that effectively lowered their corporate taxes.  Who’s up next? European regulators are finishing up investigations into McDonald’s and Amazon’s tax affairs in Luxembourg and Apple’s arrangements in Ireland.

Outgoing House Speaker John Boehner said Republicans will meet on Oct. 28 to nominate a candidate to replace him. Last night, Rep. Paul Ryan of Wisconsin said he would run for the job if certain conditions were met. With a critical deadline just two weeks away, House Republican leaders are discussing options for raising the U.S. debt limit.

Last week, Treasury Secretary Jacob Lew moved the cutoff for raising the debt limit to Nov. 3, earlier than the Nov. 5 date he had set earlier. After that point, Lew said, the Treasury would have less than $30 billion to fund the government, “far short” of expenses on certain days.

Syrian President Bashar al-Assad arrived in Moscow on an unannounced visit on Tuesday, in the leader’s first known trip outside his country since the start of the country’s civil war. During the meeting, Russia’s Vladimir Putin reiterated his commitment to support Assad through military and political channels, and said he would call on other world powers to look into a potential diplomatic solution to the conflict.

A group of high-profile lawyers plans to file a request today to begin impeachment proceedings against Brazilian President Dilma Rousseff. Today’s move is only the first step in a drawn-out process which could take up to eight months. The Brazilian real is down 32% this year.

General Motors and EMC released their latest earnings reports before opening bell this morning. GM posted adjusted earnings of $1.50 per share, a 55% year over year increase that beat estimates of $1.18 per share. EMC reported earnings of 43 cents per share and revenue of $6.08 billion for the third quarter. Analysts had been looking for earnings of 44 cents per share and $6.17 billion in revenue.

Coca-Cola said revenue fell a worse-than-expected 4.6% in the third quarter despite improvements in volume, as the beverage giant said currency fluctuations will hurt results for the year more than expected.

Boeing posted a $1.7 billion net profit, up from $1.3 billion during the same period last year. Boeing delivered 199 commercial jets in the third quarter, up from 186 during the same quarter last year. And more of those jets are expensive wide-bodies, such as the 787 Dreamliner.

During this quarter last year, 31 Dreamliners were delivered to airlines; this year Boeing delivered 37. The challenge now for Boeing is to bring down the production cost of the long-delayed Dreamliner so it can bring in more cash and maybe, someday, breakeven on the plane whose development costs ran over budget.

Credit Suisse reported worse than expected third-quarter results with net income falling 24 percent and the investment bank posting a pre-tax loss of 125 million francs. Separately, the bank announced a plan to raise $6.3 billion in new capital and a corporate reorganization.

Western Digital agreed to buy SanDisk for about $19 billion. SanDisk is one of the largest makers of Nand flash memory chips, which store data in mobile devices and are increasingly being used in hard drives in computing. The technology uses less power and is faster to access information, making it more useful in cloud-computing data centers.

Lam Research is buying KLA Tencor for about $10.6 billion. The merger will create a $19 billion semiconductor firm that will rival Applied Materials, and serve 42% of the wafer fabrication equipment market when the deal closes in the middle of next year. The offer of $67.02 per KLA Tencor share represents a 24% premium to Tuesday’s closing price.

According to Hedge Fund Research, hedge funds suffered their largest quarterly loss in assets since the financial crisis during the three months that ended in September. The third-quarter saw the average fund lose 3.9% driven by slowing growth in China, sliding commodities prices and a likely U.S. Fed rate hike that sent stocks tumbling. Notables: David Einhorn’s Greenlight Capital is down 17% YTD, and Bill Ackman’s Pershing Square has now fallen 12.6% for the year (down 12.5% for September.)

Today, Ackman’s Pershing Square just purchased 2 million more shares of Valeant Pharmaceuticals. It’s either brilliant or insane; time will tell.  In September Valeant dropped 23% and Ackman’s large 5.7% stake in Valeant really hurt his returns for the month; so he doubled down. And today, Valeant dropped another 30%. We don’t know when Ackman bought in today.

Citron Research, a stock-commentary site run by a short seller, said Valeant is using a couple of specialty pharmacy called Philidor RX Services and R&O Pharmacy to store inventory and record those transactions as sales; comparing the accounting and auditing to Enron. Valeant has been at the forefront of an intensifying debate over price increases for older drugs in the U.S. Last week it said it had received subpoenas from the U.S. Attorney’s Offices in Massachusetts and Manhattan.

Here’s the kicker. R&O Pharmacy has sued Valeant. The lawsuit says that R&O believes that both Valeant and R&O are “victims of a massive fraud perpetuated by third parties” or that “Valeant is conspiring with other persons or entities to perpetuate a massive fraud against R&O and others.”

I think I’ll go with insane.

The chairman of the Commodity Futures Trading Commission, Timothy Massad, says that the regulator is very concerned about the potential for disruptive events in the U.S. Treasury market and is already taking steps to address the growth of automated trading and increasing cybersecurity risks. New proposals include requirements for pre-trade risk controls and other measures to reduce risks of automated trading. The CFTC also wants to increase transparency regarding market maker incentive programs and self-trading to make sure it isn’t illegal wash trading.

Toyota is recalling about 6.5M vehicles worldwide to fix a defective power window switch in models including the Yaris/Vitz subcompact, Corolla, Camry and others. Debris caused by wear from the electrical contact points can accumulate and cause a short circuit. That in turn could make the switch assembly overheat, potentially leading to a fire.

Yahoo has signed a search advertising deal with Google. The deal builds on an existing search partnership with Microsoft under which the company gets a percentage of revenue from ads displayed on its sites. The move also follows disappointing Q3 results from Yahoo that missed expectations and unveiled cost cuts, content write-offs, and more soft guidance.

Today is the day that Marty McFly flies the time traveling Delorean to Hill Valley California, and if the flux capacitor is correct, he landed there about 18 minutes ago. We’re talking about the movie Back to the Future, Part 2. And if you don’t really remember the movie or you haven’t heard the news stories over the past few day, the intrepid time traveler from 1989, played by Michael J. Fox, set his time machine to October 21, 2015. Today is the day of futures past.

And it has been intriguing to look back at the movie to see how their fictional predictions have panned out. Of course, one of the favorite futuristic gizmos was the hoverboard; it isn’t a ubiquitous toy but a couple of companies have built functioning hoverboards. The garbage powered portable nuclear fission machines – not so much. Fax machines everywhere – nope. Cubs win the World Series – still within the realm of possibility but the odds are astronomical; however there is now a major league team in Miami.

Still the movie got some things right: Flat panel TVs with built in video-conferencing were in the movie, and I actually have a flat screen at my home with the Skype app. Wearables, such as Google Glasses or Apple Watch – yep. Biometrics – sort of; Biff paid for a taxi with his thumbprint; I can’t do that but I can pay for stuff with my phone and my phone can be unlocked with a thumbprint.

Programmable, automated homes – yes; my home is not automated but the technology exists. 3D holographic entertainment, advertising, and gaming – yes we have that; still working out the specifics, but we have it. The Black & Decker food hydrator – not exactly but I do have a microwave, which is probably worse. There are other examples, but you get the idea.

The writers, 30 years in the past, actually did a pretty good job of predicting the future. New ideas and technologies have completely changed the way we live, learn, and work. So, the next question is: What will our world look like in 2045, thirty years from today?

Maybe we’ll make a mess of everything but I hope and believe that 30 years from now we’ll be doing much better. Maybe we’ll have peace, or end poverty, or find cures to horrible diseases. Try to imagine the world you want to live in 30 years from today, and then move in that direction. And if the future has hoverboards for everybody, that’s just a bonus.

Alphabet Inc. Will Replace Google

Financial Review

Half True

Sinclair Noe — August 10, 2015

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DOW + 241 = 17,615
SPX + 26 = 2104
NAS + 58 = 5101
10 YR YLD + .06 = 2.24%
OIL + .95 = 44.82
GOLD + 10.30 = 1105.10
SILV + .41 = 15.33

Berkshire Hathaway is buying Precision Castparts for $235 per share in cash in a deal worth about $37 billion. On Friday, Precision Castparts closed at $193.94, meaning Berkshire is paying a 21% premium to own the company. Berkshire originally began investing in Precision Castparts in 2012 and had already acquired a 3% stake before today’s announcement. Berkshire Hathaway posted disappointing earnings on Friday. Revenue for the second quarter came in at $54 billion.

Precision Castparts makes parts for the aerospace industry, and also the energy industry; their major customers are Boeing, General Electric, and Airbus. This is a company with a large moat; there is a big barrier for new competition; GE isn’t going to outsource parts inside a jet engine for a couple of dollars savings. And there is a good chance that PCP can make some decent sized acquisitions to consolidate its industry, or what Buffett calls “bolt-on’ acquisitions.

When you consider some of the recent acquisitions by Warren Buffett, it becomes clear that Berkshire Hathaway is no longer a pseudo-hedge fund or quasi-mutual fund. It is a diversified conglomerate with interests in heavy industry, transportation, consumer staples, and much more. On the industrial side, consider the acquisitions of Iscar Metalworking in 2006 and Lubrizol in 2011, plus industrial component producer Marmon, and US Chemical; or what Warren calls the Powerhouse Five. You could also include in that list, the $27 billion deal for Burlington Northern in 2009.

In 2013 Buffet teamed with 3G Capital to purchase Heinz Foods, and last year Heinz merged with Kraft Foods in a deal backed by Berkshire. And in 1998, Buffett purchased General Re, a global reinsurance company for a little over $16 billion; the $5.6 billion deal for NV Energy in 2013; and the $4 billion purchase Van Tuyl Auto Group last year. Today’s purchase of Precision Castparts is the biggest deal ever for Buffett.

Stanley Fischer, the Federal Reserve’s vice chairman, says inflation in the US is “very low” due in part to commodity prices. Fisher says: “A large part of the current inflation is temporary. It has to do with the decline in the price of oil; it has to do with the decline in the price of raw materials,” but he expects prices will stabilize at some point. Fisher’s statements cast doubt on quick action from the Fed to raise interest rates; the statements also suggested low energy prices won’t last.

A rebound in U.S. drilling signaled production is withstanding the slump in prices; after data from Baker Hughes showed that drillers added rigs for the fifth weekly gain in six. Meanwhile, OPEC’s largest members have sustained record output, while U.S. stockpiles remain almost 100 million barrels above the five-year seasonal average. The average price of gasoline has dropped 11 cents over the past two weeks to $2.71 a gallon-about 81 cents below the year-ago. Oil prices bounced higher today, but they are coming off a 5-month low.

The dollar traded at a 2-week low, which helped commodity prices across the board. And that might be the most important consideration in the commodities markets. If the dollar continues to show strength, commodities will remain under pressure.

Of course many bullish investors have tried to call a bottom in oil and commodities; it has been a painful exercise. The S&P GSCI Commodity Index is down 17% in the past 3 months, and down 42% in the past 2 years.

It’s not just an energy issue, either; copper, platinum, lumber, coffee, sugar, wheat, oats and lean hogs are all down double-digit percentages this year. While each specific commodity obviously responds to its own distinct supply-and-demand dynamics, the biggest fundamental factor weighing on commodities appears to be a strong dollar.

Stocks in China rallied with the Shanghai Composite Index closing 4.9 percent higher, its biggest gain in a month. The rise comes after the nation’s cabinet approved plans to overhaul state-owned enterprises to boost the economy. Disappointing economic data released over the weekend which showed exports declining more than expected in July did little to dent equity market optimism; Shenzhen +4.3%; Chinext +5%.

The Greek government is seeking to conclude talks on a new rescue program by tomorrow to allow national parliaments to pass the deal and give Greece access to funds ahead of a payment due to the European Central Bank on August 20. If agreed to, the plan would make as much as $93 billion available to Greece.

Ukraine and international creditors will also seek to hammer out a debt deal this week, in what many see as the last opportunity for an agreement before a $500 million bond matures next month. The country has been looking to reduce its debt burden as part of the $40 billion IMF rescue plan aimed at stabilizing its economy. If a restructuring deal is not reached, Ukraine has threatened to impose a debt moratorium in September.

These are tough times for high-yield bond investors. For the third week in a row mutual funds and ETFs reported outflows from risky asset classes, including stocks and high-yield bonds. This week, outflows from high-yield bond funds totaled $820 million after $1.3 billion in the prior week.  The commodity rout has pushed bond yields in the energy sector higher since mid-July. That suggests that investors are worried about risk, and are demanding to be better compensated for it. Meanwhile, the stress has seeped from the energy and materials sector into the broader high-yield market.

After the close of trade, Google announced a big restructuring of its business. CEO Larry Page will take the reins of a new publicly traded company called Alphabet, which counts Google, among other companies, as a subsidiary. Alphabet Inc will replace Google as the publicly-traded entity and all shares of Google will automatically convert into the same number of shares of Alphabet, with all of the same rights.

The Department of Labor will hold four days of public hearings this week to discuss its proposed fiduciary rule, which is aimed at requiring brokers to put client interests ahead of their own when handling retirement money. The DOL asserts that the lack of consumer protection costs investors as much as $17 billion annually, or 1% of their assets, but the industry says it’s too expansive and would significantly increase liability risk and regulatory costs.

Coca-Cola, the world’s largest producer of sugary beverages, is backing what they are calling a new “science-based” solution to the obesity crisis: To maintain a healthy weight, get more exercise and worry less about cutting calories. Which is about half true. The beverage giant has teamed up with scientists who are advancing this message in medical journals, at conferences and through social media. To help the scientists get the word out, Coke has provided financial and logistical support to a new nonprofit organization called the Global Energy Balance Network, which promotes the argument that weight-conscious Americans are overly fixated on how much they eat and drink while not paying enough attention to exercise. Which is about half true. And of course the other name for a half  truth is….

Last week a team from the Environmental Protection Agency was investigating an abandoned mine near Durango, Colorado. The Gold King mine was last active in the 1920s, but it had been leaking toxic water at a rate of 50 to 250 gallons a minute for years. It is owned by a group called the San Juan Corporation. But last week something went wrong; the EPA team made a mistake and a bright yellow toxic sludge spilled from the old mine into the Cement Creek; from there it flowed to the Animas River. The river has literally turned a bright mustard yellow color.

At first the EPA thought the spill was about 1 million gallons; they hoped they could contain the mess. Now, they say the spill is more like 3 million gallons, and they are not sure what is spilling into the water but it is suspected to contain arsenic, lead, copper, zinc, aluminum and cadmium. Residents along the contaminated rivers are being advised to have their water tested before drinking, cooking or bathing. The toxic brew is now flowing through the San Juan River near Farmington, New Mexico; has moved into Utah and is expected to flow into Lake Powell on the Colorado sometime Wednesday.

The chemical spill is now making its way through the Navajo nation. The infiltration of toxic material is a haunting memory for the Navajos. In 1979, a dam failed in a uranium waste pond spilling 1,100 tons of solid radioactive mill waste and approximately 93 million gallons of acidic and radioactive tailings solution into a nearby river tributary. There have been claims the amount of radiation released in the Churchrock incident exceeded Three Mile Island. Navajo Nation President Russell Begaye announced that he intends to take legal action against the EPA for last week’s chemical spill.

Until the late 1970s there were no regulations on mining in most of the region, meaning anyone could dig a hole where they liked and search for gold, silver, copper or zinc. Abandoned mines fill up with groundwater and snowmelt that becomes tainted with acids and heavy metals from mining veins which can trickle into the region’s waterways. The federal government says 40 percent of the headwaters of Western waterways have been contaminated from mine runoff.

Financial Review

Preview

Sinclair Noe — August 6, 2015

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

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DOW – 120 = 17,419
SPX – 16 = 2083
NAS – 83 = 5056
10 YR YLD – .03 = 2.23%
OIL – .31 = 44.84
GOLD + 5.00 = 1090.50
SILV + .06 = 14.76

Jobless claims rose by 3,000 to 270,000 in the week ended August 1. Firings are at historically low levels as employers hold on to more workers. More hiring would help convince Federal Reserve policy makers that the economy can withstand an increase in the benchmark interest rate this year. Claims have remained below the 300,000 level since March.

Outplacement consult Challenger, Gray & Christmas reports employers announced 105,696 layoffs last month. A year ago, U.S. companies announced plans to cut 46,887 jobs. The Army accounted for more than half of the total with 57,000 cuts expected over the next two years. The technology sector also contributed to July’s announced job reductions, with computer and electronics companies announcing 18,891 layoffs in July.

Tomorrow is the big monthly jobs report; and it probably represents the most important data the Fed will consider before the September 17 FOMC meeting. And the Fed will need to communicate any action beforehand to avoid disruption in the financial markets. We may be seeing a rate hike being priced in right now. The major averages came off session lows in the close. The Dow Jones industrial average ended at its lowest level in 6 months and posted its first 6-day losing streak since October.

The Dow Industrial Average is trending slightly lower, having fallen below its 200 day moving average. The S&P 500 is still in a very flat or sideways trend, but it is just about 10 points above its 200-day moving average, and it has posted losses in 10 of the last 15 sessions. And keep it in context; we’ve had good economic news; earnings season has been solid. But, good news on the jobs front could be bad news for the markets. The S&P has been in a historically tight range for the past 9 months. Something’s got to give. The question is which way it will break. I’m leaning toward the downside, but we haven’t seen good confirmation, yet.

The Fed tends to dig deep into the jobs data. Here’s what they will probably be looking at: first, the gap between the U-3 and the U-6. The U-3 is the headline unemployment rate which stands at 5.3%. The U-6 is the alternative measure which includes unemployed plus underutilized workers – it stands at 10.5%. The difference, or spread, is 5.2%. In the 10 years before the recession began in late 2007, the average spread was 3.6 percentage points. If the gap narrows, even if the U-3 unemployment rate holds steady, it would signal to policy makers and financial markets that the labor market is fully healing from the recession in some important ways: fewer workers stuck in part-time jobs, and better wages and more opportunities drawing those on the fringes back to the labor market.

The Fed will also watch the labor force participation rate; last month it came in at 62.6%, the lowest level since 1977. This indicates that people are moving out of the labor pool, and there is still significant slack. Was last month just a glitch in the data? We could see the headline unemployment number move higher as more people move into the market for a job, and would be considered good for the economy. The other area the Fed will watch is wages, which have been stagnant for what seems like forever. As long as there is not a dramatic and startling move, the Fed doesn’t really seem concerned about wages.

Since the start of 2013, payrolls have climbed at an average monthly pace of 225,000. And government data out tomorrow is expected to show a similar-sized gain in July. Of course, part of that is recovery from the downturn – in other words, we are still in the process of taking slack out of the labor market. Generally speaking, the economy only needs to add 150,000 jobs per month to maintain employment levels; some analysts say we could hold steady with just 100,000 or so new jobs per month. So the Fed doesn’t need a big jobs number to justify a rate increase.

The Fed has two mandates: maximum employment and price stability. And while we’re not at maximum employment, and nobody is quite sure exactly what that is, price stability may be easier to spot; the most common gauge is inflation, which is running below target.

Commodity markets continue to slide. Oil can’t seem to find a bid even after the Energy Information Administration (EIA) reported a whopping 4.4 million barrel drop in weekly crude oil supply, much larger than expected. So oil is moving on other issues each day, like Fed speak and the Chinese stock market and other issues. If the Fed raises rates, the fear is that U.S. demand will fall. In China, if demand slows, oil is toast. Saudi Arabia is feeling the pinch of the oil -price war that they started. Reuters reports that “Saudi Arabia has issued its first sovereign bonds since 2007 to cover a budget deficit created by low oil prices, launching a series of debt sales that could reshape its financial markets. The government sold $4 billion of bonds to local banks this year.” Of course oil has crashed three times this year and anyone who got short at these levels lost big. Maybe the third time will be the charm, or not. Today, crude dropped .31 = 44.84

Meanwhile, a sharp fall in prices for vegetable oils and dairy products saw the Food and Agriculture Organization of the United Nation (UN)’s food price index fall to 164.6 points last month, one percent lower than in June and 19.4 percent lower than last year. The index is trade-weighted, and follows international market prices for cereals, dairy, sugar, vegetable oils and meat.

The Bank of England’s policy makers decided that price pressures are too weak to raise interest rates for now; policymakers left rates unchanged at a record-low 0.5%.  The BOE governor said that the outlook is “consistent” with the need for higher borrowing costs — but only in due course.

The average rate for a 30-year fixed-rate mortgage dropped to 3.91% in the week that ended Aug. 4, falling to the lowest level in two months, from the prior week’s reading of 3.98%.

Greece’s banking share index headed back uphill this morning, following a three-day plunge that wiped out 63% of its market value. Greek stocks are also bouncing, with the ASE Stock Index +3.7%.

Tesla posted a wider quarterly loss, revising down its sales forecast, and stating that it may need to raise more cash to offset heavy spending. The company posted a net loss of $184 million in Q2, compared with a loss of $61 million in the year-ago period, and it’s now possible Tesla won’t be cash-flow positive until early 2016. The automaker also lowered its full-year sales outlook to 50K-55K cars. There is still strong demand. The problem is with production as the electric car company prepares to introduce a new, lower cost model later in the year. Tesla dropped 8% today.

Automakers recalled more cars in the U.S. through the end of July (34.5 million vehicles) than during any other similar time frame except 2014 – highlighting the lax quality standards of the auto industry and unprecedented government crackdown on safety lapses. Honda recalled 8 million vehicles due to defective Takata air bags; Fiat Chrysler called back more than 9.6M vehicles due to cybersecurity gaps and rear gas tank fires.

Keurig Green Mountain shares were down about 29 percent, after the K-Cup coffee maker announced a workforce reduction of about 5 percent, as quarterly revenue and sales projections missed forecasts.

Coca-Cola Enterprises will merge with two Western European Coca-Cola bottlers to form the largest bottling company serving over 300 million consumers across 13 countries.

Creating the world’s largest publicly traded nitrogen company, CF Industries and OCI have entered into an agreement under which CF will combine with OCI’s European, North American and Global Distribution businesses in a transaction valued at approximately $8 billion.

Bill Ackman has built a $5.5B stake in Mondelez, betting that the snack maker will become a large target in a wave of consolidation reshaping the food industry. The new move squeezes Mondelez between two well-known activist investors. Nelson Peltz’s Trian Fund Management also holds a substantial stake in the food company.

Viacom fell 14 percent to its lowest in almost four years after reporting lower-than-expected quarterly revenue due to weakness in its cable TV business. Walt Disney was down for a second session after it lowered profit guidance for its cable networks unit on Tuesday. The S&P 500 media index lost 2.1 percent and notched its biggest two-day fall since November 2008, with Time Warner, Comcast, and CBS all in the red and Twenty-First Century Fox down 6.4 percent. All the media stocks are down and it seems people just want to get out of the sector at any cost and take any loss. Viacom’s results and Disney’s warning put the spotlight on a trend of viewers shifting from cable TV to Internet-based services such as Netflix, which rose 2.2 percent.

Financial Review

Blue Moon

Sinclair Noe — July 31, 2015

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DOW – 56 = 17,689
SPX – 4 = 2103
NAS – 0.5 = 5128
10 YR YLD – .07 = 2.20%
OIL – 1.64 = 46.88
GOLD + 7.10 = 1096.40
SILV + .04 = 14.87

For the week the S&P 500 index gained 1.2%, while posting a 2% gain for the month of July. The Dow Industrials finished the week with a 0.7% gain which lifted the monthly gain to 0.4%. The Nasdaq was up 0.8% for the weeks and 2.9% for the month. For the month, the yield on the 10 year Treasury dropped 13 basis points. Spot gold dropped 6% for the month and silver was down 5%. The big decline came in oil prices: down 12.59 per barrel or 21% for the month.

Consumer sentiment fell to a final July reading of 93.1 from a final June level of 96.1. For context, the consumer-sentiment gauge averaged 86.9 over the year leading up to the recession. After adjusting for changes in prices, just three in 10 surveyed thought their chances were better than 50 percent for real income gains over the next five years. Call it the voice of experience.

An index that measures the price of US labor slowed sharply in the second quarter, easing fears of inflation and signaling the labor market may not be as healthy as the low unemployment rate suggests. The employment cost index barely increased, rising 0.2% in the second quarter after a 0.7% increase in the first three months of the year. The rise was an all-time low for the series going back to 1982. In the past 12 months, compensation (wages plus benefits) have risen just 2%, about the same pace as since 2010. A spike of 2.6% in the first quarter, which got everyone excited about wage growth, was apparently just a spike in bonus pay, especially for Wall Street. There is no indication companies are having to pay up to lure or retain workers; there is no wage push inflation moving prices higher. Today’s employment cost index certainly gives no reason for the Fed to hike interest rates, but Fed policymakers have not made higher wages a precondition for raising rates.

We still haven’t worked through the fallout from the housing crash.  RealtyTrac reports 7.4 million borrowers were still “seriously” underwater on their mortgages at the end of June. The real estate information company defines that as the loan amount being at least 25 percent higher than the property’s estimated market value. Over 13 percent of all properties with a mortgage are in this predicament, and that is actually a slight increase from the first quarter of this year. The number of underwater borrowers has now increased for two straight quarters but it is still lower than a year ago, when over 17 percent of borrowers were seriously underwater. One reason why there is still a serious negative equity problem is because people with equity have sold to take advantage of higher prices, while homeowners who are underwater are stuck.

The International Monetary Fund has warned it will not participate in a third bailout for Greece unless debt relief is granted to the country. IMF staff reportedly told the fund’s board that Athens’s debt burden and poor track record of implementing reforms rule out further financial help from the fund, until there is an “explicit and concrete agreement” on debt relief from Greece’s Eurozone creditors. The warning means the IMF is unlikely to provide further funds to Athens at this stage, potentially raising pressure on Greece’s Eurozone partners to find more money to plug the country’s short-term financing needs. This is an unusual development; the IMF has never been a friend to debtors. While talk of debt relief may sound magnanimous, it likely just means extending maturities, or lowering interest rates. And the IMF is still demanding structural reform. I’m not sure what would satisfy that requirement; more austerity likely.

Greece’s financial markets are scheduled to reopen on Monday, ending a five-week suspension that began after the country imposed capital controls amid a confrontation with creditors. Greek traders will be able to buy stocks, bonds, derivatives and warrants – but only if they use new money such as funds transferred from abroad or cash-only deposits.

Meanwhile, when or if Greece gets another bailout package, it won’t help much; only a fraction of the money would go toward healing the economy. Nearly 90 percent would go towards debts, interest, and supporting failing Greek banks. And another bailout would actually hurt by increasing Greece’s overall debt, which stifles the potential for an economic rebound.

Investors are bracing for Puerto Rico to miss $58 million in bond payments in the coming days, as the commonwealth attempts to restructure $72 billion of debt. Saturday’s deadline could mark the first skipped payment to bondholders.

Chinese shares suffered their worst month in nearly six years this July despite (or perhaps because of) government-led recovery efforts. The Shanghai Composite lost 9% this week, and is down 14% month to date – its worst monthly performance since August 2009. The latest market crackdown: China’s securities regulator said it launched a probe into automated trading, restricting 24 stock accounts suspected of “influencing securities trading prices.”

Oil prices touched a four-month low. The rout in Chinese stock markets prompted concerns that oil demand in one of the world’s largest energy consumers would fall. Also, high international supplies have kept prices under pressure and increased competition among producers, who are taking cost-cutting measures. But few have ventured to cut production. WTI posted the biggest monthly decline of 2015. For the month of July, U.S. crude has lost 21%.

The big news in earnings today came from Big Oil. Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as Exxon could slash expenses. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges. The companies’ shares fell to the lowest in more than three years. Exxon and Chevron contributed to the avalanche of supply by increasing second-quarter crude output by 12 percent and 1.7 percent, respectively. Exxon cut share repurchases for the current quarter in half to $500 million. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

And while the weak performance from the oil patch raises many questions, one of the most important for investors is what will happen to dividends. The answer is not much. Chevron maintained its quarterly dividend at $1.07 per share in the second quarter, returning $2 billion to shareholders. Chevron hasn’t raised its dividend since Q2 2014. Exxon raised its dividend to 73 cents per share from 69 cents in the first quarter. And that’s about all you can hope for; look for dividends to remain flat, and if you’re lucky, they won’t be cut.

General Electric is taking steps to shift some U.S. manufacturing work overseas now that the U.S. Export-Import Bank will be shuttered at least until September. GE Vice Chairman John Rice says the company is looking to work with export credit agencies in other countries to finance potentially $10 billion worth of projects, with much of the production going to GE plants in those foreign locations.

Three bottlers of Coca-Cola products in Europe are in advanced talks about a merger that would further Coke’s push to consolidate its bottlers around the world and cut costs. Coca-Cola Enterprises is discussing the tie-up with Coca-Cola bottlers in Poland and Germany. Terms of the potential deal are not known, but it is likely to be valued well into the billions of dollars.

Yesterday we told you about Google’s Project Loon, a plan to beam internet from helium balloons. Now, comes word that Facebook has completed building its first full-scale drone called the Aquila, which has the wingspan of a Boeing 737 and will beam Internet down to remote parts of the world. The plane will hover between 60,000 feet and 90,000 feet, above the altitude of commercial airplanes, and will be able to fly for 90 days at a time.

Google is quietly distributing a new version of Google Glass to various enterprise partners ahead of a full launch later this year. The device’s price appears to be “well below” the $1,500 charged for the Explorer Edition, and contains a button-and-hinge system to attach the mini-computer to different glasses. Google is pitching the product “exclusively to businesses,” and that a new consumer version is still “at least a year away.”

The weak underbelly of high tech cars has been exposed again. A white-hat hacker  has released a video showing a security flaw in GM’s OnStar vehicle communications system that can be remotely accessed to unlock cars and start engines. The move comes just one week after Fiat Chrysler recalled some 1.4 million vehicles after hacking experts demonstrated a more serious vulnerability in the Jeep Cherokee. That bug allowed them to gain remote control of a Jeep traveling at 70 mph on a public highway.

The hackers are everywhere. The FBI says financial companies are facing extortion threats from hackers who threaten to knock their websites offline unless firms pay what amounts to a ransom. More than 100 companies, including targets from big banks to brokerages in the financial sector, have received distributed denial of service threats since about April.

Today is not only the end of the month, it is a blue moon, which is not really a reference to the color of the moon, rather it means the second full moon in one month; which also means that 2015 features 13 full moons. Step outside after sunset to check out the blue moon, then if you’re so inclined, go ahead and celebrate by doing something you only do “once in a blue moon.” You do have an excuse, after all.