Financial Review

Not Known for Patience

Sinclair Noe — June 9, 2017

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

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DOW + 89 = 21,271
SPX – 2 = 2431
NAS – 113 = 6207
RUT + 6 = 1421
10 Y + .01 = 2.20%
OIL + .26 = 45.90
GOLD – 11.20 = 1267.40
BITCOIN + 0.39% = 2837.72
ETHEREUM + 0.65% = 278.78

The Dow Industrials, S&P 500 and the Nasdaq Composite all hit intraday record highs – only the Dow managed to hang on for a record high close.

Tech stocks have been on a roll recently. Not today. Some of the biggest names tumbled. Alphabet dropped about 3.5%. Apple down almost 4% – its biggest one day loss in more than a year. Microsoft lost 2.2%. Facebook down 3.3%.

The strangest trade was Amazon. Over a period of about 5 seconds, the stock price went from $960 to $930. Back up to $953, down to $927, then traded just over $959. Looks like a fat-finger, flash crash. Amazon finished the day down 3.1%.

Goldman issued a report saying the big 5 mega-tech stocks have added $600 billion in market cap since the start of the year. In Goldman’s view, the sector has gotten ridiculously crowded. Bank of America issued a report saying the tech sector is the “most overweight it has ever been.”

We all know that trees don’t grow to the stars and stocks don’t trade in a straight line. It is a rotation today and it is out of tech into some of the other sectors. We’ll look for confirmation on Monday. The VIX, the volatility index, started the session in single digit territory, finished just above 10 – still very, very complacent.

Next week brings another Federal Reserve FOMC policy meeting. They are expected to raise rates another 25 basis points. Today, a group of economists published a letter urging the Fed to consider a monumental change in policy: raising its target for inflation above the current 2 percent. The Bank of England, the Bank of Japan and the Swiss National Bank also meet next week.

The Federal Reserve has been communicating that it will raise interest rates, and so that is what they will almost certainly do; anything less would shock the markets, and this Fed does not like surprises. Absent a shocker, we’ll watch the Fed for signs of a softer, or more dovish stance on future rate hikes and lower projections for inflation and economic growth.

In the follow-up to Super Thursday, President Trump denied accusations by former FBI director James Comey that he tried to block an investigation into a former national security adviser, adding that he was willing to give his version of events under oath. Asked by a reporter if he had told Comey to drop a FBI probe into former top aide Michael Flynn, Trump said, “I didn’t say that.”

Last month Trump tweeted that there might be tapes of the conversations. Time will tell. Meanwhile, oxygen continues to leak out of Washington DC at a rapid rate. And this means problems for the legislative agenda. It’s still unclear whether Republicans will ever be able to pass a replacement for Obamacare.

But whatever happens on the legislative front, there are big problems developing in the insurance markets as we speak: companies pulling out, leaving some parts of the country undeserved, or asking for large increases in premiums. The problem is the uncertainty, especially the failure to make clear whether crucial subsidies will be maintained.

In North Carolina, for example, Blue Cross Blue Shield has filed for a 23 percent rise in premiums, but declared that it would have asked for only 9 percent if it were sure that cost-sharing subsidies would continue.

On the international front, Trump blasted Qatar of being a “funder of terror at a very high level” and demanding that it cut off that money flow to rejoin the circle of responsible nations. Meanwhile, Secretary of State Rex Tillerson called for calm in the standoff urging an end to a blockade.

Qatar is in talks with Iran and Turkey to secure food and water supplies amid concerns of possible shortages two days after its biggest suppliers, the United Arab Emirates and Saudi Arabia, cut trade and diplomatic ties with the import-dependent country.

And remember, there is a US air base in Qatar, one of the biggest in the region with over 8,000 US military.

But, you say, stocks are up, so how bad can it be? And it’s true that while Wall Street has lost some of its initial enthusiasm for Trumponomics — the dollar is back down to pre-election levels — investors and businesses don’t seem to be pricing in the turmoil.

The good news is that the global economy keeps expanding as corporate profits rise and the recovery continues. Even as the Federal Reserve normalizes rates, the economy has the potential to grow for several more years before its next cyclical stumble. How this all plays out, I do not know. You do not know. The pundits do not know. But time is running out for the bold legislative moves Trump promised: healthcare reform, tax reform, infrastructure investment, and deregulation.

The economic agenda might still move forward but right now it isn’t. And one thing I think I know is that Wall Street is not known for its patience. Wall Street has been rolling along on a buy the dip mentality, but what happens when we get a day where liquidity doesn’t fill the void, and we don’t buy the dip?

The other big Super Thursday news was the election in the UK. Theresa May’s Conservative party did not win a majority. Between now and Tuesday, someone will have to create a coalition; either May and the Tories, or Jeremy Corbin and the Labor party. Likely, May will prevail, in a very weakened state.

Even if she holds power, the battles are just beginning. Foes include Tory dissidents who want her out now, a born-again Labor opposition that will confront her at every turn, anti-European hardliners who will demand she hew to the toughest possible line and the 27 European Union leaders who will seek to make Brexit as painful as possible.

This is largely a British problem, not a global problem. The pound dropped today – the biggest drop in 8 months, beyond that, market reaction was muted. The British economy has been sluggish, the worst performer among the G7. This election setback won’t help. And again, markets are not known for patience.

As an aside, note that Labor did worse in the seat results than predicted, but better in popular vote, getting 40.1% versus the Tory 42.3%. But in general, the pollsters have as much egg on their faces as the Tories do.

Brazilian President Michel Temer, who pushed back strongly against attempts to bring him down over corruption allegations, appeared set to win a victory in a court with the power to strip him of his office. The Supreme Electoral Tribunal (TSE), considering charges that Temer’s election in 2014 should be annulled because of the role of corruption money, was deeply split.

After deliberating since Tuesday, the lead judge on the case, voted to sack the scandal-plagued president. He laid out a damning portrait of systemic undeclared donations and bribes from big Brazilian corporations that he said had fatally undermined the election result in Latin America’s biggest country.

But when the other six judges on the panel began voting in turn, it became clear that the outcome may go the other way. The next three to vote after Benjamin decided in favor of Temer and the session was expected to continue late. Brazilian analysts were unanimous in predicting at least a narrow acquittal

Stocks Mixed After Tech Troubles

Charles Schwab: On the Market

Posted: 6/9/2017 4:15 PM ET

Stocks Mixed After Tech Troubles

U.S. equities finished a volatile session mixed as strength in financial and energy issues was countered by a tumble in technology stocks, which led the Nasdaq sharply lower on heavy volume. The U.S. dollar gained ground, gold was lower and crude oil prices were slightly to the upside. Treasuries continued a recent move lower, while a light domestic docket showed that wholesale inventories declined more than expected.

The Dow Jones Industrial Average (DJIA) increased 89 points (0.4%) to 21,272, the S&P 500 Index lost 2 points (0.1%) to 2,432, and the Nasdaq Composite tumbled 114 points (1.8%) to 6,208. In heavy volume, 984 million shares were traded on the NYSE and 3.1 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.19 to $45.83 per barrel and wholesale gasoline was $0.01 higher at $1.50 per gallon. Elsewhere, the Bloomberg gold spot price decreased $7.10 to $1,272.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.28. Markets were mixed for the week, as the DJIA advanced 0.3%, the S&P 500 Index declined 0.3%, and the Nasdaq Composite fell 1.6%.

VeriFone Systems Inc. (PAY $18) reported a fiscal Q2 loss of $0.80 per share, or earnings-per-share (EPS) of $0.30 ex-items, versus the FactSet estimate of a $0.29 per share profit, as revenues declined 10.0% year-over-year (y/y) to $474 million, above the projected $472 million. The payments and commerce solutions company issued Q3 guidance that missed expectations, while lowering its full-year outlook. Separately, PAY announced that it is divesting three non-strategic businesses to reallocate resources and capital to its core payments and commerce platform. Shares traded solidly lower.

The technology sector gave back some of a decisive rally that led to a plethora of record highs for the stock markets, and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his latest Schwab Sector Views: Technology—Too Far or Room to Run?, on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

DuPont Fabros Technology Inc. (DFT $61) and Digital Realty Trust Inc. (DLR $113) announced an all-stock merger agreement with a total enterprise value of $7.6 billion. Under the terms of the deal, DuPont Fabros shareholders will receive a fixed exchange ratio of 0.545 Digital Realty shares for each share they own. DFT rallied, while DLR declined.

Pandora Media Inc. (P $9) finished higher after announcing Sirius XM Holdings Inc. (SIRI $5) made a $480 million investment in the company and an agreement to sell its Ticketfly business to Eventbrite for $200 million.

Rite Aid Corp. (RAD $3) fell sharply amid a report from Capitol Forum saying Federal Trade Commission (FTC) staff are preparing a recommendation to sue to block the takeover of the company by Walgreens Boots Alliance Inc. (WBA $81). Neither entity mentioned commented on the story.

Wholesale inventories revised lower

Wholesale inventories (chart) were revised down to a 0.5% month-over-month (m/m) decline for April, versus the Bloomberg forecast of an unrevised preliminary 0.3% decrease, and following March's unrevised 0.1% rise. Sales were 0.4% lower m/m, after March's negatively revised 0.2% decline. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at March's 1.28 months level.

Treasuries finished lower with the yields on the 2-year and 10-year notes rising 2 basis points (bps) to 1.34% and 2.21%, respectively, while the 30-year bond rate gained 1 bp to 2.86%.  

Treasury yields continued a rebound from recent pressure that came amid heightened domestic and European political uncertainty, mixed economic data, and the Fed's highly expected rate hike next week and the likelihood that the Fed could begin the process of shrinking its large balance sheet later this year. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the Fed's potential changes to its bloated balance sheet and the impact on the bond markets in her article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Knowon the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Also, Chief Investment Strategist Liz Ann Sonders addresses the recent mixed economic data in her latest article, Turn Down For What: Why is Job Growth Slowing?, in which she discusses last Friday’s weak jobs report that raised alarm bells about slowing job growth, but notes that perhaps it's natural at this stage in the cycle. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The stock markets revisited record high territory alongside the pressure on bond yields, and we discuss this in our article, Stocks and Bonds Rally: Can Both Be Right?. The two major asset classes appear to be pitted against one another in a tug-of-war over where the economy is headed. Many investors can't reconcile the diverging market action with a common view of the economy, and the situation could raise concerns about the fallout from a potentially messy divorce. Read more on the Insights & Ideas page at www.schwab.com.

Europe gains as markets react to U.K. election, Asia also ticks higher

European equities finished higher, with the markets digesting yesterday's U.K. election results that showed Prime Minister Theresa May's Party lost a majority, resulting in a hung parliament. The British pound dropped sharply versus the U.S. dollar, providing some support to U.K. stocks, as the outcome fostered Brexit uncertainty regarding the timing of negotiations and whether it will result in a hard of softer exit terms. For commentary on the political front check out Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. In economic news, German exports rose more than expected, while industrial and manufacturing production out of France and the U.K. came in softer than expected. Also, the U.K. trade deficit narrowed more than expected. The euro modestly extended yesterday's decline versus the greenback that stemmed from the European Central Bank's monetary policy decision that showed the central bank upgraded its economic outlook but lowered its inflation forecast. Bond yields in the region traded mixed.

Stocks in Asia finished mostly to the upside, with the global markets taking yesterday's vote that led to a hung parliament in the U.K., the ECB's changed language and outlook, and fired FBI Director Comey's testimony in the U.S. in stride. Japanese equities gained ground, with the yen giving back some recent gains, while South Korean shares also advanced. Mainland Chinese stocks rose, but those traded in Hong Kong dipped on the heels of a report that showed consumer price inflation rose in line with forecasts, while wholesale price increases slowed more than expected for May. Australian securities finished flat and Indian equities moved higher. For a look at the global economic front, see Jeffrey Kleintop's video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com. 

Stocks mixed as technology sees late-week stumble

Stocks finished mixed, with a late-week pullback in technology issues from a decisive rally as of late weighing on the markets. Stocks showed little reaction to some highly-anticipated events such as the relatively surprising U.K. election, the European Central Bank's mixed outlook and apparent dovish tone by President Mario Draghi and former FBI Director Comey's testimony on Capitol Hill. Financials led the charge, with Treasury yields and the U.S. dollar rebounding from a recent drop. Energy stocks also showed some resiliency, gaining ground despite pressure on crude oil prices that has persisted since last month's disappointing extension of OPEC production cuts, exacerbated by this week's unexpected jump in U.S. oil inventories. Economic data was relatively light, though the ISM non-Manufacturing Index showed growth continued for the all-important services sector and the JOLTS Job Openings report hit a record high.

The markets are looking to next week's fully-loaded economic calendar, highlighted by the Consumer and Producer Price Indexes (CPI & PPI), NFIB Small Business Optimism, retail sales, industrial production and capacity utilization, the NAHB Housing Market Index, housing starts and building permits, and the preliminary University of Michigan Consumer Sentiment Index. However, the headlining event will likely be the Federal Open Market Committee's (FOMC) monetary policy decision. A 25 bp hike to the target fed funds rate is highly expected, but the accompanying statement, updated economic projections and subsequent press conference by Chairwoman Janet Yellen are poised to garner heavy attention.

As noted in the latest Schwab Market Perspective: Goldilocks…or the Three Bears?, we believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet. It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come. Read more on the Markets & Economy page at www.schwab.com, including our continued belief that the bull market has legs, but why investors should be aware that risks are elevated.

International reports due out next week that deserve a mention include: Australia—consumer confidence and employment change. China—lending statistics, retail sales and industrial production. India—CPI, industrial production and trade balance. Japan—Bank of Japan monetary policy decision, machine orders and industrial production. Eurozone—industrial production, Q1 employment, trade balance and CPI, along with German investor confidence. U.K.—Bank of England monetary policy decision, CPI, retail sales and employment change.

Financial Review

Stuff Happening

Sinclair Noe — June 8, 2017

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

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DOW + 8 = 21,182
SPX + 0.65 = 2433
NAS + 24 = 6321
RUT + 18 = 1415
10 Y + .02 = 2.19%
OIL + .04 = 45.68
GOLD – 9.20 = 1278.60
BITCOIN + 0.04% = 2826.04
ETHEREUM + 0.61% = 259.56

We had a bunch of stuff happening today. The Dow Industrials hit a record high intraday, but could not hold on for a record high close. The trading session went from positive to negative and back.

The Nasdaq Composite did manage a new record high. But it looks like markets are still trying to digest everything. The S&P 500 traded in a range of about one-half of one percent.

The VIX, the volatility index, also known as the “fear gauge,” held at historically low levels. The dollar and bonds both traded lower but nothing out of the daily norm.

Let’s start with the testimony of former FBI Director Jim Comey before the Senate Intelligence Committee. The public hearing lasted nearly 3 hours. I won’t try to recap everything. One or two interesting points. None of the senators questioning Comey tried to claim that Comey was lying about his representation of his meetings with President Trump, however there was sharp disagreement over the significance of their conversations.

A one point, Comey said Trump lied. None of the senators tried to claim Trump did not lie. However, after the hearing, Trump’s lawyer, and spokesperson Sarah Huckabee Sanders had the unenviable task of proclaiming the president is not a liar. Comey did not answer some of the most pointed questions because of the classified nature. He later testified before a closed-door committee. We do not know what he said there.

We certainly learned more today than yesterday, when Intelligence chiefs Coats and Rogers stonewalled the Committee, but what Comey said in public is not the be-all, end-all of this investigation, no matter how much you might want to debate about the minutiae and innuendo and nuances of the testimony.

While it was compelling television, it is just one small piece of the puzzle; nothing that exonerated nor nailed the coffin. Perhaps the most important thing we learned today is that contemporaneous memorandums of communication carry probative value.

In other words, it was a smart move to keep a diary. The bottom line is what I said a month ago when Comey was fired: “Comey… is going to consume most of the oxygen in Washington for the foreseeable future.”

We are not seeing much progress on tax reform or an infrastructure plan. This doesn’t mean nothing is happening, just that it is now on a back burner, and time is running out. The Senate is working on its version of Trumpcare but if they can’t come up with something substantially different than the House, it will be dead on arrival.

Today, the House of Representatives voted largely along party lines to replace the 2010 Dodd-Frank Wall Street reform law, a move that is expected to die in the Senate but open the door to revamping or eliminating regulations that came out of the 2007-09 financial crisis. No real word on what might replace Dodd-Frank, other than the prospect of just letting the banksters run wild.

The  European Central Bank left interest rates and policies unchanged while trimming expectations for inflation through 2019. While that was largely expected, the shared currency fell as ECB President Mario Draghi said in his news conference that the euro area still isn’t generating enough inflation, overshadowing improved prospects for the economy that led officials to upgrade their growth assessment.

The change in the assessment of risks for the economy sets the scene for the ECB to start a discussion about the timing for the removal of the stimulus, but that is apparently a debate for another day.

According to an exit poll released shortly after voting ended, Prime Minister Theresa May will win 314 seats in Britain’s election, short of a majority in the 650-seat parliament. That is an exit poll, not official results.

Prime Minister May called the snap election in a bid to strengthen her hand in Brexit negotiations, to win more time to deal with the impact of the divorce and to strengthen her grip on the Conservative Party. It appears that her electoral gamble failed. If the exit polling numbers hold, it means May’s Conservative Party would have to form a coalition or attempt to govern with the backing of other smaller parties.

For investors, the over-riding factor is likely to be greater uncertainty about whether there will be a deal on Brexit and what it will look like. A delay in forming a government could push back the start of Brexit talks, currently scheduled for June 19, and reduce the time available for what are expected to be the most complex negotiations in post-World War Two European history.

Labour, led by veteran socialist Jeremy Corbyn, could attempt to form a government with those smaller parties, which strongly oppose most of May’s policies on domestic issues such as public spending cuts.

If Corbyn’s Labour does take power with the backing of the Scottish nationalists and the Liberal Democrats, both parties adamantly opposed to Brexit, Britain’s future will be very different to the course the Conservatives were planning and could even raise the possibility of a second referendum. The unofficial exit polls sent a small shock through markets, pushing the pound sterling down.

Brazil’s top electoral court excluded testimony of engineering company executives from an illegal campaign funding trial against President Michel Temer, a move that suggested it would throw out a case that had threatened to unseat him.

The Commerce Department’s quarterly services survey, or QSS, showed consumer spending, including healthcare spending, increased at a faster clip than the government had assumed in its second estimate of gross domestic product published last month.

The QSS data suggested first-quarter GDP could be revised up to as high as a 1.5 percent annualized rate from the 1.2 percent growth pace reported in May. Growth in the current quarter may be above 3 percent, due to payback from the first quarter’s 1.2 percent reading, but the underlying trend appears to be holding steady at close to 2 percent for the year.

The Federal Reserve reports net worth of U.S. households and nonprofit groups rose by $2.35 trillion, or 2.5 percent, to $94.84 trillion in the first quarter from the previous three-month period. Household wealth has grown, boosted mostly by a 5.5 percent gain in the Standard & Poor’s 500 Index last quarter and house price appreciation that matched the biggest year-over-year increase since 2014.

Now, the bad news. Household debt increased at a faster rate, or 3.2 percent, as mortgage borrowing advanced at a 3 percent pace. Other forms of consumer credit, including auto and student loans, climbed at a 5 percent rate, the slowest since 2013.

Although measures of consumer confidence have risen since the elections in November, that hasn’t necessarily translated into spending, helping to temper economic growth.

The number of Americans filing for unemployment benefits fell last week. Initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 245,000 for the week ended June 3. The Tuesday JOLT survey showed high job openings, and firms appear to be holding on to their workers.

Claims have now been below 300,000, a threshold associated with a healthy labor market, for 118 straight weeks. Low layoffs and record high job openings suggest a deceleration in job growth in May was likely because companies could not find suitable workers. Labor market tightness could encourage the Federal Reserve to raise interest rates at its June 13-14 policy meeting.

Department store operator Nordstrom said that some members of the Nordstrom family were considering taking the company private as it struggles with an industry-wide sales slowdown. Going private, which would involve raising debt, would be a risky but potentially profitable bet by Nordstrom’s founding family and largest shareholder bloc that the company can reshape itself and emerge from the retail meltdown stronger.

Shares of the Seattle-based clothing and accessories retailer ended 10.3 percent higher.

Hudson’s Bay Company disclosed that it will be cutting around 2,000 positions within North America as part of a major restructuring effort. HBC owns several major department stores, including Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor.

Yahoo shareholders approved the company’s pending sale of its core internet business to Verizon for $4.48 billion. Yahoo expects that the deal will close on June 13, 2017. The closing of the deal, announced in July, had been delayed as the companies assessed the fallout from two data breaches that Yahoo disclosed last year. Verizon plans to cut 2,100 jobs upon completing the acquisition.

Alibaba Group announced today at an investor conference that is expects revenue growth of 45-49 percent in the 2018 fiscal year. That figure compared with 56 percent revenue growth posted for the 2017 fiscal year ended March 31. At the same event last year, the firm predicted 48 percent revenue growth

 Alibaba was up almost 14% today.

The FDA just requested that Endo International take its extended-release opioid painkiller Opana ER (otherwise known as oxymorphone hydrochloride) off the market. The agency said that the decision came after it found that the drug’s benefits no longer outweighed its risk for abuse.

FDA commissioner Scott Gottlieb said in a news release: “We are facing an opioid epidemic – a public health crisis, and we must take all necessary steps to reduce the scope of opioid misuse and abuse.” If Endo doesn’t remove the drug from the market voluntarily, then the FDA can formally withdraw its approval.

Endo shares dropped 14% in after-hours trade.

Financial Review

Drifting Higher

Sinclair Noe — June 7, 2017

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

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DOW + 37 = 21,173
SPX + 3 = 2433
NAS + 22 = 6297
RUT + 1 = 1396
10 Y + .03 = 2.18%
OIL  – 2.10 = 45.88
GOLD – 6.80 = 1287.80
BITCOIN – 1.57% = 2736.57
ETHEREUM – 2.04% = 258.86

Major stock, bond and currency markets did little more than drift higher ahead of what many are calling Super Thursday. That’s when the U.K. holds a very important general election, the European Central Bank announces its decision on monetary policy, former FBI director James Comey testifies to the Senate about Russian meddling in the U.S. election, and Brazil’s Electoral Court may issue a decision on campaign corruption that could unseat President Michel Temer.

The Senate Intelligence Committee held public hearings today, with Director of National Intelligence Dan Coats and NSA Director Admiral Mike Rogers repeatedly said they would not discuss their private conversations with President Donald Trump.

Coats and Rogers said they did not feel the public setting of the Senate intelligence committee’s hearing was an appropriate venue to discuss their conversations with Trump. Acting FBI Director Andrew McCabe invoked the probe of special counsel Robert Mueller, when McCabe said he wouldn’t comment on issues in the special counsel’s lane.

Fired FBI Director James Comey is scheduled to appear before the committee tomorrow. Today, Comey released his written prepared opening remarks, saying the President had demanded his loyalty, pressed him to drop a probe into ex-national security adviser Michael Flynn and repeatedly pressured him to publicly declare that he was not under investigation.

The document provides a detailed account of Comey’s private meetings with the President, included direct quotes from Trump and revealed the former FBI chief’s discomfort with the President’s behavior.

President Trump took to Twitter early this morning to break the news about his pick for FBI director. The nominee is Christopher Wray, a private attorney specializing in the defense of individuals and corporations in white-collar criminal cases. He represented New Jersey Gov. Chris Christie during the “Bridgegate” investigation.

This afternoon, Trump traveled to Cincinnati to pitch his 10-year, $1 trillion infrastructure outline as part of a week’s worth of events emphasizing progress on the proposal, though it has yet to be fully fleshed out.

Over the past week, Trump has often undercut and confounded his own aides as they try to shift the conversation toward the infrastructure plan, he was tweeting out new attacks on the news media and feuding with his own Justice Department over its defense of his targeted travel ban.

So far, the infrastructure proposal is not much more than an outline, short on details and specifics, other than a plan announced this week to privatize the nation’s air traffic control. The plan, conceived by the commerce secretary, Wilbur Ross, and economic advisor Peter Navarro, calls on the federal government to spend $200 billion in cash and tax credits that would, they say, result in $800 billion in additional private investment.

In congressional testimony this year, the transportation secretary, Elaine Chao, predicted that a more detailed proposal would be released by late May. But last week she would say only that it was “coming soon.”

Russian hacking of the 2016 U.S. election included sophisticated targeting of state officials responsible for voter rolls and voting procedures, per a top-secret U.S. intelligence document that was leaked and published this week, revealing another potential method of attempted interference in the vote.

The month-old National Security Agency document outlined activities including impersonating an election software vendor to send trick emails to more than 100 state election officials. However, there is no evidence that hackers could manipulate votes, or the vote tally.

Analysts at the NSA believed the hackers were working for the Russian military’s General Staff Main Intelligence Directorate, or GRU. The document’s publication by The Intercept received attention because an intelligence contractor, Reality Winner, was charged the same day with leaking it.

According to Bill Gross, who manages the $2 billion Janus Henderson Global Unconstrained Bond Fund, markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they’re taking. Speaking at a Bloomberg Investors conference in New York, Gross said, “Instead of buying low and selling high, you’re buying high and crossing your fingers.”

Central bank policies for low and negative interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies. Despite being concerned about high asset prices, Gross said he feels required to stay invested and sees value in some closed-end funds.

Consumer and business bankruptcies are rising again, after declining for years since the financial crisis. That’s not a propitious sign. For bankruptcy filings by businesses from large corporations to tiny sole proprietorships, the dance started in November 2015. At first it was the energy bust. But bankruptcies of energy companies have tapered off with new money surging into the oil & gas sector once again.

Now bankruptcies in the retail sector are steadily worsening, and other sectors too have picked up the slack. So here we go again. Total US business bankruptcies in May rose 4.7% year-over-year to 3,572 filings, according to the American Bankruptcy Institute. That’s up 40% from May 2015 and up 10% from May 2014.

And there’s another concern: Bankruptcy filings are highly seasonal. They peak in tax season – March or April – and then fall off. The decline in April after the peak in March was within that seasonal pattern. Over the past years, filings dropped in May. But not this year. This year, they jumped.

Sears is closing 72 more stores, in addition to the more than 180 closings that had already been announced this year.  The closings will bring Sears’ store count to about 1,200, down from 2,073 five years ago.

OPEC and other oil producing nations have cut back production in hopes of shrinking a global oil glut. Today, the U.S. government reported an unexpected increase in inventories of crude and gasoline. Crude stocks in the United States grew 3.3 million barrels to 513 million barrels, according to the U.S. Energy Information Administration.

Gasoline inventories also unexpectedly rose, imports increased, and exports dropped. The EIA report pegged total product demand at 19.340 million barrels a day. That included a drop of 505,000 barrels a day for gasoline demand and 520,000 barrels a day for distillate demand from a week earlier.

A 1.4 million barrel-per-day petroleum-demand drop is the kind of shift one associates with a catastrophic storm or economic plunge. Even more shocking, the rise for crude inventories came despite a decline in domestic production and the biggest weekly drop in Saudi imports ever.

Oil has traded below $50 for the past couple of weeks amid speculation that rising U.S. output will counter supply curbs by OPEC and its partners, including Russia. U.S. crude production will average more than 10 million barrels a day in 2018, breaking a record almost five decades old.

Low-cost, long-haul air travel has taken off across the Atlantic. Transatlantic routes are among the industry’s most popular and profitable, and budget carriers are trying to grab a slice of that business by boosting capacity on them by 68 percent this summer.

And that means the flying public may see price wars. Like Boston to London, round trip for under $300. Norwegian Air Shuttle and Icelandic rival Wow have grabbed headlines with one-way fares as low as $69 and $55 this summer, although Wow’s flights involve a stop in Reykjavik.

Lufthansa’s Eurowings budget carrier is in its second year of long-haul flying, while Air France is planning to launch a lower-cost long haul brand this fall in a project dubbed Boost. International Airlines Group launched low-cost long-haul brand Level on Thursday with surprisingly strong ticket sales.

Toshiba aims to name a winner for its prized semiconductor business next week. Sources told Reuters the choice has narrowed to one bid from U.S. chipmaker Broadcom and U.S. tech fund Silver Lake and another from Toshiba chip partner Western Digital and Japanese government-related investors.

Toshiba is rushing to find a buyer for the world’s second-largest producer of NAND chips, which it values at $18 billion or more, to cover billions of dollars in cost overruns at its now-bankrupt U.S. nuclear business Westinghouse Electric.

The British pound sterling gained ground today as the UK saw the final day of campaigning ahead of Thursday’s general election. Polls suggest that Theresa May’s Conservative Party hold a lead of around six points over Jeremy Corbyn’s Labour Party, although outliers suggest that lead could be as big as 12 points, or as small as one point.

While a big move in the price of sterling is expected once results start to come out on Thursday evening, investors in Britain’s currency were largely in wait and see mode ahead of the vote. The polls have been notoriously wrong in recent voting.

Yes, there’s a lot going on tomorrow, but don’t forget to keep an eye on Canada. The Bank of Canada will release its semi-annual Financial System Review and investors will be watching for what the central bank says about the nation’s red-hot housing market. Toronto home prices rose almost 30 percent last month from a year earlier.

In Vancouver, the country’s most expensive real estate market, they’ve climbed 58 percent over four years. Meanwhile, household debt is at record levels, surpassing gross domestic product for the first time. Fitch said Wednesday that banks with greater exposure to those two cities are more sensitive to a market correction.

In the last FSR in December, the Bank of Canada listed elevated household indebtedness, housing market imbalances and fixed-income liquidity as the three main risks to the financial system, and the focus should be similar this time.

Financial Review

More Drift

Sinclair Noe — June 6, 2017

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

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DOW – 47 = 21,136
SPX – 6 = 2429
NAS – 20 = 6275
RUT – 1 = 1394
10 Y – .03 = 2.15%
OIL + .58 = 47.98
GOLD + 14.30 = 1294.60
BITCOIN – 0.15% = 2909.82
ETHEREUM + 6.26% = 264.16

Once again stocks drifted aimlessly. We are not seeing a risk off trade, but nobody is going full hog, risk on. We are waiting for Thursday. It could be a big day.

First, we have the European Central Bank, which has remained committed to its ultra-loose monetary policy since March 2016, when it cut its key interest rate, the main refinancing operations, to zero per cent, meaning it does not charge interest to banks borrowing money.

The bank has come under sustained pressure to raise interest rates as inflation has recovered, with some economists expecting the ECB’s governing council to remove a reference to “lower” interest rates in the future.

Then there is a parliamentary election in the UK. Prime minister Theresa May squares off against Jeremy Corbin. The major issues in the election are the National Health Service (NHS), Brexit, terrorism and national security, income inequality, how much money Britain has and what it should be spent on…

I’m joking of course; the major issues are why Theresa May hates appearing in public and whether Jeremy Corbyn loves the IRA. May leads the Conservative party. Corbin leads the Labor Party. But wait, there’s more – parties that is; including: The Scottish National Party, UKIP and Liberal Democrats.

And even though Labor has closed the gap on Conservatives, there is a possibility nobody wins outright – and that might mean a coalition. Hopefully, we’ve all learned not to bet on British elections.

Back in the US, Thursday morning brings the James Comey testimony on Capitol Hill. The White House confirmed that Trump would not seek executive privilege to stop Comey from appearing before the Senate Intelligence Committee.

Comey is expected to face questions about whether Trump pressured him to cancel an investigation into former national security adviser Michael Flynn, whose links to Russia are under scrutiny. The former FBI chief will reportedly stop short of saying that Trump interfered with the agency’s probe into Flynn. Yet he is also likely to face questions about a loyalty pledge reportedly requested by Trump.

Elected on pledges to overhaul the healthcare system and slash taxes, Trump has yet to achieve a major legislative win, and time is running out before lawmakers leave Washington for the August break.

Today, he met with senior Republicans. Senate Majority Leader Mitch McConnell said Senate Republicans are “getting close” to a healthcare plan after he presented an outline at a lunchtime meeting but he declined to say when he might bring it up for a vote. Other senior Republicans, such as Senator Orrin Hatch, said they may vote by early July.

Anthem, one of the nation’s largest health insurers, announced that it will stop offering policies in the Ohio marketplace next year. While Anthem, which operates for profit Blue Cross plans in more than a dozen states, said it has not made any decision about its participation in other state’s exchanges.

Anthem has previously warned that it might leave the marketplaces because of the uncertainty over the future of the individual market and the struggle over federal law. The company said, “an increasing lack of overall predictability does not provide a sustainable path forward to provide affordable plan choices for consumers.”

The Pentagon renewed praise of Qatar for hosting a vital US air base and for its “enduring commitment to regional security,” sticking to a message of reassurance even as President Trump, via Twitter, applauded a decision by Arab powers to cut ties to the Gulf ally, calling the diplomatic isolation was just punishment for the country’s support of Islamic extremists.

He also said the action is proof that his meeting with Persian Gulf Arab leaders in Saudi Arabia earlier this month was “already paying off.” More than 11,000 US and coalition forces are deployed to or assigned to al Udeid Air Base, from which more than 100 aircraft operate.

The latest job openings and labor turnover survey — known as the JOLTS report — released by the Bureau of Labor Statistics on Tuesday showed there were 6.04 million jobs open in the US in April. In the same month, last year there were 5.64 million jobs open. This is the most ever for the series dating back to its inception in 2001.

The jump in job openings also came as hiring and firing declined slight in April. The number of unemployed workers who are new entrants to the workforce continues to fall, indicating that people like college grads who go from being out of the workforce altogether are quickly getting jobs.

The number of unemployed workers per job opening in the U.S. was at a record low of 1.2. This compares to there being more than six unemployed workers per job opening in the wake of the financial crisis.

Additionally, almost twice as many people are quitting jobs as getting laid off, a sign that workers are confident they’ll find another job. In April, the quits rate fell slightly to 2.1%, with the 3.03 million folks who quit jobs during the month coming in only slightly lower than 16-year high for total quits we saw back in January.

Scott Pruitt, administrator of the US Environmental Protection Agency, has a new favorite statistic. Pruitt claims that 50,000 coal jobs, or coal and mining jobs, had been created in the US since the fourth quarter of last year. He’s off by about 49,000.

There has been an increase of about 50,000 mining jobs since October, but that number includes oil and gas exploration and drilling, and metal mining jobs, and only about 30,000 of those were during the Trump administration, and only about 1,000 of those jobs are in coal mining.

The US coal-industry employs about 51,000 workers total. Last month, 400 coal jobs were added—not 7,000. Kansas City Power & Light announced it will shut down several generating units that burn coal. And since Octoberr of 2016, the general merchandise retail sector has lost just over 95,000 jobs, nearly twice as many jobs lost in retail as in the entire coal industry.

Meanwhile, one company – Tesla,  has about 30,000 employees and they are hiring more all the time – 1,861 job openings in the US. And the company isn’t just looking for coders. These positions are blue-collar, white-collar, skilled, unskilled. And while they are generally concentrated in Tesla’s home state of California, there are openings all over the country.

The national home price index from data provider CoreLogic was 6.9% higher than a year ago, and 1.6% higher than in March. Washington was the hottest state for prices, notching a 12% annual gain. Arizona posted a 6% annual gain in home prices. CoreLogic forecasts national home price growth of 5.1% in the coming 12 months.

Stocks hit records on Friday but have been drifting lower this week. Meanwhile the bond market has been in rally mode, up about 4.7% year-to-date. If the year ended today, it would be the best annual performance since 2011. If the pace continues through December, it would be the best performance since 2003.

When we started the year, most people were expecting the Trump administration’s pro-growth policies would spark inflation and lead to higher rates. That hasn’t happened. Meanwhile, China is buying US Treasuries again, after halting purchases last year – a move that might help cushion the blow if the Federal Reserve starts unwinding its massive bond portfolio.

The Fed is expected to raise borrowing costs next week, narrowing the rate gap between the US and China and making American debt more attractive.

The S&P 500 just posted a third straight quarter of year-over-year earnings growth, but there is a trend of more and more companies that are not posting profits. About 10% of the companies in the S&P 500 have posted losses in the last 12 months, something we haven’t seen since 2010.

No surprise that energy companies made the list of losers. A small surprise is that tech and consumer stocks are also showing up on the list. Overall, the 51 companies lost $55 billion over the last year. Trailing 12-month earnings in the S&P total about $986 billion, or $113 per share, just below an all-time high reached in 2014.

Take out the companies losing money and the total hits $1.04 trillion, or $117 per share, the highest ever. The $4-a-share gap is the widest since 2011, a year when the S&P did nothing in terms of returns.

If you are trying to figure out where in the world to invest, well ... The Korean peninsula is dealing with political uncertainty; tensions in the Middle East; South Africa’s economy has dipped into recession; Brazil is up to its chin in political corruption.

But let’s follow the money. The Institute of International Finance reports emerging markets are enjoying steady growth in capital inflows that should top $1 trillion next year, for the first time since 2014. The group expects nonresident inflows to top $970 billion this years, up from$718 billion last year, led by China, India and Brazil.

The Amazon vs. Walmart battle continues with Amazon offering its Prime subscription at a discount for US customers on government aid. Both stocks were down today.

Macy’s warned its margins could shrink further. Shares dropped over 8%. The news hit other department stores: JC Penney down 4%, Sears down 2.5%, Nordstrom down 3.6%.

Uber has fired 20 employees following an investigation by a law firm into sexual harassment and other claims. The law firm investigated 215 harassment claims going back to 2012, acted in 58 cases and took no action in 100 more cases.

Financial Review

Go Placidly

Sinclair Noe — May 19, 2017

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

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DOW + 141 = 20,804
SPX + 16 = 2381
NAS + 28 = 6083
RUT + 6 = 1367
10 Y + .01 = 2.23%
OIL + 1.18 = 50.53
GOLD + 8.80 = 1256.60

Stocks finished with triple digit gains but well off session highs as news headlines once again rattled traders. The Dow gave back more than 50 points and the S&P 500 saw gains cut in half following an afternoon news dump. The Washington Post is reporting that a current White House official is a significant person of interest in the law enforcement investigation.

Separately the New York Times reported that Trump told Russian officials at the White House that firing FBI Director James Comey relieved “great pressure” from an ongoing probe into Russia and the election. The Times report cited a document summarizing the meeting.

Trump is on the first leg of a ten-day overseas trip that starts in Saudi Arabia, then moves to Israel, the Vatican, Brussels (for a NATO summit), and then Sicily for a G7 summit. The Trump administration planned to announce $110 billion in sales of advanced military equipment and training to Saudi Arabia this weekend.

Despite the firing of James Comey, and a general sense from the mainstream media that the Trump White House is in disarray, and the lowest public approval ratings since the inauguration, Wall Street continues to trade near record highs.  For the week, the Dow and S&P dropped 0.4 percent and Nasdaq was down 0.6 percent.

The dollar index lost 1.6 percent in the five days, the worst week since July 2016. Gold capped its best week in a month. The yield on 10-year Treasuries climbed less than one basis point to 2.23 percent, after rising as much as three basis points earlier in the session. It fell nine basis points this week.

Oil prices rose. West Texas crude rose 2.2 percent to settle at $50.53 a barrel in New York, for a weekly increase of 5.4 percent, the most since March and the second week of gains, on growing expectations that OPEC and other producing countries will agree next week to extend output cuts.

OPEC and other producers including Russia are scheduled to meet on May 25. They are expected to extend output cuts of 1.8 million barrels a day until the end of March 2018. U.S. crude production has climbed 10 percent since mid-2016 to 9.3 million barrels per day as shale producers have taken advantage of higher prices to boost activity.

Iran holds its first round of presidential elections this weekend. If President Hassan Rouhani remains in office, it should encourage Western investment and boost Iranian oil production. If the winner is Ebrahim Raisi, a critic of Iran’s nuclear deal with the West, then it is possible that new sanctions could be imposed, which could reduce the oil supply from Iran.

After two weeks chock full of retailers’ earnings — largely disappointing Wall Street and missing analysts’ expectations — the S&P 500’s Retail ETF (XRT) finished the week down about 3.5%. Leading the declines were names like Ascena Retail Group, Foot Locker, American Eagle and Sears.

Ascena — the parent of clothing companies such as Ann Taylor and dressbarn — saw its shares plunge more than 30 percent earlier in the week, after it adjusted its second-half outlook to reflect worse-than-expected business conditions. Meanwhile, Foot Locker’s same-store sales fell short of expectations.

Off-price retailer TJX, which operates T.J. Maxx, Marshalls and HomeGoods stores, was expected to be an upbeat outlier for the week, but even its first-quarter comparable sales couldn’t match Street estimates. Gap reported a surprise rise in quarterly same-store sales, bucking the trend of dismal results in the U.S. retail industry, as the company benefited from the robust performance at its Old Navy brand.

Campbell Soup’s quarterly sales and profit missed analysts’ estimates, hurt by higher promotions and weak demand for its condensed soups, broths and V8 vegetable juices, and the company warned that its full-year sales could decline.

Deere & Co raised its full-year sales and profit forecast for the second time, as demand improves for its farm and construction equipment, particularly in South America, sending its shares to a record high of $122. The company said it expected fiscal 2017 industry sales of tractors and combined harvesters in South America to be at the high-end of its earlier forecast of about 15-20 percent rise.

While farmers in South America have been complaining about low prices, they have enjoyed big gains in corn and soybean output.

Brazil’s Supreme Court released explosive plea-bargain testimony today accusing President Michel Temer, along with former presidents Lula da Silva and Dilma Rousseff, of receiving millions in bribes. The testimony raises serious doubts about whether Temer, who replaced the impeached Rousseff last year, can maintain his grip on the presidency.

The testimony implicates both ruling and opposition parties and indicates that Temer, a conservative, accepted $4.6 million in bribes from JBS, which ranks as the world’s largest meat processor. It also alleges that Lula, who is already facing five corruption trials, received $50 million in bribes in offshore accounts from JBS, while Rousseff took $30 million in bribes.

Temer said he would not resign from the presidency. The Supreme Court released an audio tape of Temer, approving the payment of hush money to former lower house speaker Eduardo Cunha, who last year orchestrated Rousseff’s impeachment and was later convicted for corruption.

Many politicians fear that if Cunha should turn state’s witness, his testimony could implicate scores of congressmen and members of the executive branch.

About 37,000 AT&T workers, or less than 14 percent of the company’s total workforce, began a three-day strike after failing to reach an agreement with the No. 2 U.S. wireless carrier over new contracts. This is the first time that AT&T wireless workers are on strike, which could result in closed retail stores during the weekend.

The workers on strike are members of the CWA Communications Workers of America union. The workers are demanding wage increases that cover rising healthcare costs, job security against outsourcing, affordable healthcare and a fair scheduling policy.

Slightly over half of the workers on strike are part of the wireless segment and the rest wireline workers, including a small number of DirecTV technicians.

Fiat Chrysler plans to update software that it expects will resolve the concerns of U.S. regulators about excess emissions in 104,000 older diesels. The software update would begin rolling out once the Environmental Protection Agency and California Air Resources Board approved.

In January, the EPA and California accused Fiat Chrysler of illegally using undisclosed software to allow excess diesel emissions in 104,000 U.S. 2014-2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks in a notice of violation.

The Environmental Protection Agency and California Air Resources Board announced approval of a fix for about 84,000 older Volkswagen diesel vehicles that can emit excess emissions. Volkswagen agreed last year to offer to buy back up to 475,000 2.0-liter diesel vehicles that had been sold in the United States or offer fixes if regulators approved.

Friday’s announcement covers a fix for 84,000 2012-2014 Passat diesel vehicles with automatic transmissions. A fix for vehicles with manual transmissions has not yet been approved. In January, regulators approved a fix for 67,000 2015 model diesels, leaving around 325,000 older vehicles still awaiting approval for a fix.

The federal government has, in recent years, paid debt collectors close to $1 billion annually to help distressed borrowers climb out of default and scrounge up regular monthly payments. New government figures suggest much of that money may have been wasted.

Nearly half of defaulted student-loan borrowers who worked with debt collectors to return to good standing on their loans defaulted again within three years, according to an analysis by the Consumer Financial Protection Bureau. For their work, debt collectors receive up to $1,710 in payment from the Department of Education each time a borrower makes good on soured debt through a process known as rehabilitation.

They keep those funds even if borrowers subsequently default again. What constitutes rehabilitation? Nine months of on-time payments, even if the borrower only pays $5 a month. That means that in many cases, the government pays $38 to collect one dollar. The department has earmarked more than $4.2 billion for payments to its debt collectors since the start of the 2013 fiscal year.

Seven years into an economic recovery, nearly half of Americans didn’t have enough cash available to cover a $400 emergency. That’s according to the latest findings from the Federal Reserve’s annual economic well-being of U.S. households, which found 44% in 2016 said such an expense would have to be covered by borrowing or selling something.

That’s a similar percentage to what was found in past Fed surveys. Of the group that can’t pay in cash, 45% would use a credit card to pay off the expense over time, about a quarter would borrow from friends of family, another 27% just couldn’t pay the expense and smaller fractions would turn to selling items or using a payday loan.

We now know where all the money is hiding. Retirees who are usually expected to spend that hard-earned nest egg are instead cutting their spending and living frugally, according to a University of Michigan survey analyzed by software company United Income. The median retiree spends 8 percent less than they comfortably could afford; the result, retirees now hold assets totaling more than $25 trillion.

Spending money, besides being a boost for the economy, could help retirees be more active, if they physically get out of the house to do it. Meanwhile, younger Americans, whose incomes are falling behind those of previous generations, aren’t saving enough.

So, the moral of the story is get out and spend some money this weekend, you might feel younger.

Financial Review

A Tale of Two Markets

Sinclair Noe — May 16, 2017

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

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DOW – 2 = 20,979
SPX – 1 = 2400
NAS + 20 = 6169 (record)
RUT + 0.76 = 1394
10 Y – .01 = 2.33%
OIL – .35 = 48.31
GOLD + 6.30 = 1237.70

Another record high close for the Nasdaq Composite, with minor losses for the other major indices. The safe play appears to be mega-cap tech plays.

A rally in the euro was reinforced by dollar losses, prompted by allegations that President Trump disclosed highly sensitive intelligence information to senior Russian officials. Late yesterday, White House National Security Adviser H.R. McMaster rejected the conclusions of a Washington Post article which claimed the president had revealed sensitive classified information to Russia’s top diplomat during an Oval Office meeting last week.

McMasters said the story “as reported is false”. Then this morning, Trump took to Twitter and confirmed reports by the Washington Post and other media outlets that he gave sensitive information to Russian officials, tweeting he had the “absolute right” to do so. Questioned about the report in the early afternoon, Trump simply said he had a “great meeting” with the Russians.

The disclosures add to concern over the administration’s chances of passing legislation, including tax reform, that has partly been priced in by financial markets. Sen. Majority Leader Mitch McConnell said, “I think we could do with a little less drama from the White House on a lot of things so that we can focus on our agenda,” “I think we could do with a little less drama from the White House on a lot of things so that we can focus on our agenda.”

Well.., not today – NBC News has just reported that Trump allegedly asked ousted FBI Director James Comey to “let go” of the investigation into former national security advisor Michael Flynn. According to Comey’s account of events, the conversation happened the day after Flynn resigned.  Stock markets continue to hit new highs, even as new headlines out of Washington reflect what appears to be a profoundly dysfunctional White House.

Stocks remain supported by the strongest earnings season for S&P 500 components since 2011. There are mostly two markets, tech and everything else. S&P 500 tech valuations, as measured by price/cash flow, have struggled to break above the 15x threshold that served as valuation floor during the 2002-07 bull market.

The 60%-plus gain in the S&P 500 Technology Index since the end of 2013 has occurred with that price/cash flow ratio hovering at a 15 multiple. The tech trade may be crowded but it still doesn’t look like a bubble at these valuations. The mega-cap tech trade is a different beast. Amazon.com trades at 144x 2017 EPS consensus, 85x 2018 EPS consensus. Netflix trades at 155x 2017 EPS consensus, 84x 2018 EPS consensus. Tesla doesn’t have positive expected EPS for 2017 or 2018.

China‘s latest efforts to curb risky debt levels are not only shocking local markets but raising worries globally about another market shock. As a result, China has replaced Europe as the top worry for global money managers, according to the latest Bank of America Merrill Lynch survey published today. Thirty-one percent of the 184 respondents consider Chinese credit tightening the biggest “tail risk” for markets.

The second worry is a crash in the global bond market, at 19 percent, followed by trade war, at 16 percent. The China worries also feed into existing worries about expensive stocks. The BofAML survey found that 37 percent of respondents think global equity markets are overvalued. That’s the most since January 2000, just before the burst of the tech bubble.

 The Commerce Department said  housing starts ticked down 2.6% to a 1.17 million annual pace, and stood just 0.7% higher than in the same month last year. Permits fell 2.5% to a 1.23 million pace in April. That was 5.7% higher than a year ago. Starts have been 6% higher in the first four months of this year than in the same period last year, and the pace of permit authorizations is over 10% higher, pointing to stronger growth in the future.

Housing starts remained strong but the more volatile multi-family sector dropped. This should be expected. Apartment construction bounced backed more quickly after the recession and may have peaked. More of the action should now be in the single-family component, which continues to gain traction. Given under-building in many markets, there seems to be plenty of room for continued growth in that sector.

The Federal Reserve said that industrial production grew 1% in April. This is the fastest pace of growth since February 2014. Compared with a year ago, production was up 2.2%. Manufacturing was hurt by the strong dollar in 2015 and 2016 but business investment has picked up this year.

In April, manufacturing output grew 1% after a 0.4% increase in the prior month. This is also the fastest rate since February 2014. One point to watch is the improvement in automobile assemblies. Given tepid auto sales, this may add to inventories and ultimately place downward pressure on car prices.

The US economy is forecast to expand at a 4.1 percent annualized pace in the second quarter, according to the Atlanta Federal Reserve’s GDP Now forecast model.

Investors shrugged off reports Ford plans to cut about 10 percent of its salaried workforce in North America and Asia. Ford does not plan any cuts to its hourly workforce or production capacity. Ford plans to offer financial incentives to convince salaried employees to depart voluntarily, including generous early retirement offers.

In 2016, Ford cut hundreds of white-collar jobs in Europe to cut costs by $200 million annually. The focus of the new cost-cutting effort is on North America and Asia. Ford has about 30,000 salaried U.S. employees.

It seems like the U.S. automakers are in an odd spot. A secular shift toward electric, driverless, or some other automotive technology paradigm seems possible. We also can’t rule out a cyclical downturn, considering a recent flattening in auto sales. Meanwhile, shareholders are clamoring for cost reductions, making it hard to double down on growth projects.

Home Depot’s first-quarter profit and same-store sales topped estimates as customers spent more on expensive items such as appliances and flooring and roofing materials. The company’s shares rose about 2 percent to hit a record high. Sales at stores open for more than a year rose 5.5 percent, topping estimates.

The company also raised its earnings forecast for the year ending January 2018. Home Depot’s results contrast with falling sales at department stores such as Macy’s and JC Penney, which are struggling with lower customer spending on apparel and growing competition from online and off-price retailers.

Shares of Staples jumped 3.5% in premarket trade but then lost 3.5% in regular trade as the retail sector struggled. The office supply retailer beat same-store sales expectations, while matching on profit and coming up short on revenue. The net loss for the quarter to April 29 was $815 million, or $1.24 a share, after a profit of $41 million, or 6 cents a share, in the same period a year ago.

TJX, the owner of T.J. Maxx and Marshalls stores, posted its slowest comparable-store sales growth in more than 10 quarters and forecast a disappointing current-quarter profit. Shares dropped about 5%.

Urban Outfitters became the latest major retailer to report dismal first-quarter results, with key metrics missing on all fronts. Same store sales fell 3.1%. Revenue decline 0.2%. Gross profit margins fell.

Another one bites the dust… retailer Rue21, owned by Apax Partners, has filed for Chapter 11, as shoppers shift their spending online and away from teen fashion trends. Rue21 entered into a Restructuring Support Agreement with certain stakeholders and expects to continue normal operations throughout the Chapter 11 process.

There’s a blame game brewing over the massive cyberattack that infected hundreds of thousands of computers. Microsoft is pointing a finger at the US government, while some experts say the software giant is accountable, too. The hack used a technique purportedly stolen from the US National Security Agency to target Microsoft’s market-leading Windows operating system.

The attack started Friday and has affected computers in more than 150 countries, including severe disruptions at Britain’s National Health Service. The hack effectively takes the computer hostage and demands a $300 ransom, to be paid in 72 hours with bitcoin. Microsoft blamed the NSA’s practice of developing hacking methods to use against the U.S. government’s own enemies.

The problem is that once those vulnerabilities become public, they can be used by others. In 2014, Microsoft ended support for the highly popular Windows XP, released in 2001 and engineered beginning in the late 1990s, arguing that the software was out of date and wasn’t built with modern security safeguards.  The company had already been supporting it longer than it normally would have because so many customers still used it and the effort was proving costly.

Microsoft released a patch for the flaw in March after hackers stole the exploit from the NSA, but some organizations didn’t apply the updates. Businesses that failed to update Windows-based computer systems that were hit by the WannaCry ransomware attack could be sued over their lax cyber security, but Microsoft likely enjoys protection from such lawsuits.

Hackers claim to have stolen an upcoming Disney movie for a ransom, and will release the film if the company doesn’t transfer the fee via bitcoin. It is believed that the movie is the latest installment in the Pirates of the Caribbean series.  CEO Bob Iger said he’s not paying, but is working with the FBI on the matter.

The issue is reminiscent of Netflix’s recent troubles with Orange is the New Black, which had most of its new season released online by hackers.

Financial Review

Consuming Oxygen

Sinclair Noe — May 10, 2017

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

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DOW – 32 = 20,943
SPX + 2 = 2399
NAS + 8 = 6129
RUT + 7 = 1399
10 Y + .01 = 2.41%
OIL + 1.45 = 47.33
GOLD – 2.30 = 1219.80

President Trump’s stunning firing of the FBI director, James Comey, injected another volatile ingredient into the partisanship already engulfing the capital and threatened to overwhelm Republican efforts to turn their government control into legislative success.

The abrupt decision has investors raising questions about whether the president’s pro-growth, tax-cutting reforms will stall as the focus shifts to why Comey was dismissed while the FBI was investigating possible Russian ties to Trump’s campaign. Every piece of Trump’s agenda just became harder to get through Congress. Wall Street is shallow that way.

Whoever Trump nominates as Comey’s replacement will face a brutal confirmation hearing before the Senate Judiciary Committee. It will get saturation-level media coverage. There are legal implications that will take time to fully unravel. The Comey dismissal is going to consume most of the oxygen in Washington for the foreseeable future.

As US equity markets continue to price to perfection a grab bag of promised corporate giveaways, a group of researchers at the International Monetary Fund (IMF) had the temerity to ask last month – what could possibly go wrong.

In their April 2017 “Global Financial Stability Report,” IMF researchers methodically pare back the rosy lenses of the stock market and focus on the warning signs in the U.S. corporate debt market. Two findings have the power to potentially jolt the equity markets out of their euphoric stupor. The researchers note:

“The [U.S.] corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010…”

“The number of [U.S.] firms with very low interest coverage ratios—a common signal of distress—is already high: currently, firms accounting for 10 percent of corporate assets appear unable to meet interest expenses out of current earnings.

This figure doubles to 20 percent of corporate assets when considering firms that have slightly higher earnings cover for interest payments, and rises to 22 percent under the assumed interest rate rise.

The stark rise in the number of challenged firms has been mostly concentrated in the energy sector, partly as a result of oil price volatility over the past few years. But the proportion of challenged firms has broadened across such other industries as real estate and utilities.

The report acknowledges that equity markets “have taken a relatively benign view” of the downside risks and warns that there could be a “swift repricing of risks in the event of policy disappointment.”

The Senate rejected efforts to roll back an Obama-era rule limiting methane emissions from energy production sites on federal land. The vote over the greenhouse gas was close — 49-51 — with Republican Sens. John McCain, Lindsey Graham and Susan Collins coming down against the resolution.

In a statement, McCain said he voted against the repeal because the effort made use of a legislative tool called the Congressional Review Act, which would have blocked similar regulations in the future. The greenhouse gas rule is intended to curb a practice called flaring, during which energy producers burn off natural gas that they can’t process or sell. That process releases methane into the atmosphere.

Oil prices rose more than 3 percent, as inventories suffered the biggest one-week drop this year. The US Energy Information Administration said crude inventories fell 5.2 million barrels last week. Gasoline and distillate stocks also fell. Production rose, however, and gasoline demand over the last four weeks was 2.5 percent lower than at the same time a year ago.

Prices also found support in comments by Algeria’s energy minister that Algeria and Iraq favor extending global supply cuts when OPEC meets this month. Saudi Arabia’s energy minister went public with his support not only for an extension of the OPEC cuts for another six months, but he also dangled the possibility of an extension into next year.

Per the just released Monthly Treasury Statement, in April the US Treasury collected $456 billion and spent $273 billion, resulting in a budget surplus of $182 billion, higher than the $179 billion expected, and well above last year’s $106.5 billion surplus.

In a surprising jump in government revenues, receipts rose 3.9% y/y in April while outlays plunged a whopping 17.7% y/y. The increase in the surplus is due entirely to calendar quirks and a shift in the timing of some corporate income tax payments.

On Friday, Treasury Secretary, Steven Mnuchin, will be on the world stage for the start of two days of meetings in Italy, with finance ministers from the G7: The United States and six other major economies — Canada, Germany, Japan, Britain, France and Italy. The talks come amid several geopolitical uncertainties.

The issue of trade was at the forefront in March, when Mnuchin and leaders of the world’s 20 largest economies met in Germany. The tough talks ended in the group deciding to drop longstanding pro-trade language from a joint agreement. Hoping to bypass another row this week, Italian officials said they would keep trade off the official agenda. Italy is the current president of the G7 and has the power to set the agenda of the finance ministers’ meetings.

Aetna, one of the major five public health insurers in the US, announced it will remove its products from the Obamacare exchanges in Nebraska and Delaware. The move comes after Aetna announced it was pulling out of Iowa and Virginia over the past few weeks, citing losses sustained in the Affordable Care Act’s individual insurance exchanges.

The moves mean Aetna has completely removed itself from every Obamacare exchange for now.

Tesla opened up orders and announced pricing information for its Solar Roof product. The company also launched a calculator to show people how much it would cost to replace their roof with a Tesla Solar Roof. It uses information like the size of the roof, the average local price of electricity, and how much sunlight a neighborhood receives during a year to calculate the price.

Tesla’s Solar Roof uses both solar and non-solar tiles, which allows consumers to choose how many solar tiles they need based on their home’s electricity consumption. Tesla’s estimate of $21.85 per square foot is based on a roof that’s 35% solar tiles.

To help put the cost into perspective, a Tesla Solar Roof for a home needing 3,000 square feet of roofing would cost more than $65,000 if 35% of the tiles were solar. Per Consumer Reports, a slate-tile roof for a home the same size would cost about $45,000, and an asphalt roof would be about $20,000. Tesla said the cost would be offset by the value of energy the tiles produce.

Sears Holdings Chief Executive Officer Edward Lampert blasted the media for “unfairly singling out” the company over the past decade and blamed “irresponsible” coverage for the retailer’s woes. Sears, once the largest US retailer, warned investors in March there was a chance it may not be able to continue as a going concern after years of losses and declining sales.

But sure, let’s say the reason is the media and not pathetic management that has not been able to capitalize on an iconic brand name, and failed to modernize. Lampert, a hedge fund investor who is rarely seen in public, kicked off his appearance at an annual shareholders’ meeting at Sears’ headquarters in Hoffman Estates with a slideshow of headlines about the company’s financial distress, dating back to 2008.

Sears has not reported a profit for six years, which Lampert compared to Amazon.com’s early unprofitable growth. There is a pretty big difference between Sears and Amazon. Sears has not reported a profit for six years. Sears has been closing stores, selling off assets like its Craftsman brand and borrowing money from Lampert to survive.

Amazon plowed profits back into the company as it created and dominated in e-book readers and voice assisted speakers, and state of the art distribution centers and logistics. Amazon also built a new division that handles cloud computing, one of its fastest growing divisions.

Sears never figured out how to turn its print catalogue into an online catalogue. Sears has almost no online presence. Earlier this year, because of new rules from the Securities and Exchange Commission, Sears was required to disclose that there is “substantial doubt” about the retailer’s “ability to continue as a going concern.”

So today Lampert ranted that the media is to blame for the problems with Sears and he predicted people will look back and wonder how they missed the Sears’ turnaround, which he said would be driven by the Shop Your Way loyalty program. Sure, that’s the ticket Eddie.

Snapchat’s user growth slowed to its lowest pace in years, as parent company Snap Inc. missed Wall Street expectations for its first quarterly earnings as a public company on Wednesday, sending its shares plunging more than 20% in after-hours trading. Snap added 8 million new daily users in the first three months of the year, representing year-on-year growth of 36%. Now last year, Snapchat was growing its DAUs by 52%.

Shares of Whole Foods Market rose by as much as 3.5 percent Wednesday after the company named five new board members and a CFO, and released fiscal second-quarter earnings that met expectations. The grocery store chain posted adjusted earnings of 37 cents per share on $3.74 billion in revenue. Whole Foods had been expected to report earnings of 37 cents per share on $3.73 billion in revenue.

Same-store sales were down 2.8 percent for the quarter — a shallower drop than Wall Street had expected. It was the seventh consecutive quarter of negative comparable store sales.