Financial Review

Getting Warmer

Sinclair Noe — August 8, 2017

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

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DOW – 33 = 22,085
SPX – 5 = 2472
NAS – 13 = 6370
RUT – 4 = 1410
10 Y + .03 = 2.28%
OIL – .23 = 49.16
GOLD + 3.40 = 1261.70
BITCOIN – 1.06% = 3416.49 USD
ETHEREUM + 7.34% = 286.39

President Trump said North Korea will be “met with fire and fury and, frankly, power the likes of which the world has never seen before” if Kim Jong Un’s regime continues to threaten the US. Trump was speaking with reporters in Bedminster, New Jersey.

Trump’s comments followed a report in the Washington Post, citing a Defense Intelligence Agency analysis, that North Korea successfully developed a miniaturized nuclear warhead that could fit onto its missiles. And it comes just days after the United Nations Security Council ratcheted up sanctions on North Korea, targeting about $1 billion of the nation’s approximately $3 billion in exports.

Those restrictions followed two intercontinental ballistic missile tests in July. The S&P 500 Index fell to session lows and the CBOE Volatility Index jumped 11 percent about a half hour before the end of the trading session on Wall Street. The 10-year Treasury yield rose. Crude retreated toward $49 a barrel.

The effects of climate change are already having an impact on the U.S. after average temperatures have risen dramatically over the last four decades. The U.S. Global Change Research Program Climate Science Special Report, compiled by a group of scientists from 13 federal agencies, found with high confidence that it was “extremely likely that more than half of the global mean temperature increase since 1951 was caused by human influence on climate.”

The report states: “Evidence for a changing climate abounds, from the top of the atmosphere to the depths of the oceans. Thousands of studies conducted by tens of thousands of scientists around the world have documented changes in surface, atmospheric, and oceanic temperatures; melting glaciers; disappearing snow cover; shrinking sea ice; rising sea level; and an increase in atmospheric water vapor.

Many lines of evidence demonstrate that human activities, especially emissions of greenhouse gases, are primarily responsible for observed climate changes in the industrial era. There are no alternative explanations, and no natural cycles are found in the observational record that can explain the observed changes in climate.”

The report is part of the National Climate Assessment, which has been congressionally mandated to take place at least every four years since 1990. A National Academies of Science committee reviewed the study and said it was “timely, accurate, and well-written.”

The report’s authors also described a link between climate change and severe weather events, citing: “A change in the frequency, duration, and/or magnitude of extreme weather events is one of the most important consequences of a warming climate,” with an increase in heavy precipitation, extreme heat events and tropical storms as a result.

The report says that the cost of extreme weather has exceeded $1.1 trillion since 1980. The National Academy of Sciences has signed off on the paper, and it is now awaiting approval from the Trump administration.

The New York Times released a draft of the report today. According to the Times, scientists fear that the Trump administration could either alter or suppress the findings, and for good reason. The report directly contradicts claims by Trump and members of his cabinet who say that the human contribution to climate change is uncertain, and that the ability to predict the effects is limited.

This past week, the State Department began the formal process to withdraw from the Paris climate accord, officially notifying the United Nations. Trump has instructed the Environmental Protection Agency to scrap or change regulations aimed at reducing greenhouse gases, and has started to open more public land and waters to fossil fuel activity.

Mentions of the perils of climate change have been removed from the White House’s Web site and the Department of Interior and, in April, the EPA eliminated its online climate-change section pending a review that will be focused on “updating language to reflect the approach of the new leadership.” How the Trump administration decides to handle the report remains to be seen. The EPA and 12 other agencies have until Aug. 18 to approve the report.

Shortly after the Bureau of Labor releases the monthly non-farm payroll report, we get more details in a report called Job Openings and Labor Turnover Survey; the JOLTS report is on a one month lag. The number of advertised job openings rose to a record-high 6.2 million in June.

While the record high in job openings was good news, actual hiring declined in the month, and the number of workers quitting their jobs — a gauge of confidence in the jobs market — wasn’t significantly changed. The report shows that layoffs have become more and more rare in the past year, with about one worker in 100 getting laid off per month. With layoffs so infrequent, it doesn’t take much net job creation to keep the unemployment rate trending down.

Even though the unemployment rate dropped to 4.3%, there is ongoing concern about weakness in wage growth. The Labor Department reports that 7.6 million workers held multiple jobs last month, up 2% from 7.4 million in July 2016. That’s back to highs not seen in 20 years.

And it should not be mistaken as a sign of healthy entrepreneurship. The principal reason workers hold more than one position is that no single job provides a sufficient income. In a strong economic recovery, the number of full-time workers should be rising, and the number of workers employed part-time or holding multiple jobs, should decline.

Sentiment among small-business owners skyrocketed in July as customer demand improved, despite continued gridlock in Washington. The sentiment gauge from the National Federation of Independent Business rose 1.6 points to 105.2. That snapped a five-month streak of readings that either declined or remained the same, and easily beat the consensus forecast for a decline to 103.2.

The jump in the July survey reflected better views of the labor market: owners reported having more open positions now as well as plans to hire more in the future. Survey respondents also have stronger sales expectations, and expect better business conditions, thanks in part to resilient American consumers.

The NFIB said little about Washington in the release, except to note that “stronger consumer demand” came despite dysfunction among lawmakers.

The CoreLogic Home Price Insights report shows home prices nationwide, including distressed sales, increased year over year by 6.7 percent in June 2017 compared with June 2016 and increased month over month by 1.1 percent in June 2017 compared with May 2017.

The CoreLogic HPI Forecast indicates that home prices will increase by 5.2 percent over the next 12 months. The report finds inventories tight, with unsold inventory at 1.9 percent, the lowest second quarter reading in over 30 years.

As a result, prices are marching higher and affordability is deteriorating nationally. In Arizona, home prices climbed 6.1 percent over the past 12 months, and 0.7 percent from May to June.

Disney reported a near 9 percent fall in quarterly profit, pulled down by higher programming costs and declining subscribers at its flagship sports channel ESPN. Disney also announced it will stop providing new movies to Netflix starting in 2019 and launch its own streaming service.

CVS Health forecast current quarter profit below Wall Street estimates and said it has been ordered to cooperate with investigations into possible false claims submitted to a government healthcare program and drug pricing.

The No.2 US drug store chain reported quarterly profit above Wall Street estimates on strength in its pharmacy benefits management business, which helped to more than offset a 2.6 percent drop in same-store sales. The attorney general for the Southern District of New York has sought information on possible false claims submitted regarding reimbursements for Medicare Part D prescription drugs.

Minnesota’s attorney general wants info regarding a probe into pricing of insulin and epinephrine drugs. Sanofi, Eli Lilly and Novo Nordisk were named in a proposed class action lawsuit, which alleged the firms simultaneously hiked insulin prices by over 150 percent in the past five years.Mylan, the maker of emergency epinephrine injectors EpiPen, is facing investigations after it doubled the cost of its syringes used to treat severe allergic reactions.

On Monday, a class-action lawsuit was filed against CVS Health, which alleged the company colluded with third-party PBMs to raise generic drug prices. The suit claims that the pharmacy agrees with pharmacy benefit managers, or PBMs — the middlemen of the industry who manage the list of what drugs an insurer will and will not pay for — to sell certain drugs at a higher price if a customer is paying with insurance.

US News & World Report publishes and annual “Best Hospital Honor Roll”, ranking the 20 hospitals that outperformed all others in its review based on a variety of specialties. Mayo Clinic Hospital in northeast Phoenix ranked No. 20. It was the first time the Phoenix hospital had cracked the honor roll and the first time any Arizona hospital made the top 20.

The hospital also was ranked No. 1 in Arizona and the Phoenix metro area on the publication’s overall review. Mayo Clinic in Rochester, Minnesota, where the health system is headquartered, was ranked No. 1. The Phoenix hospital was cited for excelling in: cancer; cardiology and heart surgery; ear, nose and throat; gastroenterology and gastroenterologic surgery; geriatrics; nephrology; neurology and neurosurgery; orthopedics; pulmonology; and urology.

Right now, Earth is plowing through a cloud of tiny bits of comet dust, turning the rice-grain-size debris into what many call shooting stars.  Known as the Perseid meteor shower, this recurring astronomical event is easily the most watched — and beautiful — shower every year.

The peak viewing time will be this weekend – Friday, Saturday, and Sunday, enjoy.

Financial Review

Welcome Back

Sinclair Noe — July 5, 2017

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

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DOW – 1 = 21,478
SPX + 3 = 2432
NAS + 40 = 6150
RUT – 6 = 1420
10 Y – .01 = 2.33%
OIL – 1.46 = 45.61
GOLD + 3.50 = 1227.70
BITCOIN – 0.36% = 2619.68 USD
ETHEREUM – 2.87% = 266.25

Welcome back. A holiday shortened trading week kicked off today with FOMC minutes and will finish with a G20 meeting and the jobs report on Friday. Today, the Fed released minutes of its Federal Open Market Committee meeting from June 13-14.

We know the Fed raised its fed funds target rate for a second time this year to a range of 1 percent to 1.25 percent, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases. Beyond that, the Fed was divided on the timing of when to begin shrinking its massive balance sheet.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year, maybe within a couple of months – without naming an exact date.

The Fed said in June it would runoff maturing principal payments on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month.

The minutes said, “several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.” Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.”

Financial conditions were also debated at the meeting, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices. A few others expressed concern that “subdued market volatility” could lead to financial stability risks.

The minutes showed Washington political gridlock is also starting to creep into the outlook of the Fed’s business contacts. “Some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies.”

Factory orders sank 0.8% in May following a smaller decline in April. Factory orders were up 4.8 percent from a year ago. Activity is slowing against the backdrop of a moderation in oil prices and declining motor vehicle sales. Motor vehicle manufacturers reported on Monday that auto sales fell in June for a fourth straight month, leading to a further increase in inventories, which could weigh on vehicle production.

Nationally, home prices rose 6.6% compared to a year ago, according to a home price index from data provider CoreLogic. Prices rose 1.2% from April to May. Arizona posted 6.1% price growth over the past year, and 0.8% from April to May. The cost of rent is growing much faster than inflation – and wages.

Overall single-family rents rose 3.1% for the year in May, while rental costs in the affordable single-family rental segment of the market, which includes properties with rents less than 75% of the regional median, grew 4.7%. Wages rose 2.5% in May compared to a year ago.

Two weeks ago, crude oil slipped into a bear market, then it rallied. Today, oil prices fell sharply, ending the longest winning streak this year, as Russia was said to oppose any proposal to deepen OPEC-led production cuts. They will stick with current production limits but they won’t go for additional output cuts.

After the close, the American Petroleum Institute reported Wednesday a much larger-than-expected drop of 5.8 million barrels in U.S. crude supplies for the week ended June 30. Supply data from the Energy Information Administration will be released Thursday morning.

The death of the internal combustion engine might be just down the road. Volvo will become the first major car manufacturer to go all electric, with the Swedish company saying that every new car in its range will have an electric power train available from 2019.

The company said the announcement marks “the historic end” of cars solely powered by petrol or diesel and “places electrification at the core of its future business”. Volvo – which is owned by China’s Geely – will launch five fully electric cars across its range between 2019 and 2021.

Two of these new cars will be in the company’s Polestar high performance sub-brand, which is being revived. The rest of the company’s range will be available with “plug-in hybrid” power trains and 48-volt “mild hybrid” systems, which give an extra “kick” to the acceleration of normally powered cars.

Meanwhile, other countries are pushing forward with legislation to reduce greenhouse gas emissions that will impact car manufacturing: Germany recently mandated that all vehicles sold in the country must have zero emissions by 2030, effectively outlawing sales on solely gas-powered vehicles; Sweden is aiming to have net-zero emissions of greenhouse gases by 2045; and the EU is tightening the restrictions on how much carbon dioxide vehicles can emit by 2021.

By starting the move to a fully electrified catalogue of offerings now, Volvo is ensuring it can continue to sell its vehicles in some of the largest car-buying markets soon.

Volvo’s announcement comes in the same week that Tesla announced its low-cost Model 3 electric car will go sale. The latest Tesla car – priced at around $35,000 – is aimed at bringing electric cars to the mass market, rather than being the preserve of early adopters of technology or those with deep pockets.

Tesla reports deliveries are flat-lining. Tesla reported quarter-by-quarter shipment declines for the second time in the past year. After the market closed on Monday, the company reported more than 22,000 vehicle deliveries in the second quarter. In addition to stoking fear about whether demand has peaked, these figures cast doubt on whether Tesla can pull off a steep production ramp for the cheaper Model 3 sedan.

The Tesla investment thesis hinges on the success of Model 3, and the ability for the company to ramp production, make the car profitably and deliver good initial build quality. Tesla plunged as much as 6.1 percent today to $331, the steepest intraday decline since May 4.

O’Reilly’s stock plunged $41.64, or 18.9%, to suffer the biggest one-day price and percentage decline since it went public in April 1993. Volume ballooned to 12.8 million shares in recent trade, which was nine times the full-day average. The auto parts retailer said second-quarter same-store sales rose 1.7% from a year, well short of its guidance of 3% to 5% growth.

O’Reilly said the disappointing sales results, in the wake of a slowdown during the final two months of the quarter, will have a “consequent impact” on profitability. There seem to be 2 long term trends at play here; first, brick and mortar retailers are struggling almost across the board; second, auto sales have been extremely strong the past 3 years – meaning people have been buying new rather than repairing.

US credit card processor Vantiv agreed to buy Britain’s Worldpay for about $10 billion. Payments companies have become targets for credit card companies and banks seeking to capitalize on a switch from cash transactions to paying by smartphone or other mobile devices.

Tech stocks moved higher today, breaking a 4-day slump. A funny thing happened while we were celebrating the Fourth. A computer glitch sent shares in dozens of US technology companies including Apple, Amazon and Microsoft to the same price, leading some to apparently lose billions in market value.

The bug showed many stocks on the Nasdaq exchange to briefly be reported as $123.47 on Bloomberg, Reuters and Google Finance data. It was triggered after financial information providers wrongly interpreted a Nasdaq data test as live prices, leading to brief pandemonium on trading floors.

Amazon’s shares were shown falling from almost $950, a drop of 87 per cent, Google owner Alphabet’s fell by 86 per cent and Apple fell by 14.3 per cent. Other companies that have share prices well below $123.47 saw them briefly rocket. Microsoft shares jumped almost 80 per cent, giving the company a valuation of more than $1 trillion and gaming company Zynga rose by more than 3,000 per cent.

The glitch occurred in after-hours trading after the Nasdaq had closed early ahead of the July 4 holiday and led several stocks to be halted. The Nasdaq stock exchange says the glitch stemmed from a routine daily data test that was moved up by several hours because trading closed early on July 3.

Erroneous prices apparently based on test data showed up on Bloomberg terminals used by professional traders, as well as on websites like Google used by non-pros. The root of the error can probably be found somewhere along the chain between Nasdaq and a small number of third-party vendors who distribute market data. Perhaps someone failed to heed a notice of the early data test, or didn’t receive it in the first place.

So far, it doesn’t seem like anyone lost much—if any—money, so the main harm is reputational. But it is increasingly a fact of modern life that mundane, simple human errors now have the potential to spiral rapidly and cause problems for people all over the world.

It also reveals the vulnerability of an interconnected world. If someone really wants to do serious harm, a glitch that could not be easily undone might shake financial institutions to their core.

Financial Review

Computer Says

Sinclair Noe — June 13, 2017

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

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DOW + 92 = 21,328 (record)
SPX + 10 = 2440 (record)
NAS + 44 = 6220
RUT + 6 = 1425 (record)
10 Y un = 2.21%
OIL – .13 = 45.95
GOLD + .60 = 1267.10
BITCOIN + 1.48% = 2779.42
ETHEREUM – 1.97% = 387.89

The Dow Jones Industrial Average and the S&P 500 Index ended at all-time highs, while the Nasdaq 100 Index bounced back from its biggest two-day drop since September.

European and emerging-market equities advanced. Sterling rose for the first time since the U.K. election. Ten-year Treasury yields held near 2.21 percent and the dollar slipped versus major peers before the Fed is projected to raise rates Wednesday.

Tech stocks enjoyed a bit of a rebound but there are still concerns about valuations. A Bank of America Merrill Lynch report found a record 44 percent of fund managers polled in a monthly survey see equities as overvalued, up from 37 percent in May.

The technology-heavy Nasdaq Composite Index was named the most crowded trade, with 57 percent of investors saying Internet stocks are expensive and 18 percent calling them “bubble-like.’’ In the ninth year of a bull market, stocks are expensive.

So, what was behind the recent two-day sell-off in tech? Did investors just get nervous? Are tech stocks fundamentally overvalued? Computer says…. No. The quants were just rebalancing.

According to a new report from JPMorgan quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets. The report estimates “fundamental discretionary traders” account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double its share a decade ago.

Figures from market structure research firm TABB Group point to similar gains in machine-driven trade volume, while the overall number of shares traded has declined. A subset of quantitative trading known as high-frequency trading accounted for 52 percent of May’s average daily trading volume.

Crude tumbled in early trading on a report that at the same time as OPEC and its partners agreed last month on prolonging production cuts, the group’s output was climbing the most since November as members exempt from the deal restored lost supply. Oil then reversed and gained amid estimates that U.S. supplies declined.

The producer price index was flat last month following a sharp 0.5% increase in April. Still, inflation is more widespread after being largely invisible in 2016. The 12-month rate of wholesale inflation stood at a 2.4% in May, up from zero a year earlier and just a notch below a five-year high.

The flat reading in wholesale inflation in May, as expected, was tied to falling prices for gas and fuels used to heat and cool homes. The wholesale cost of gasoline sank 11.2%. The wholesale cost of food also fell for the first time in six months. Core wholesale costs slipped 0.1% in May, when stripping out the volatile categories of energy, food and retail trade margins.

The core rate of inflation was up 2.1% over the past 12 months.

The Corelogic Home Price Index shows home prices nationwide, including distressed sales, increased year over year by 6.9 percent in April 2017 compared with April 2016 and increased month over month by 1.6 percent in April 2017 compared with March 2017. Corelogic forecasts that home prices will increase by 5.1 percent on a year-over-year basis from April 2017 to April 2018.

Arizona posted 6% year-over-year growth in home prices, with 0.7% increase March to April. Corelogic forecasts Arizona home prices will increase 6.3% over the next 12 months.

The National Federation of Independent Business said its small-business optimism index held steady at a seasonally adjusted 104.5 in May from the prior month. In May, five of the 10 index components gained, four declined and one remained unchanged. A net 28% of owners reported plans to make capital outlays, well below historic levels.

Duke University/CFO Magazine conducted a survey of US chief financial officers. The share of CFOs who are more optimistic about the economy is the lowest since before the presidential election. A jump in sentiment about near-term fixes to tax and health-care policy has given way to increased doubt as Congress stays fixated on investigating Russia’s role in the U.S. election.

The Federal Reserve’s Federal Open Market Committee met today. Tomorrow they will conclude their meeting and issue a statement – almost certainly announcing a 25-basis point increase in the fed funds target rate. Fed officials have penciled in three rate hikes this year. A rate hike tomorrow would be the second rate hike of the year.

Fed officials have said they are not worried about the strength of the economy. They view weak first quarter growth as transitory and believe inflation will resume rising toward the central bank’s 2% target. The interest-rate decision is straightforward. Monetary policy works with a lag, so the Fed must think ahead.

The big question is whether the central bank will start to shrink its $4.5 trillion balance sheet in September or December, assuming the economy stays on course. The balance-sheet decision is slightly more complicated. It has three parts: The Fed must choose when to start shrinking its holdings, how quickly to shrink them once it has started, and how small the balance sheet should be when the holdings are back to normal.

When to start shrinking the balance sheet is partially dependent on the path of interest rate hikes. Once interest rates are at more normal levels, the Fed will likely begin to let its bond holdings mature and fall off the balance sheet based on a set timetable. This coming policy shift isn’t yet imminent, because interest rates need to rise a bit more first. But it’s fast approaching, and this week isn’t too soon for the Fed to start being clearer about its intentions.

Attorney General Jeff Sessions offered an aggressive defense of his conduct surrounding the Russia investigation, telling an open Senate hearing any allegations he had colluded with Moscow to undermine the election were an “appalling and detestable lie”. Sessions recused himself from the Russia investigation in March, citing his role as a key foreign-policy adviser in the Trump campaign.

His abstention came one day after The Washington Post reported Sessions, during his Senate confirmation process, had failed to disclose two meetings during the presidential campaign with the Russian ambassador to the United States.

Meanwhile Bloomberg is reporting Russia’s cyberattack on the U.S. electoral system before Donald Trump’s election was far more widespread than has been publicly revealed, including incursions into voter databases and software systems in almost twice as many states as previously reported.

In all, the Russian hackers hit systems in a total of 39 states. The new details, seem to confirm a classified National Security Agency document recently disclosed by the Intercept.

In November, Steven Mnuchin pledged the wealthy would not see “an absolute” tax cut under the administration’s developing tax plan. That is, whatever reduction in tax rates would be offset by fewer deductions, so the net result would be the same for the wealthy. During Mnuchin’s confirmation hearing to become Treasury Secretary, Mnuchin repeated his pledge, earning the nickname “The Mnuchin Rule”.

Today, during a Senate Budget Committee hearing Mnuchin walked back the rule, indicating tax reform might result in a windfall for the wealthy.

Verizon has completed its purchase of Yahoo’s internet business for $4.48 billion. The acquisition, which was first announced last July, aims to combine Yahoo’s operating business with AOL, which it purchased in 2015. The merger will form Oath, a division of Verizon that is expected to house more than 50 media and technology brands.

Verizon plans to layoff more than 2,000 people, or the equivalent of 15 percent of Oath’s new workforce. Tim Armstrong, AOL’s former chief executive, will lead Oath as its CEO. Marissa Mayer, Yahoo’s CEO, is out.

Uber CEO, Travis Kalanick, will step away from the company for an unspecified period. But that won’t likely change the day-to-day lives of the more than 5,000 Uber employees as much as the changes the company is committing to make to their recruiting, retention, and workplace-culture policies, detailed in a report known as the Holder Report.

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

Split

Sinclair Noe — February 7, 2017

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

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DOW + 37 = 20,090
SPX + 0.52 = 2293
NAS + 10 = 5674 (record high close)
RUT – 5 = 1361
10 Y – .02 = 2.39%
OIL – .75 = 52.88
GOLD – 1.80 = 1234.40

The dollar, recovering from its worst start to a year in three decades, gained against a basket of other currencies. The euro is on the defensive, with markets nervous about elections in the Netherlands, Germany and possibly Italy, plus more wrangling over Greece’s bailout and an upcoming reduction in the European Central Bank’s monthly bond-buying.

The head of the German Bundesbank responded to accusations from the Trump administration that Germany was manipulating the euro lower. Jens Wiedmann said the dollar strength was “triggered by the political announcement s of the new government.” The pound was among the biggest losers today, falling to a two-week low as Brexit and economic growth concerns return to put pressure on sterling.

Yields on two-year Greek bonds are up 9 basis points and are at their highest level since the middle of last year, as a rare split at the International Monetary Fund puts the country’s bailout at risk. The IMF says that Greece won’t meet targets set by Europe for the country to run a budget surplus. The fund also reiterated its view that Greece’s debt levels are unsustainable.

The fund’s annual review of the Greek economy showed they disagree over the austerity measures imposed on Athens and the need for further economic reforms. The split decision fueled fears the fund might pull out of the rescue plan for the country.

China’s foreign exchange reserves have dropped below the $3-trillion level for the first time since 2011, marking the seventh straight monthly decline as capital continues to flow out of the world’s second-largest economy. Data from the People’s Bank of China showed reserves falling by over $12 billion in January, despite government efforts to tighten capital movement controls and stabilize the yuan’s exchange rate.

The US trade deficit rose slightly in 2016 to $502.3 billion, marking the highest level in four years. The trade gap widened last year because exports fell faster than imports, the result of a weak global economy and a stronger dollar that made American products more expensive to foreign buyers. The gap with China is by far the largest among the major U.S. trading partners.

Although the deficit dropped 5.5% in 2016, it still totaled $347 billion. That’s more than three-fifths of the overall U.S. trade deficit. The deficit with Mexico rose 4.2% to $63.2 billion in 2016 to mark a five-year high. Exports rose 2.7% $190.7 billion, led by higher shipments of passenger planes and parts.

Imports increased a smaller 1.5% to $235 billion as demand for pharmaceutical drugs, cell phones and televisions declined.

The Federal Reserve reports total consumer credit increased $14.2 billion in December to a seasonally adjusted $3.76 trillion, posting an annual growth rate of 4.5%, The increase was below estimates for a $20 billion gain. Revolving credit, which is mostly made up of credit card loans, slowed to a gain of $2.3 billion or an annual rate of 2.9%.

Non-revolving credit, which covers loans for education and cars, increased $11.8 billion in December, or at a 5.1% annual rate. For all of 2016, total consumer credit rose at a 6.4% rate, down from a 7% rate in the prior year.

Data provider CoreLogic said its home price index was up 0.8% during December, and 7.2% compared to a year ago. That’s the fifth straight month in which the yearly price increase was higher, including during months that saw mortgage rates jump nearly a full percentage point.

Low supply is boosting home prices higher and higher, and CoreLogic expects that prices will rise 4.7% during 2017. That would take its national index – now 3.9% below the high last set in 2006 – to a fresh high sometime this year. Arizona prices were up 0.6% for the month and 6.8% for the past year. Home prices in Arizona are still 21.4% below the peak.

The Labor Department’s JOLT survey, or Job Openings and Labor Turnover, shows there were 5.5 million job openings on the last day of December. That was essentially flat compared to November. But 5.3 million people were hired during the month, up from 5.2 million in November. Fewer people quit jobs voluntarily in December: 3 million compared to 3.1 million in November. “Quits” are tracked as a signal of how confident workers are in their ability to secure another job elsewhere.

Philadelphia Fed President Patrick Harker said he could support raising interest rates at the central bank’s March meeting if job market momentum holds up, growth continues and wages rise. John Williams, President of the San Francisco Fed, said last week that he sees the March policy meeting as a possible rate-hike candidate.

And on the flip side, Minneapolis Fed President Neel Kashkari published a blog post today stating the economy has not reached the point in terms of inflation and employment that would necessitate aggressive monetary policy. Kashkari wrote: “From a risk management perspective, we have stronger tools to deal with high inflation than low inflation.” Investors give roughly a one in four chance of a quarter-point increase in March, per federal fund futures.

Betsy DeVos was confirmed by the U.S. Senate to be education secretary, but only after Vice President Mike Pence was called in to break a tie that threatened to defeat her. It’s the first time in US history that a vice president has needed to intervene in a cabinet nominee’s confirmation.

The Department of the Army announced today that it has completed a presidential-directed review of the remaining easement request for the Dakota Access pipeline, and has notified Congress that it intends to grant an easement. Thousands of predominately Native Americans protesters boycotted the $3.8 billion pipeline’s construction in the state of North Dakota last year. The Standing Rock Tribe have said that they will fight the decision in court.

Last week President Trump signed an executive order to roll back the Dodd-Frank Act – the 2010 legislation meant to help protect taxpayers from another financial crisis. And Congress has acted, by getting rid of the Dodd-Frank rule that forces huge oil and gas companies to disclose how much they pay foreign governments while they’re doing business abroad.

Three federal judges on the Ninth Circuit Court of Appeals are set to hear oral arguments this evening on whether Trump’s travel ban will remain suspended for now; the court is not expected to decide on the constitutionality of the ban. The central question for the appellate court is whether US District Judge Robart abused his discretion by putting a temporary hold on the travel ban.

Oil prices slipped as lower production by OPEC and other exporters was undermined by growing evidence of a revival in U.S. shale production and sluggish demand. Prices have been supported over the last two months by efforts by the Organization of the Petroleum Exporting Countries and other exporters to cut output by almost 1.8 million barrels per day in the first half of 2017.

But while OPEC and Russia have together cut at least 1.1 million barrels per day so far, rising U.S. production is compensating for the shortfall. After the close, the American Petroleum Institute estimated that U.S. crude stockpiles had surged 14.2 million barrels last week.

BP’s fourth quarter earnings came in below analyst expectations, with the company saying that its cash flow won’t cover spending and dividends until Brent crude rises above $60 a barrel.

Statoil, Norway’s biggest oil company, said that it is targeting another $1 billion in cost savings after reporting an unexpected loss in the fourth quarter.

General Motors said fourth-quarter net income fell partly because of $500 million in foreign exchange losses, while the automaker forecast 2017 profit per share would be flat to slightly up from 2016. Excluding one-time items, GM earned $2.4 billion, or $1.28 a share, in the latest quarter, down 14 percent from a year earlier. The adjusted result beat analysts’ expectations of $1.17 per share.

Hourly workers for General Motors will get record bonus checks of up to $12,000 after the company reported booming sales in North America. The profit-sharing checks owed to GM’s 52,000 United Auto Workers-represented workers are based on a simple formula. They get about $1,000 for every $1 billion in annual pre-tax North American profit, according to a formula adopted as part of contract negotiations in 2011. Record U.S. industry vehicle sales powered GM to a $12 billion North American profit in 2016, up from $11 billion a year earlier.

After the closing bell, Disney reported quarterly earnings that beat expectations, but revenue fell short of estimates. The company posted first-quarter earnings per share of $1.55 on $14.78 billion in revenue.

Michael Kors Holdings reported a bigger-than-expected drop in comparable sales for the holiday quarter and forecast current-quarter profit well below estimates. Sales at stores open for more than a year fell 6.9 percent in the quarter ended Dec. 31, falling for the seventh time in eight quarters. Kors is trying to regain its brand value by reducing supplies to department stores, which have been heavily discounting its products to drive traffic.

Gap raised its profit outlook for the fourth quarter after reporting better-than-expected sales for the holiday shopping period; sales improved at its Gap and Old Navy stores.

21st Century Fox reported adjusted quarterly profit of 53 cents per share, 4 cents a share above estimates. Revenue was just slightly below estimates. Profit was up 27 percent over a year earlier, as ad sales and affiliate fees increased.

Apple pulled ahead of Samsung in smartphone shipments. Apple shipped 78.3 million units in the fourth quarter, surpassing Samsung for the first time in five years. Samsung shipped 77.5 million units, a number that was affected by its exploding-battery problem, which cost it $3 billion in lost sales.

Financial Review

Batten Down the Bonds

Sinclair Noe — November 14, 2016

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

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DOW + 21 = 18,868
SPX – 0.25 = 2164
NAS – 18 = 5218
10 Y + .10 = 2.22%
OIL + .26 = 43.67
GOLD – 7.60 = 1221.00

Another record high close for the Dow.

U.S. bond yields are sharply higher across the board following a public market holiday on Friday. The yield on the benchmark 10-year Treasury note topped 2.25%; they surged 37 basis points last week, the most in three years, amid speculation Trump’s plans to boost spending and cut taxes will widen the budget deficit and stoke inflation.

The 30-year Treasury bond yield is over 3% for the first time since January. The two-year yield crossed the 1.00% threshold for the first time since January.

The movement has also lit a fire under the greenback, with the U.S. dollar index up more than 1%, hitting 100 for the first time in almost a year.

The global bond rout is intensifying. Long-dated bonds are getting hit hardest in Europe. The selloff wiped a record $1.2 trillion off the value of bonds around the world last week. Investors rotated into stocks, as global developed-market shares beat investment-grade debt by the most since 2011 amid concern the stimulus will stoke inflation and lead the Fed to increase rates.

President-elect Donald Trump has made the first official appointments to his White House administration after a shake-up on Friday that saw VP-elect Mike Pence replace Chris Christie as the head of his transition team. RNC Chairman Reince Priebus has been selected as Chief of Staff, while Trump’s campaign Chairman and former head of news outlet Breitbart, Steve Bannon, will lead as Chief Strategist and Senior Counsel.

The common view is that the inflation trade has been reignited by the election results. If this were so, the two major inflation markers in the commodity market, gold and oil, would have rallied strongly. Instead, gold sold off approximately $70 or over 3% from its level a week before the election, while the price of oil has been slightly weaker. Industrial metals, especially copper, did see major rallies.

This was not across the board, however. Aluminum, which has almost as widespread commercial use as copper, fell about 3%, while copper was up 17% in the days immediately following the election. Tin was up around 6% and nickel 9% from a week earlier. The inflation argument came mostly from action in the global bond markets.

While it is true yields soared, they have been at unsustainably low rates for years now. Still, it looks like the bond market is sending a message about a fiscally expansive, deficit spending growth agenda – there will be price to pay.

And while the Dow and the S&P rallied following the election, the big winner was the Russell 2000 index of smaller stocks. And while small-cap stocks can outperform in inflationary environments, this rally is probably provoked by the idea that small-cap companies are less likely to do business internationally and more likely to get most of their sales domestically. The companies that tend to have most of their sales overseas are tech companies, and the tech-heavy Nasdaq hasn’t rallied at all. So, the stock rally has been selective and not broad-based.

Next, consider that the Federal Reserve will probably raise rates sooner and later. Fed funds futures rates are pricing in an 84% probability of an interest rate increase at the Fed’s meeting in December. PIMCO said the central bank may move three times by the end of 2017. Those rate hikes will hit the markets much sooner than any legislative action, which tends to move very slowly.

Japan’s economic growth handily beat expectations in the July-September period, expanding for a third straight quarter as exports recovered, but weak domestic activity cast doubt on hopes for a sustainable recovery. While GDP grew at an annualized 2.2% pace, household spending and capital investment were flat on quarter.

Mixed Chinese economic data for October came out overnight, released by the National Bureau of Statistics. Retail sales rose a weaker-than-expected 10%, slowing from the previous month’s 10.7% growth, while industrial output expanded 6.1%, matching September’s pace but remaining a hair below expectations.

After gathering in Brussels to discuss the future of Europe-U.S. relations, EU foreign ministers said the bloc would stand by its key foreign-policy positions on issues including the Iran deal, Russia’s annexation of Crimea and climate change, but vowed to work with the Trump administration. Not everyone attended the emergency meeting. Britain’s Boris Johnson called it “unnecessary.”

Colombia’s government and Marxist FARC rebels have agreed on a new peace pact to end a 52-year war, six weeks after the original was narrowly rejected in a referendum amid objections it was too favorable to the rebels. The new accord, which will be presented to Congress for a vote, includes several new provisions – from requiring FARC to surrender money and holdings to infrastructure development for the countryside.

Just one day after the IEA warned the world could drown in oil if production does not fall beneath demand sometime soon, OPEC released a new market whammy, offering up the cartel’s production figures, which largely jive with figures reported by the IEA yesterday: OPEC has increased its oil production. OPEC’s Monthly Oil Market Report revealed daily oil production for the cartel of 33.64 million barrels for October—up by 240,000 barrels per day in September—largely confirming the IEA’s report.

A little over 90% of S&P 500 companies have reported their quarterly results, and it’s become clear that the recession in corporate profits has come to an end. Since the second quarter of 2015, S&P 500 earnings reports have shown a decline in profits – year-over-year. A decline for two consecutive quarters indicates an earnings recession.

Based on the companies that have reported so far this quarter, S&P earnings will be up 2.75% from the prior year’s third quarter. Leading the comeback is the financial sector, which posted growth of 13.1% in profits from the third quarter of last year. According to FactSet, 71% of companies that have reported beat their estimates, higher than the five-year trailing average of 67%.

Samsung Electronics is buying Harman Industries for $112 a share in cash, or a total equity value of about $8 billion, placing the company in the vanguard of the auto industry. The deal – Samsung’s largest acquisition in its history – will reshape the pecking order in the global automotive supply chain.  Samsung could combine its display and semiconductor operations with a business that already provides sound, electronics, and other smart components for a new generation of digitally connected cars.

In Europe, Novartis AG is said to be in talks to acquire U.S. generic-drugs maker Amneal Pharmaceuticals in a deal which could value the closely-held company at as much as $8 billion. Siemens, meanwhile, agreed to buy software company Mentor Graphics for $4.5 billion, a premium of 21 percent on Friday’s closing price.

American Apparel files for bankruptcy. The retailer filed for Chapter 11 bankruptcy protection for the second time in just over a year, (so maybe we should call it Chapter 22) listing assets and liabilities in the range of $100 million to $500 million. The company exited court protection in early 2016 but quickly encountered trouble again.

Toyota will pay up to $3.4 billion to settle claims that some of its trucks and SUVs lacked proper rust protection, leading to premature corrosion of vehicle frames. The proposed settlement covers about 1.5 million Tacoma compact pickups, Tundra full-size pickups and Sequoia SUVs and estimates the value of frame replacements at around $15,000 per vehicle. However, Toyota admitted no liability or wrongdoing in the proposed settlement.

Hedge fund filings will give investors a chance to see what they were betting on when the third quarter ended. Hedge funds have had a tough time of it recently with some $50 billion flowing out of the industry this year. Hedge fund managers are required to disclose their holdings to the SEC in a Form 13F. Filed four times a year, the reports show which sectors these traders were betting on when the quarter ended, roughly 45 days ago.

Out of 13 western states, California and Texas have the highest number of single-family residential homes in extreme risk wildfire areas, per a new report from CoreLogic. CoreLogic’s scale has four categories: low, moderate, high and extreme risk, and 1.8 million homes across 13 western states fall into the high and extreme risk category.

While only a small percentage of the millions of homes that fall somewhere on the scale, these 1.8 million homes represent a combined total reconstruction value of nearly $500 billion. The other 27 million homes on the scale — those at low and moderate risk — have an estimated reconstruction cost value of $6.7 trillion.

Financial Review

Break Down

Sinclair Noe — November 1, 2016

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

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DOW – 105 = 18,037
SPX – 14 = 2111
NAS – 35 = 5153
10 Y – .02 = 1.84%
OIL – .53 = 46.33
GOLD + 10.80 = 1288.80

Stocks started the session in positive territory but slippage was immediate; slow at first then picking up momentum. The Dow Industrial Average dropped below 18,000 for the fourth time since September 12, at one point posting a 200-point loss.

The S&P 500 took out the lows of September at the 2120 level. We had talked about 2020 being a level of support, which has now been broken. The next levels of support are 2080 (representing the 200-day moving average) and 2040 (representing lows from April and May). The point here is that today’s trading did some serious technical damage; the other point is to remind you to keep an eye on the charts; they are very effective at cutting through the chatter and the clutter.

The Fed began its 2-day FOMC meeting.  Treasury yields climbed early toward the highest since May on speculation the Federal Reserve will raise interest rates this year as the global economy improves. The Atlanta Federal Reserve’s GDP Now forecast model shows the economy is on track to grow at a 2.3 percent annualized pace in the fourth quarter; that is a downward revision from just yesterday, when the GDP Now forecast was for 2.7 percent fourth quarter growth.

Investors will be scouring the accompanying statement for clues on how determined the Fed is to raise rates in December. As things stand, the markets are taking policymakers such as Bill Dudley of the New York Fed at their word when they say a move is likely before the year is out if growth stays on track. Fed funds futures data compiled by Bloomberg shows the market is pricing in a 16% chance of a November interest-rate hike and a 71% chance of a rate hike before the end of the year.

The Bank of Japan kept policy on hold. Japan’s central bank voted 7-2 to keep its key interest rate at negative -0.1%, and target for the 10-year Japanese bond yield at 0%, warning that risks to growth and inflation were “skewed to the downside.”

Australia’s central bank held rates steady at 1.50%, as expected, and said “the Bank’s forecasts for output growth and inflation are little changed from those of three months ago.”

American manufacturers grew slightly faster in October and even put more people to work for the first in four months. The Institute for Supply Management said its manufacturing index rose to 51.9%, the highest in three months, from 51.5% in September. Readings over 50% indicate more companies are expanding instead of shrinking.

A measure of factory employment jumped 3.2 percentage points to a reading of 52.9. But a gauge of new orders slipped to a reading of 52.1 from 55.1 in September, suggesting any future gains in manufacturing activity would be modest.

The Affordable Care Act Open Enrollment starts today. Arizonans will find in most counties only one insurer selling exchange plans for 2017. Premiums for some plans will be more than double this year, some of the biggest increases in the nation. Only last-minute maneuvering prevented one Arizona county from becoming the first in the nation to have no exchange insurers at all.

Outlays for U.S. construction projects fell 0.4% in September. Spending on private outlays fell 0.2%. Residential spending rose 0.5% but spending on nonresidential projects sank 1%. For overall public construction projects, spending fell 0.9%. Outlays for the first nine months of the year are 4.4% higher compared with the same period in 2015.

CoreLogic reports home prices nationwide, including distressed sales, increased year over year by 6.3 percent in September 2016 compared with September 2015 and increased month over month by 1.1 percent in September 2016 compared with August 2016. Arizona is still 22% below peak prices. Arizona home prices were up 0.6% for the month and 5.6% year-over-year.

Sales of new cars and trucks were expected to fall in October. Auto sales have been strong but there are limits and it looks like car makers hit those limits last month. General Motors’ sales fell 2 percent from last October, while Toyota’s sales fell 9 percent. Honda’s sales were down 4 percent and Nissan’s fell 2 percent. Fiat Chrysler’s sales were down 10 percent. Volkswagen’s sales fell 18 percent. Ford will report later in the week due to a fire at their headquarters.

Sales fell even though automakers increased average discounts per vehicle by 12 percent from last October to $3,726 per vehicle. But the average sales price still was expected to set an October record at $31,383. Prices are rising because more high-priced trucks and SUVs are being sold.

Gasoline is surging, despite a recent drop in crude oil prices. An explosion of a Colonial pipeline in Alabama killed one person and injured 5 other; it is also causing gasoline futures to skyrocket higher. Futures for December delivery jumped 10.8% to $1.57 a gallon. Colonial Pipeline said it hopes to restart its major gasoline pipeline between Gulf Coast refiners and customers in the East and Southeast by noon Saturday; that news pushed prices down, but futures are still up about 4% at $1.48.

Meanwhile, crude oil has not been able to mount any kind of rally despite a weaker dollar. Following last week’s inventory draws across the entire energy complex, API was expected to report a seasonally normal 1.5 million barrel build but instead printed a massive 9.3 million build.

Royal Dutch Shell and BP both reporting higher than expected earnings by making further deep cuts in spending. Shell announced higher quarterly earnings than Exxon Mobil, the world’s largest listed oil company by output and market capitalization. At $2.8 billion in the third quarter, Shell’s net income was above Exxon’s third quarter net income of $2.65 billion. Both Shell and BP maintained their dividends unchanged as expected.

Mortgage provider Freddie Mac reported a profit of $2.3 billion in the third quarter, as interest rates turned in its favor, credit quality improved, and mortgage volumes surged. Freddie has operated under federal conservatorship since the 2008 financial crisis, when it received $71 billion in bailout funds. In December, the enterprise will remit $2.3 billion to the U.S. Treasury, bringing its total paid post-crisis to $101 billion.

Pfizer lowered its earnings outlook for the year and said it was ending the development of a drug in the cholesterol-treatment sector. Pfizer reported a profit of $1.3 billion, or 21 cents a share, down from $2.1 billion, or 34 cents a share a year prior; bottom line missed estimates – revenue matched estimates.

Prosecutors are focusing on Valeant Pharmaceuticals’ former CEO and CFO as they build a fraud case against the company that could yield charges within weeks. Authorities are considering potential accounting fraud charges related to the company’s hidden ties to Philidor Rx Services LLC, a specialty pharmacy company that Valeant secretly controlled.

Federal prosecutors in Manhattan and agents at the Federal Bureau of Investigation in New York have been investigating the company for at least a year. Last October, accusations of accounting malfeasance combined with government scrutiny over the company’s drug price hikes brought the company to its knees. Valeant’s stock price is down around 90% since last year’s peak.

One of the most difficult things Valeant has had to deal with through this entire mess is its over $30 billion debt load, which could be an even bigger problem with a criminal charge. Prosecutors in Boston and Philadelphia are also said to be conducting separate inquiries of Valeant.

Boston’s investigation focuses on Valeant’s payments to charities that then helped patients make co-payments for the soaring cost of Valeant drugs, some of the most expensive on the market. The Philadelphia case is examining Valeant’s billing of government health care programs for the company’s drugs.

And while that all sounds very bad for Valeant, if you pull up a quote today, you will see the stock is up 33%. The reason – Valeant is in talks to sell its Salix unit to Japan’s Takeda for $10 billion, per the Wall Street Journal. The crown jewel of Salix’s product line is Xifaxan, a drug that cures irritable bowel system.

When the company bought Salix, it told investors that Xifaxan would be a $1 billion drug in 2016. So far though, that hasn’t been in case. Valeant acquired Salix for $11 billion in 2015 and took on around $4 billion of its debt, so the company would be taking a loss, but it would show Valeant still has some valuable assets, even in a fire sale.

Sony’s second-quarter profit missed estimates, as a one-time charge and stronger yen weighed on profit from financial services and PlayStation games.

Angie’s List said it has hired financial advisers to review its strategic options as it continues to work on a turnaround and seek new opportunities. The company said it had a net loss of $16.8 million, or 28 cents a share, in the quarter, after breaking even in the year-earlier period – a big miss on top and bottom line estimates.

Gannett (the publisher of USA Today) has dropped its bid to buy Chicago Tribune and Los Angeles Times publisher Tronc. Gannett first made a bid for Tronc in April, then Tronc rejected a sweetened offer in May.

ChemChina has extended its $43 billion cash offer for Syngenta to Jan. 5 while it works to gain regulatory approval for the transaction. On Friday, EU anti-trust regulators opened an in-depth investigation into China’s biggest-ever foreign acquisition, setting a March 15 deadline to complete its review.

In one week and a few hours, the results will pour in. Hang in there.

Financial Review

7 Straight

Sinclair Noe — August 2, 2016

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

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DOW – 90 = 18,313
SPX – 13 = 2157
NAS – 46 = 5137
10 Y + .03 = 1.53%
OIL – .43 = 39.67
GOLD + 10.40 = 1363.80

The Dow logged its seventh straight drop, while the Nasdaq snapped its five sessions winning streak. The S&P 500 broke out of a very tight consolidation pattern, but still managed to close with a loss of less than 1%.  WTI crude oil erased an early gain and closed down 1.1% at a four-month low.

Consumers boosted spending by 0.4% in June — the third straight strong increase — but they’ve also been saving less to fund their purchases.  Income growth has not been keeping pace with spending. Incomes rose 0.2% in June for the second straight month.

As a result, the personal-savings rate dropped to 5.3% and matched a 15-month low. Savings had hit a four-year high earlier in the year. Inflation as measured by the PCE index edged up 0.1% in June. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 0.9% in the 12 months ended in June. That’s unchanged from in the prior month.

The annual rate of core inflation was also flat at 1.6%.  Although inflation has been creeping higher lately, there still are no signs of widespread price pressures in the U.S. economy.

CoreLogic reports home prices were 5.7% higher in June compared to a year ago, and prices were up 1.1% from May to June. They forecast a 5.3% increase in home prices over the next year. Including distressed sales, national single family home prices remain 6.7% below peak values recorded in April 2006. Mortgage rates dipped in June to their lowest level in more than 3 years. Among major metro areas, Denver had the lowest unemployment rate and the strongest home price appreciation. Arizona saw a 5.5% increase in home prices over the past 12 months.

Japanese Prime Minister Shinzo Abe’s cabinet approved a $274 billion stimulus package. The Bank of Japan last week only tweaked its monetary stimulus. By total size, the stimulus package ranks among Japan’s biggest since the global financial crisis, but three quarters of the stated value comprises targeted low-interest loans from the government and state-owned companies. The program will include money for infrastructure projects, including a magnetic-levitation train line connecting Tokyo and Osaka, as well as reconstruction projects in the southern region hit by earthquakes in April.  It also will pay for cash handouts to 22 million low-income people.

The Federal Reserve reports loan standards to commercial and industrial firms and commercial real estate tightened for the fourth straight quarter in the three months ended in June. The survey also found standards on all categories of residential real estate mortgage loans were little changed, except some easing for loans that can be bought or guaranteed by Fannie Mae and Freddie Mac. The report also showed that demand for most types of residential real estate loans strengthened over the second quarter.

Major automakers in the U.S. market reported July vehicle sales slightly below expectations as the pent-up demand that has helped drive sales since 2009 plays itself out. In a continuing trend, consumers shunned passenger cars in favor of SUVs and pickup trucks. GM sales dropped 2%. Ford sales slipped 3%. Fiat Chrysler sales rose 0.3%. Nissan reported a 1.2% increase. Honda surprised with a 4.4% increase. Ford shares dropped 4.3% today and are down 14% in the last 4 sessions.

Shares in Biogen jumped almost 10% today, after the Wall Street Journal reported that Merck and Allergan have each informally expressed interest in a possible acquisition. A takeover of Biogen would be the biggest of a biotech company since 2008, and one of the largest takeovers by a drug company on record. Biogen makes drugs that treat multiple sclerosis and hemophilia, and its main focus overall is on neurological and autoimmune diseases, as well as rare diseases.

Pfizer said it has reached a $486 million settlement of shareholder litigation accusing it of causing big losses for shareholders by concealing safety risks associated with its Celebrex and Bextra pain-relieving drugs. Pfizer pulled Bextra from the U.S. market in April 2005, and agreed in September 2009 to pay $2.3 billion to settle a U.S. government probe into the marketing of Bextra and other drugs. The accord is subject to negotiation of a final settlement agreement and court approval, and would end more than 11 years of litigation against the drug maker.

Also, Pfizer reported better-than-expected quarterly results, driven by lower taxes and sales of generic medicines, but revenue from its array of branded patent-protected medicines brought disappointment. Pfizer did not offer any hints on whether it plans to split into two separate companies, a long-mulled potential decision that has kept investors in suspense.

Of the 353 companies in the S&P 500 that have reported earnings through Tuesday morning, 71 percent have topped analyst expectations, according to Thomson Reuters data. Earnings for the second quarter are expected to show a decline of 2.6 percent, an improvement from the expected 4.5 percent decline on July 1.

Emerson Electric, which makes factory automation equipment, said it would sell two units for a total of $5.2 billion as the company focuses on its high-growth businesses. Emerson will sell its network power unit to investment firm Platinum Equity in a deal worth $4 billion, while Japan’s Nidec Corp will buy its motors and electric power division for $1.2 billion.

Australia cut rates to a record low. The Reserve Bank of Australia lowered its benchmark interest rate to a record-low 1.50%, as expected. The central bank’s board noted “that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

European bank stocks were crushed again today. The sector remains under pressure after the results of the European Banking Association stress tests were released after markets closed on Friday. Europe’s STOXX Banking Index traded lower by 2.8%, taking this year’s total losses to more than 30%; with Germany’s Commerzbank pacing today’s decline among individual names, down 8.2% after reporting a 32% drop in quarterly profits.

Credit Suisse and Deutsche Bank – will be dropped from the STOXX 50, an index of Europe’s top 50 blue-chip companies next week. Credit Suisse and Deutsche Bank shares have lost half their value this year. Exclusion from a benchmark generally means that exchange-traded funds and other passive investors that track the index will be forced to sell the shares.

Deutsche’s plight should be of particular concern. Its shares are now worth barely a quarter of its book value. That is a twofold bind: proof that investors distrust the bank; and a practical block on being able to raise the equity needed to boost regulatory capital and absorb the cost of fines; and Deutsche faces considerable fines.  Investors are again pricing in a risk that the bank’s coco (or contingent convertible) bonds will be bailed in. Last month, the International Monetary Fund issued a report that concluded Deutsche is probably “the most important net contributor to systemic risks in the global banking system”.

And as bad as that is, the worst of the lot, is Italy’s Banca Monte dei Paschi, which utterly failed the stress test last week and now requires recapitalization. The Financial Times reports: “The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalization with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalization fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.”

The only good news is that Monte dei Paschi is nowhere near as big as Deutsche Bank. Italy is turning into the next Greece. Non-performing bank loans have risen to 18% in Italy. Monte dei Pachi has non-performing loans around one-third of its assets. I’m not sure how this plays out but it will probably be messy.

The Centers for Disease Control and Prevention advised pregnant women not to go to a Miami neighborhood where new, confirmed cases of Zika virus that appeared to be locally transmitted were reported. It was the first time the government health agency tasked with preventing the spread of disease has issued such an advisory for the Zika virus within the 48 contiguous US states, and it appeared to be the first time the CDC has warned against visiting any part of the continental United States for health reasons.

The warning applied to a one-square-mile area north of downtown Miami. Despite the narrowness of the warning, it may be problematic for Florida’s important tourism industry. The state drew in more than 100 million visitors and generated more than $89 billion of economic activity last year

At the end of last year, the FAA mandated—arguably as a stopgap against potentially stricter regulations from Congress about how citizens can use drones—that anyone wishing to fly a consumer drone weighing more than a half pound needed to get a registration number from the FAA for $5.

At a conference at the White House today on the future uses of drones in US airspace, Federal Aviation Administration director Michael Huerta told the gathered crowd that more than consumer 500,000 drones had been registered with the agency since December. According to the FAA, it took 100 years for about 320,000 regular aircraft to be registered with US officials—a feat that drones have surpassed in a matter of months.