Financial Review

Turkey

Sinclair Noe — February 13, 2017

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DOW + 142 = 20412
SPX + 12 = 2328
NAS + 29 = 5763
RUT + 3 = 1392
10Y + .02 = 2.43%
OIL – .98 = 52.88
GOLD + 8.20 = 1225.70

Wall Street hit record highs again. Stock markets around the world were higher this morning. The S&P 500’s market value topped $20 trillion. The markets appear to be pricing in a best-case scenario for Trump tax cuts, deregulation, plus infrastructure spending. The problem is that Washington is unlikely to deliver best-case.

There are differing opinions on where to cut taxes, by how much, and when. Some of the proponents of tax cuts are also strong deficit hawks who will need to reconcile the books with more than blind faith and dynamic scoring. Even if you think you have the right economic theory, there are always unintended consequences.

Don’t hold your breath waiting for tax action this year. The budget is not agile, and even if unanimity is possible (highly doubtful), it will take time. Assuming of course that there are no distractions. Good luck. Infrastructure spending is not exactly shovel ready and there will be sharp disagreements. So far, Trump’s plan largely means privatizing infrastructure development with tax credits.

Federal Reserve board governor Daniel Tarullo said he would resign from the Fed, leaving the central bank on or around April 5. This now creates three openings at the Fed for the Trump administration to fill. Tarullo was the Fed governor in charge of overseeing financial regulation.

A major part of the post-election rally in stocks was centered on deregulation of the financial sector. Today, the Financial Select Sector SPDR fund (XLF) was up 1.2 percent. Investors may be betting Tarullo will be replaced by a regulator who is friendlier to the banking industry.

Federal Reserve Chair Janet Yellen is not expected to give any clear hints as to the timing of the next rate hike in her semi-annual testimony to lawmakers in Washington this week, but we will get a better idea about inflation trends with release of the CPI report on Wednesday. The first point of interest will be whether Yellen provides any more guidance on the possibility of a March rate hike.

Markets have so far written off the chance, pricing in just an 18 percent probability of a quarter-point move. But that may be too low, given that Yellen is likely to signal that the Fed is close to meeting its inflation and employment goals set by Congress.

A Federal Reserve Bank of New York survey showed inflation expectations are running hot. Consumers expect inflation in the year-ahead to increase to 3.0 percent, from 2.8 percent in December and 2.5 percent in November.

Canadian Prime Minister Justin Trudeau met with President Trump to discuss a variety of topics including jobs, trade, and immigration. Trump said the United States will be “tweaking” its trade relationship with Canada, stopping short of calling for a major realignment. It was a polite meeting – of course.

Japan, the largest holder of Treasuries, cut back on the debt by the most in almost four years in December, according to data from the Ministry of Finance. This appears to be part of a global trend in Treasury ownership, as investors seem increasingly wary of stepping into the nearly $14 trillion market, with uncertainty over the new administration’s policies and the prospect of higher US interest rates. Foreigners still hold almost $6 trillion in US government debt, or about 43%; that’s down from 56% in 2008.

On the surface, this is an alarming development, considering that these investors own almost half of the Treasuries outstanding. Their flight could signal a drastic rise in borrowing costs. China is the biggest seller of US Treasury debt. China has been funneling billions of dollars into its economy to keep it chugging along despite an increasing number of cracks in its credit system and to prevent its currency from depreciating too quickly. Despite all its efforts to prevent money from leaving the nation, capital outflows are continuing.

Japanese Prime Minister Shinzo Abe wrapped up a visit to the US with President Trump calling for a trade relationship that is “free, fair, and reciprocal.” Trump also committed to “the security of Japan”.

The US, Japan, and South Korea have requested a Monday meeting at the UN after North Korea launched an intermediate-range ballistic missile into the Sea of Japan Sunday, violating UN restrictions.

Two US cabinet votes today. The Senate is expected to approve Trump’s nominee for Treasury secretary, Steven Mnuchin, and David Shulkin for Veterans Affairs secretary. Mnuchin is among the prominent Goldman Sachs alums populating the Trump administration.

Copper has been on a tear lately thanks to supply disruptions at the world’s largest mine caused by a strike, plus strong demand from China. Rio Tinto Group said that iron ore prices, which have surged to the highest level since August 2014, are not going to fall off a cliff. In soft commodities, sugar traders are bracing for a wild ride, with global stockpiles set to fall to their lowest levels since 2011-12, meaning the outlook for prices is almost completely dependent on the weather in the coming year. In the shorter-term, there is good news for Valentine’s Day as chocolates should be cheaper on the back of a boom in cocoa supplies.

OPEC reports January oil production fell by 890,000 barrels a day compared with December, confirming that its members have so far largely complied with an agreement to slash output. The largest contributor to the output reduction was Saudi Arabia with data showing that it trimmed almost 500,000 barrels per day of production in January.

Almost 200,000 people have evacuated from several Northern California counties after damage to a spillway at the Oroville Dam. The dam remains intact, but the emergency spillway, which guards against the overflow of the dam when water levels are high, was eroding Sunday.

The damage prompted a mandatory evacuation for cities and counties near Lake Oroville. In the worst-case scenario, an uncontrolled release from the dam could send a 30-foot wall of water downstream. But for now, the dam is holding. Workers are draining the lake. Water levels have now dropped 4 feet lower than the emergency spillway, which suffered damage during its first ever water release over the weekend.

Workers with the Department of Water Resources are scrambling to reduce the lake’s overall water level to 50 feet below the emergency spillway elevation of 901 feet. That mission has taken on added urgency as heavy rains are expected later in the week.

Allergan said it would buy Zeltiq Aesthetics for about $2.5 billion. Allergan agreed to pay $56.50 per Zeltiq share, or a premium of 14.4 percent to the company’s Friday close. Zeltiq is known for its body contouring technology, the CoolSculpting System. Allergan, the maker of Botox, has been on an acquisition spree since its $160 billion merger with Pfizer collapsed in April.

South Korean prosecutors summoned Jay Y. Lee, the third-generation heir of the Samsung conglomerate, for a fresh round of questioning, seeking answers about his role in a political corruption scandal. Special prosecutors had previously summoned Lee, the 48-year-old vice chairman of Samsung Electronics, as a bribery suspect in the scandal, as authorities attempted to zero in on payments made by Samsung to organizations linked to the impeached president’s confidante.

Shares in Toshiba moving higher today on reports that tomorrow it will reveal the extent of losses related to its takeover of a nuclear business in 2015. The Japanese firm had originally said in December that it was expecting billions of dollars in losses, which caused shares to tank and lose more than half their value.

Oracle has filed an appeal in its case against Google. In May, Oracle lost a court case against Google and Android regarding bits of code copied from Java — but now it’s arguing that the jury didn’t have all the information it needed to reach a verdict.

South Carolina’s biggest labor union vote in decades scheduled to take place Wednesday; a knock-down, drag out between Boeing and the International Association of Machinists. About 3,000 production workers will be eligible to vote in the election — one of the biggest tests of organized labor in a state with the lowest percentage of union workers nationally.

South Carolina is a right-to-work state, which means no workers can be required to join a labor union. Just 1.6 percent of South Carolina workers belong to a union. This is the second time in two years at the IAM has scheduled a vote at the Boeing campus. In 2015, the union canceled the vote days before it was scheduled to take place, citing political interference and misinformation from Boeing management.

Walt Disney hiked admission prices for US theme parks by as much as $5 for certain one-day tickets. The price increase, effective Sunday, are an annual tradition for Disney parks.

Financial Review

Wallonia World

Sinclair Noe — October 21, 2016

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DOW – 16 = 18,145
SPX – 0.18 = 2141
NAS + 15 = 5257
10 Y – .01 = 1.74
OIL + .57 = 51.00
GOLD + .50 = 1266.70

The Dow and S&P 500 ended well off their lows of the session, while the Nasdaq rallied and all three indexes ended a string of back-to-back weekly declines. For the week, the Dow advanced 0.04%, the S&P gained 0.38% and the Nasdaq picked up 0.83%.

And we are seeing higher oil prices even as the dollar continues to strengthen, back to the highest level since February; the Dollar Index topped 98. A higher dollar should affect commodity prices as well as US exports. The US is likely to embark on raising interest rates in December while others such as England and the EU are still discussing easing monetary policies. The CME FedWatch Page now puts the odds of a rate hike in December at slightly over 74%.

There are no economic reports on today’s calendar but we do have speeches from a couple of Federal Reserve officials; Fed Governor Daniel Tarullo is kind of the Fed’s point person on regulation; he spoke today at the Columbia Law School and said the Fed may introduce new more measures to test big banks’ capital and liquidity levels are strong enough to safeguard the financial system.

San Francisco Federal Reserve Bank President John Williams called for gradual rate hikes “sooner than later,” saying that waiting too long to do so could end up forcing sharp rate hikes that could choke economic growth. Williams is not a voting member of the FOMC this year. For Williams, raising rates soon and gradually has the best chance of keeping the economy growing without letting inflation get out of control, a circumstance that would require aggressive rate increases that could tip the economy into recession.

Last week Fed Chair Janet Yellen suggested that running a “high pressure economy” may be the best way to reverse damage from the financial crisis. That phrase was taken to mean a willingness to overshoot on the Fed’s inflation and employment goals for some time.

British American Tobacco has offered to acquire the 58% in Reynolds American it doesn’t already own for $47 billion in cash and shares. BAT’s proposal is worth $56.50 a share, or 20% above Reynold’s closing price of $47.17 yesterday. The deal would bring together Newport, Kent and Pall Mall cigarettes under one umbrella and create the world’s largest publicly traded tobacco company.

Qualcomm might finally put its cash to work. CNBC reports they have agreed in a handshake deal that Qualcomm will pay $110 a share for NXP Semiconductors, in a deal that would be close to $40 billion. Qualcomm has about $30 billion in cash, most of which is overseas, so acquiring a foreign company is attractive. NXP works on chips for cars, security and the internet of things, all emerging business for Qualcomm, which specializes in wireless technology like mobile phones.

AT&T and Time Warner are reportedly discussing a merger. The two sides held informal talks to discuss potential business opportunities, including a merger. Time Warner has a stock market value of nearly $73 billion. AT&T is much larger, with a market value of $231 billion. There seems to be a theme for wireless carriers to diversify by acquiring companies that offer content. And if you are experiencing a little déjà vu right now, it means you are probably old enough to remember the last time that Time Warner was one-half of a massive merger, a catastrophically ill-fated marriage to AOL 16 years ago.

At the time, AOL was an Internet juggernaut at the peak of the dot-com bubble, with a market cap of $224 billion and an aggressive appetite for growth. The deal made a certain sort of sense: Buying Time Warner would give AOL access to the old media company’s deep well of movies, TV programming and news, while Time Warner would be vaulted into the future of online distribution. “Synergy” was the buzzword. The deal went wrong; very, very wrong. AOL Time Warner had to write off $99 billion in goodwill. Just sayin.

Yesterday we told you the Wall Street Journal was planning major revisions to the newspaper, including combining sections. Today, word the paper is telling all news employees worldwide they are eligible for an “enhanced voluntary severance benefit” – that’s the first step; the next step is “involuntary layoffs”.

The earnings season is picking up pace as investors gauge the strength of corporations amid uneven economic growth. More than 80 percent of the S&P 500 Index’s companies that have released third-quarter results so far beat expectations, but it might not be enough to avoid another quarter of declining earnings.

Schlumberger reported earnings that beat estimates, but 82 percent lower than a year ago. The oilfield services company’s revenue fell slightly short of analyst forecasts. Schlumberger said there were early signs of recovery in most parts of the world, following a two-year slump in oil prices that put the brakes on global drilling activity.

McDonald’s reported third-quarter results that beat estimates. Global same-restaurant sales increased 3.5%, and same-restaurant sales in the U.S. grew 1.3%.

General Electric posted worse-than-expected revenue growth in its latest quarter. GE’s power, aviation and renewable energy segments drove industrial revenue growth, as transportation and oil and gas continued to post declines. GE said it would increase its stock-buyback program by $4 billion.

Two weeks ago, Honeywell lowered its sales and profit outlooks and preannounced the third-quarter results, saying an unexpectedly weak September and lackluster performance in the aerospace segment hurt profit. This morning, they reported results that matched the lowered expectations. For the fourth quarter, Honeywell expects sales to fall 7% to 9% due to weakness in the business jets, defense and space areas.

SAP SE climbed as it boosted its earnings and sales estimates.

Daimler AG fell amid a lower revenue forecast.

Ericsson AB slid after posting a loss.

Dyn is one of a number of outfits that host the Domain Name System, or DNS, which functions as a switchboard for the internet. The DNS translates user-friendly web addresses into numerical addresses that allow computers to speak to one another. Without the DNS servers operated by internet service providers, the internet could not operate.

And today, the internet stopped operating, at least for a while, mainly along the east coast. Dyn was attacked, a distributed denial of service attack where hackers flood the servers that run a target’s site with too much internet traffic, until the site collapses. In this case, the attack was aimed at the Dyn infrastructure that supports internet connections.

The result is that millions of internet users temporarily lost access to some of the world’s most popular websites, including: Twitter, Spotify, Reddit, CNN, Etsy and PayPal. It was a big attack, but it is too early to determine who was behind the attacks, but they appear to be precisely calibrated and on a very large scale.

It’s not just Samsung products that are overheating — Apple now has a problem, but with counterfeits. Apple said it has been buying accessories on Amazon bearing the Apple name and found that a whopping 90 percent of those are counterfeit. Even more troubling, Apple said, the phony products “pose an immediate threat to consumer safety,” because they haven’t been put through the rigorous industry standard testing Apple uses. Apple filed a lawsuit in U.S. District Court in San Francisco against Mobile Star, the company selling many of the products Apple bought on Amazon.
 
Will Japan ever escape deflation? This should come as no surprise to anyone, but Bank of Japan Governor Haruhiko Kuroda says the Bank of Japan may once again push back its 2% inflation target, which currently sits somewhere in fiscal 2017. Kuroda started his job in early 2013 and began his turbo-charged asset-purchase policy that continues to this day; he originally hoped that inflation would hit 2% by late 2014 or 2015. Almost four years later, inflation has disappeared after an initial rise.

U.K. Prime Minister Theresa May marks her first 100 days in office today, a term that has thus far been completely dominated by the Brexit debate. Prime Minister May clashed with her European counterparts in her first EU summit, where she was only allowed to give a brief update on Brexit over dinner. Though British diplomats have been calling for preparatory talks, EU leaders have remained united that no negotiations will occur until Article 50 of the EU’s treaty, which begins the official process to leave the EU, is triggered.

Have you ever heard of Wallonia? It is not some fictional country from a Marx Brothers movie, rather it is a province in Belgium, and it is the unlikely cog in the wheel of a trade deal between Canada and The Euro Union.

The fate of the trade pact with Canada — the Comprehensive Economic and Trade Agreement, or CETA — has become a symbol of how the European Union’s ability to act decisively on the world stage is losing out to parochial concerns and rising discontent with globalization. Belgium’s prime minister can only sign off on the trade pact if all provinces approve. Wallonia’s prime minister opposes the deal because he says the accord could undermine public services and industries like farming.

MetLife decided earlier this year to cut most of its U.S. life-insurance business. Now it is cutting ties with Snoopy. The 148-year-old company first used the Peanuts’ cartoon character in advertising 31 years ago as it tried to connect with U.S. consumers.

Snoopy, created by cartoonist Charles Schulz, now appears on everything from MetLife blimps to the company’s marketing and sales materials. But that need to reach consumers will shrink when MetLife spins off the bulk of its U.S. life-insurance business in the first half of 2017. Afterward MetLife will sell mostly to corporate clients in the U.S.

Financial Review

We Got Your Volatility Right Here

Sinclair Noe — September 9, 2016

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DOW – 394 = 18,085
SPX – 53 = 2127
NAS – 133 = 5125
10 Y + .05 = 1.67%
OIL – 1.95 = 46.31
GOLD – 10.40 = 1328.80

Over the 41 days, through Thursday, the S&P 500’s highest and lowest closes have been just 1.75 percent apart. It’s the first time that has ever happened in the history of S&P data, which goes back to 1928.

Heading into today’s session the S&P 500 had gone more than 50 trading days without a drop of 1% or more, only the 48th time that has happened since 1950. The last time the Dow Industrials moved over 1% was July 8^th, more than 2 months. We got your volatility right here.

Federal Reserve Bank of Boston President Eric Rosengren moved more firmly into the camp of hawkish policy makers, warning that waiting too long to raise interest rates threatened to overheat the US economy and could risk financial stability. Delivering a speech this morning, Rosengren said, “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Rosengren’s stance on raising rates are significant because he is a voting member of the FOMC, he has been a longtime dove and someone that is calling for a rate hike even after the recent string of weak economic data. After Rosengren’s comments, futures traded lower, and the major indices opened in negative territory.

Later in the morning, Federal Reserve Bank of Dallas President Robert Kaplan said it isn’t urgent for the central bank to raise interest rates and it can afford to be “patient and deliberate in its actions.” Also Fed Governor Daniel Tarullo made some dovish comments during an interview on CNBC (more on Tarullo in a bit).

So, the Fed is not unanimous on rate hikes, but we’ll get one more piece of the puzzle on Monday, when Fed Governor Lael Brainard, will be delivering a previously unannounced speech in Chicago; the final day Fed officials can speak before the blackout period ahead of the Fed’s September 21 policy statement. Brainard has been one of the most dovish policymakers in the Fed. If she comes out in favor of a rate hike, it would be a clear signal that there will be a very strong push at the September FOMC meeting.

Jeff Gundlach, the widely followed bond investor who runs DoubleLine Funds held a cautious webcast last night. Gundlach said US corporate bonds are highly overvalued and added that many folks have come around to believe that interest rates can never rise, particularly as consensus around the ineffectiveness of negative interest rates solidifies. Gundlach went on to say, “In the investment business, when you hear the word ‘never,’ that means it’s about to happen.”

Global equities were also lower after the European Central Bank held interest rates at record lows and refrained from adding new stimulus. While President Mario Draghi said the ECB was looking at options to continue its money-printing program, investors were looking for more immediate action, including an extension or expansion of the current plan, or at least clearer hints of future actions.

Meanwhile, the yield on the 10-year German bond, known as the bund, turned positive Friday for the first time since June 23, the day of the U.K.’s vote to leave the European Union. A sharp global bond selloff that also pushed Treasury yields to their post-Brexit highs.

Hours after multiple global agencies detected a magnitude 5.3 earthquake near North Korea’s nuclear test site, the government in Pyongyang said it has hit the button on its fifth and potentially most powerful nuclear test this morning, claiming to have successfully detonated a nuclear warhead that could be mounted on ballistic rockets.

This is the North’s second nuke test in eight months and its fifth since 2006. The announcement drew immediate condemnation from the United States, South Korea, China and Japan. The test violates United Nations resolutions. And the Security Council called an emergency meeting.

Korean Air Lines, the biggest shareholder in Hanjin Shipping, has delayed a decision on a funding plan for the troubled shipping company for a second time, adding to the uncertainty of around $14 billion of cargo stranded at sea. With Hanjin’s future in doubt, carriers have announced they will hike container freight rates by as much as 50% beginning next month as retailers scramble to secure shipping ahead of the peak year-end holiday season.

The FAA, is asking very politely, in a not-at-all-freaked-out way, asking passengers toting the new Samsung Galaxy Note 7 around to keep them switched off on airplanes. Oh, and don’t charge them either. And do not store them in your checked baggage. Seriously. Do not do it.

What’s the problem you ask? The new Samsung smartphone seems to have a slight technical problem where it literally explodes. And then it catches fire. The problem appears to be linked to charging the phone. Passengers are still able to carry the phone on flights. It’s unclear why an exploding cellphone would be a problem in the cargo hold but not in the overhead compartment, but we can’t expect airplane mode to bail us out of everything. Samsung has issued a recall of 2.5 million of the phones, so the best move is to just get the phone replaced.

U.S. wholesale businesses left their inventories unchanged as their sales fell in July. The Commerce Department says wholesalers left their stockpiles alone in July after increasing them 0.3 percent in June. Their sales fell 0.4 percent in July, reversing a 1.7 percent increase in June. It was the biggest sales drop since January.

The July numbers show stress in the energy industry. Weak inventory restocking has been a drag on U.S. economic growth. From April through June, businesses overall reduced inventories at the fastest pace since the fall of 2011. That’s one reason second-quarter economic growth came in at a lackluster 1.1 percent.

Federal regulators say employees at Wells Fargo created millions of fake bank accounts and credit card numbers over the past five years in an illegal bid to boost their sales figures. The bank has been fined $185 million for the practices, including a record $100 million by the Consumer Financial Protection Bureau. Wells Fargo has also fired at least 5,300 employees who were involved in the scam.

Customers didn’t know what happened until they received statements, often charging unauthorized fees on unwanted and unknown credit cards. And when those customers attempted to seek legal redress? Wells Fargo fought back and judges dismissed the cases. Unbelievably, the mandatory arbitration agreements customers signed when they opened their original accounts also covered the fraudulent activity.

Now, it can be tough to get one or two people do something, so you might wonder what kind of elaborate criminal scheme was concocted to get more than 5,000 Wells Fargo employees to fabricate millions of fake accounts. It appears that Wells Fargo paid employees to open accounts – bonuses; they also set quotas; so, open accounts or get fired. It was part of a plan to cross-sell, like bundling for bank accounts; salespeople are urged to encourage existing bank customers to use multiple bank products.

This was a large scale effort and it was a systemic problem.  It is virtually impossible for senior executives not to have known what was going on. And Wells Fargo even promoted the aggressive sales scheme in their annual reports. In other words, there is no way to defend the lack of punishment of executives in a fraud of this scale that extended over five years. Either they were in on it, or somehow more than 5,000 lower level employees cooked this up and were able to hide it from the top brass.

Under Sarbanes Oxley, the CEO and CFO are required to certify the adequacy of financial and operational controls. There is no way Wells Fargo’s can have it both ways. Either they were in on the scam or they were criminally negligent.

You may recall a couple of weeks ago, Wells Fargo was fined $4 million for illegally misleading student loan borrowers and resulted in some paying unnecessary fees; charging on-time payers with late fees, failing to inform borrowers of steps they could take to minimize fees and leaving credit report errors uncorrected. A few months ago, Wells Fargo was hit with a $70 million penalty by The Office of the Comptroller of the Currency as the bank failed to correct the shortcomings identified in the 2011 consent orders related to mortgage practices in a “timely fashion.”

Four million there, $185 million here – it’s just small change for Wells Fargo, and the truth is that Wells is probably not the worst bank when it comes to cheating customers or rigging exchanges – they are just the example of the day, the “bankster du jour”.

Federal Reserve Governor Daniel Tarullo said this morning that the latest scandal involving Wells Fargo shows that bank behavior hasn’t “changed enough” since the financial crisis. Tarullo said too many banks still only respond to particular ethical lapses instead of putting in place comprehensive compliance programs. In an interview on CNBC, the Fed governor said he wanted regulators to hold individuals at banks responsible for inappropriate behavior rather than simply have firms pay fines. Even criminal prosecution of bank officers should be pursued “in order to make the point that there is individual culpability.”

Just a reminder for Governor Tarullo the Federal Reserve does more than print money; the Fed’s Division of Banking Supervision and Regulation is responsible for the oversight of banks. Says so right on their website.