Financial Review

Quads

Sinclair Noe — July 19, 2017

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DOW + 66 = 21,640
SPX + 13 = 2473
NAS + 40 = 6385
RUT + 14 = 1441
10 Y + .01 = 2.27%
OIL + .69 = 47.09
GOLD – 1.00 = 1242.00
BITCOIN + 1.75% = 2334.63 USD
ETHEREUM – 2.36% = 209.06

The Dow Industrials, S&P 500, Nasdaq Composite and Russell 2000 all closed at record highs today. This is the first time all 4 indexes closed at a record high on the same day since March 1^st.

ETFs have seen net new inflows of $250 billion thus far this year, and more than half of that inflow has gone to just 20 ETFs, or about 1% of the ETF universe. The most popular ETF this year, in terms of flows, has been the iShares Core S&P 500 ETF (IVV), which has taken in $18.5 billion.

Two other iShares equity products—the iShares Core MSCI EAFE ETF (IEFA) a market-cap-weighted index of developed-market stocks in Europe, Australasia and the Far East, and excludes the US and Canada, and the iShares Core MSCI Emerging Markets ETF (IEMG), —rounded out the top three.

According to a Bank of America Merrill Lynch survey of 207 investors with a total of $586 billion under management, money managers are a net 20 percent underweight U.S. stocks. That’s despite the major averages setting new records on an almost weekly basis.

There are a few takeaways here, all supportive of equities. One is that the survey suggests there is lots of money that could be put to work in stocks. Another is that there aren’t a lot of natural sellers left, since anybody who wanted to sell has already done so. And finally, the most successful investors say that the time to buy is when everyone else is selling.

Investors will focus on quarterly earnings to see if high valuations are justified in the face of mixed economic data, tepid inflation and policy gridlock in Washington.

Analysts estimate an 8.7 percent rise in second-quarter earnings and a 4.6 percent increase in revenue for the S&P 500 companies from a year earlier. The S&P tech sector has been the best performing sector this year despite concerns about stretched valuations as investors look for growth sectors immune to policy uncertainties.

The exception is IBM, down 4.2 percent today to a one-year low after the company’s quarterly revenue came in below expectations – that’s 21 consecutive quarters of declining revenue for Big Blue. The stock was the biggest drag on the Dow and the S&P 500.

Wall Street has a new bond trading king. Morgan Stanley rose 2.1 percent after the Wall Street bank reported better-than-expected profit and bond trading revenue declines that were modest compared with arch-rival Goldman Sachs. Goldman was down 0.5 percent.

While revenue from fixed income fell during a quiet second quarter, Morgan Stanley still reported fixed income sales and trading revenue of $1.2 billion – and while that is down 4 percent from last year, it was better than the stunning 40 percent drop reported Tuesday by rival Goldman Sachs over the same period.

Morgan Stanley has bested Goldman in fixed income revenue for two quarters now, with $2.9 billion of fixed income trading revenue in the first half of the year versus Goldman’s $2.8 billion.

CSX fell 6.5 percent after the third-largest U.S. railroad operator’s forecast missed expectations. Other railroad companies such as Union Pacific fell 2 percent, while Kansas City Southern edged down 0.7 percent.

American Express’ profit fell less than expected in the second quarter, as higher spending by card members made up for increased costs from offering rewards. AmEx said card member spending was up 8 percent in the second quarter ended June 30. Revenue was flat and net income came in better than estimates. American Express dropped 1% in trading today.

T-Mobile beat revenue and profit estimates, and added more customers than expected in the most recent quarter. Shares gained 5%.

Vertex Pharmaceuticals jumped as much as 26 percent to an all-time high after the company reported positive results for its cystic fibrosis treatment. The stock was the biggest boost on the S&P and the Nasdaq.

Spices maker McCormick & Co has won the battle to buy Reckitt Benckiser’s North American food business, paying a higher than expected $4.2 billion. Reckitt said in April it was reviewing options for the unit, which includes French’s mustard and Frank’s RedHot sauce, to cut debt following its $16.6 billion purchase of baby formula maker Mead Johnson.

The Senate Republican plan to repeal and replace Obamacare could not muster enough support for a vote Monday. Yesterday, President Trump said he wanted to just repeal the Affordable Care Act, and come up with a replacement down the road. Today, the Congressional Budget Office released an estimate saying that just a repeal would result in 17 million more uninsured within a year, and 32 million more uninsured within 9 years.

Today, it is back to repeal and replace, and Trump wants the senators to stay in Washington until they get it done. Polling shows just 12% of Americans support the Senate healthcare bill.  Meanwhile, their counterparts in the House looked to reset matters with a fresh budget proposal.

The House Republicans’ spending plan aims to balance the federal budget within a decade, reducing the deficit by $6.5 trillion, partially by cutting billions of dollars from entitlement programs such as Medicare and Social Security. Like the proposal the White House released in May, the House proposal is a blueprint, not a bill set in stone. It also assumes the Senate health package will become law, an increasingly unlikely outcome.

But even if this budget is not passed as written, it puts House Republicans’ financial priorities on full display. The House budget proposes increasing the base national defense budget by $70 billion, from $551 billion in fiscal year 2017 to $621 billion in fiscal year 2018. That’s more than the $574 billion in base defense spending recently proposed by the White House.

Also included in the proposal is $75 billion to fight terrorism, as well as “significant funding” on resources for border security, which includes construction on a controversial border wall between the U.S. and Mexico.

The House budget proposes reducing spending on entitlement programs such as Medicare by $203 billion next year, instructing 11 House committees to find ways to reduce spending. These cuts would in part come from programs like Medicare, which could face $487 billion in cuts over the next decade, and Social Security, which faces $4 billion in cuts in that same time frame.

The proposal assumes that the Senate GOP health bill will become law, resulting in what the Congressional Budget Office estimates would be $834 billion in Medicaid cuts over the next decade.

The House proposal also recommends reducing funding for food stamp programs, noting that spending on such initiatives doubled between 2001 and the start of the financial crisis. Spending on the Supplemental Nutrition Assistance Program, or SNAP, increased from about $18 billion in 2001 to about $33 billion in 2009, according to the USDA.

The House proposal mandates that the chamber’s Ways and Means Committee pass a tax reform bill that does not increase the deficit, reduces overall tax rates and simplifies the tax code. The budget also stipulates that such a bill should repeal the alternative minimum tax and reduces the corporate tax rate. The budget instructs the committee to pass this reform through a process called reconciliation, which was primarily designed to pass budgetary laws.

This means that if a tax reform plan is passed by the House, it would only need majority support in the Senate, and won’t be subject to a filibuster. That gives the Senate’s Republican leadership additional wiggle room to pass the measure; with 52 Senators, the GOP can afford two defections.

However, the same strategy did not help avoid the internal party discord that derailed their efforts to repeal and replace the Affordable Care Act.

Supreme Court rejected parts of Trump’s travel ban. The three-sentence order by the justices,  widened the definition of which citizens from six mostly Muslim countries covered by the travel ban are still eligible to travel in the US. And that will include grandparents, cousins and other relatives of a person in the US.

The court plans to hear arguments on the travel ban on Oct. 10; the latest scuffle centered on the rules that will apply in the interim.

Crude closed above $47 a barrel for only the second time since early June as US inventories fell by 4.73 million barrels last week as measured by data from the Energy Information Administration. Gasoline supplies shrank 4.44 million barrels, the most since March.

Financial Review

Complacency Abounds

Sinclair Noe — July 14, 2017

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DOW + 84 = 21,637 (record)
SPX + 11 = 2459 (record)
NAS + 38 = 6312
RUT + 3 = 1428 (record)
10 Y – .03 = 2.32%
OIL + .52 = 46.60
GOLD + 11.10 = 1229.40
BITCOIN – 3.39% = 2156.96 USD
ETHEREUM – 5.51% = 187.69

Washington is in gridlock and the White House faces scrutiny. Valuations are at the highest levels since the financial crisis. There’s been straight months of outflows from the biggest exchange-traded fund tracking the S&P 500.

So, what happened today? Record highs for the Dow, S&P 500, and Russell 2000. The Nasdaq is within 10 points of a record. The CBOE Volatility Index ended at 9.51, a 24-year low, falling 15 percent.

We start with economic data. The Commerce Department said retail sales fell 0.2 percent in June as Americans curtailed spending at restaurants, department stores and gasoline stations. That followed a 0.1 percent drop in May. Most retail segments posted weaker results in June.

Sales at gas stations posted the biggest drop, down 1.3%, reflecting lower prices at the pump. Sales also fell at grocers, restaurants, book stores, sporting-goods stores and department stores. Auto dealers reported a small increase in sales, but they are not moving new cars off the lots as quickly as they were a year ago.

Meanwhile, the Labor Department said consumer prices were flat in June, the latest evidence that inflation remains muted. All told, inflation has climbed just 1.6 percent from a year ago. In June, energy prices sank 1.6%. Americans paid less for gasoline, natural gas and electricity. The cost of food leveled off in June after five straight increases.

The core rate of inflation that excludes the volatile food and energy categories rose 0.1% in June. Grocery prices have declined in the past year, but the cost of takeout and eating out has risen sharply. Over the past 12 months the core CPI is up 1.7%, unchanged from the prior month.

The University of Michigan’s sentiment index slipped to 93.1 in July from 95.1 in June. The index has fallen from a 13-year high of 98.5 in January. Americans feel plenty confident in the economy right now, but seem convinced we’re all headed for hell in a handbasket.

An index that measures current conditions rose to 113.2 to set a 10-year high, but a gauge that looks out six months fell to 80.2 from 83.9. The outlook of consumers is now back to where it was before the November election.

Industrial production rose 0.4% in June, a touch ahead of expectations and the fifth straight month of increases, as mining output surged 1.6%; mining includes the oil and gas sector. The Federal Reserve reported utilities output as flat and manufacturing output edged up 0.2%.

Economic forecasts are revising estimates for second quarter GDP lower, to the range of 1.9% to 2.5%. At the start of the second quarter estimates topped 3% growth. The economic data confirms a lack of inflation and a sluggish economy that fits with dovish statements from the Federal Reserve policymakers this week.

At this rate, we may have seen the last rate hike from the Fed for this year. The Fed still wants to trim its balance sheet, but 1.6% inflation and weak retail sales is hardly justification to hike rates.

The dollar dropped lower and treasuries rallied. Oil gained 1% today and 5% for the week.

Earnings season kicked off in earnest, with JPMorgan Chase, Citigroup and Wells Fargo all posting better-than-expected profits. Even though the bottom line was solid, they still faced challenges.

JPMorgan Chase reported a better-than-expected quarterly profit on Friday due to strong loan growth and higher interest rates, but said net interest income for the year would be lower than expected, sending its shares down about 2 percent.

JPMorgan earned $26.5 billion in profit over the past 12 months, the most ever by any major U.S. bank.

While trading results were worse than analysts’ estimated, second-quarter earnings set a record. The bank said that net interest income will probably climb $4 billion this year, less than the $4.5 billion it previously projected.

One area of weakness is mortgages, where the market may shrink and competition is stiff. JPMorgan said its markets revenue fell 14 percent in the second quarter. At Citigroup, trading revenue was down 7.2 percent.

On a conference call, JPMorgan CEO Jamie Dimon had a few choice words about Washington politics, choice as in four letter words we can’t repeat in print. Dimon also had trepidation about the Fed’s plans to unwind its balance sheet, saying: “We’ve never had QE like this before, and we’ve never had unwinding like this before.Obviously, that should say something to you about the risk that might mean, because we’ve never lived with it before.”

The Fed will likely announce the kick-off this year, possibly at its September meeting. The Fed’s plan calls for a phase-in period. It will unload $10  billion the first month and raise that to $50 billion over the next 12 months. Then it will continue at that pace to achieve its “balance sheet normalization.”

Just like the Fed “created” this money during QE to buy these assets, it will “destroy” this money at a rate of $50 billion a month, or $600 billion a year. It’s the reverse of QE, with reverse effects. QE had the intended effect: inflating asset prices. Unwinding QE, once it starts in earnest, is likely to pull asset prices in the opposite direction.

But given of how leveraged assets are, and to the enormous extent they have been used as collateral, Dimon – the banker who is concerned about collateral values – hit the nail on the head. It’ll be “a very different world.”

Citigroup posted earnings per share of $1.28 on revenue of $17.9 billion, topping analyst expectations on the top and bottom lines. That’s compared to earnings of $1.24 per share on $17.5 billion in revenue in the year-ago period.

Wells Fargo beat earnings expectations, as it benefited from higher interest rates, though revenue was lower than expected at $22.1 billion. At Wells Fargo, new car loans dropped by almost half in the second quarter, while its automotive portfolio fell to the lowest level in two years after the bank tightened underwriting standards.

Another cause for celebration earlier this week: court approval of a $142 million settlement of a class-action lawsuit between the bank and victims of its fake account scandal of 2016. The fiasco, you might remember, included claims that Wells Fargo employees opened up to 2 million bank and credit-card accounts without customers’ permission to boost sales numbers. Multiple class action suits followed, and the bank expects them to all fold into this settlement.

However, the bank’s first response was to veto the class action and send it to mandatory arbitration, which is an alternate form of resolving a dispute using an appointed independent party instead of the court system. It’s an option banks and financial institutions have written into contracts with consumers, and they use it to prevent consumers from joining together to pursue relief. Only after public pressure did the San Francisco bank agree to face the suit.

The big 3 banks all beat on the bottom line. There was a bit of disappointment on the guidance but overall, it’s been a good start to the earnings season.

Look for S&P 500 earnings in the range of 7%. Analysts have high hopes for earnings. Companies in the S&P 500 will earn $130 per share at year-end, compared with current trailing 12-month comparable earnings of about $120, according to data compiled by Bloomberg. That $10 spread is the widest between past and future earnings since 2001.

Expectations for tech profits have steadily climbed throughout the year, with analysts now calling for a 15 percent jump in the group’s bottom line.

Senate majority Leader Mitch McConnell has planned for a vote next week on revised healthcare legislation, unveiled yesterday, and he has his work cut out for him in the coming days to get the 50 “yes” votes needed for passage.

Republicans control the Senate by a 52-48 margin and cannot afford to lose more than two from within their ranks because of united Democratic opposition, but two Republican senators already have declared opposition. A dozen more Republican senators have expressed concern or remain noncommittal.

A major test for McConnell’s legislation expected early next week is an analysis by the nonpartisan Congressional Budget Office, which last month forecast that the prior version of the bill would have resulted in 22 million Americans losing insurance over the next decade.

Financial Review

Halftime

Sinclair Noe — June 30, 2017

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DOW + 62 = 21,349
SPX + 3 = 2423
NAS – 3 = 6140
RUT – 0.84 = 1415
10 Y + .03 = 2.30%
OIL + 1.40 = 46.33
GOLD – 4.20 = 1242.20
BITCOIN + 0.39% = 2509.80 USD
ETHEREUM – 6.64% = 279.09

I’m not sure we established a trading pattern this week. Down, up, down, up. We did see a return to volatility. The indexes saw big moves, much sound and fury amounting to very little. It might just be window dressing to finish out the quarter and heading into a long holiday weekend.

The markets will be open for a half day on Monday, but, this is the beginning of a long holiday weekend.

As we wrap up the second quarter and the first half of the year, let’s check where we stand.
For the month: the Dow gained 1.6%, the S&P gained 0.5%, the Nasdaq lost 0.9% for the month, and the Russell gained 3%.

For the second quarter: the Dow gained 3.3%, the S&P up 2.6%, the Nasdaq up 3.9%, and the Russell up 3.9%.

For the first half: the Dow is up 8%, the S&P up 8.2%, the Nasdaq up 14%, and the Russell up 6.1%.

So, the Nasdaq is the big winner so far, this year, but seemed to lose momentum in June. The S&P 500 recorded its biggest percentage first-half gain since climbing 12.6 percent in the first six months of 2013. The Nasdaq posted its biggest first-half gain since 2009.

Oil is down 14% from the start of the year and down 5% for the month of June. OPEC and certain other oil-producing countries agreed to extend their production cuts, originally set to expire at the end of June, by nine months (ending March 2018). They didn’t count on US shale producers ramping up production to fill the void.

The count of working oil rigs in the US fell this week for the first time in 24 weeks, breaking the record streak of increases. After several upward revisions, the International Energy Agency currently expects U.S. crude production to end the year 0.8 mmb/d higher than year-end 2016; although some traders are expecting closer to 1 mmb/d.

As such, the rapid U.S. shale growth in the back half of the year could meaningfully increase U.S. oil supply. Meanwhile, when OPEC cuts fall off in early 2018, look for the global oil glut to come roaring back.

The yield on the 10-year Treasury note has dropped 14 basis points from the start of the year, however the yield has been climbing in the past week or so, after hitting a low for the year at 2.13%.

This is still the most contrary move among major asset classes because the Federal Reserve has raised interest rates twice in the first half, and promises another cut in the second half plus plans to trim its balance sheet.

US 10-year yield has now moved above 200-day moving average, and broke the down trendline from March.

Second-quarter corporate results are set to begin in earnest in the coming weeks, with S&P 500 companies expected to post an 8-percent rise in earnings. Investors have been looking for earnings to support historically high valuations, with the S&P 500 trading at about 18 times earnings estimates for the next 12 months compared to the long-term average of 15 times.

We’re bumping right along the top end of historic valuation levels. It’s getting harder to find undervalued stocks with so much optimism factored into stock prices.

The U.S. dollar recovered slightly today, but posted its biggest quarterly decline against a basket of rival currencies in nearly seven years after hawkish signals from foreign central banks this week pressured the greenback further. The dollar index declined 4.6% in the second quarter to mark its steepest quarterly percentage drop since the third quarter of 2010.

The euro accelerated more than 7 percent against the greenback for its biggest quarterly percentage gain since the third quarter of 2010.

In late May, we told you the Midwest experienced flooding that damaged corn and wheat crops. Since then, the northern Plains states have experienced a drought that left crops withering in the field. Spring wheat, traded on the Minneapolis Grain Exchange, has soared 32 percent in June. Spring wheat is a thinly traded commodity, but it was a big winner, especially considering futures contracts are leveraged, this was a killer trade.

As we wrap up the first half we are once again reminded that the heavyweight champion of traders is still Warren Buffett. Warren Buffett is set to pull in $12 billion in profits on a single deal with Bank of America. Buffett invested $5 billion in Bank of America in 2011. That move came at a critical time for Bank of America with the company trying to leave behind the financial crisis with its new CEO Brian Moynihan.

Buffett negotiated a favorable deal with the bank, due to his investment acting as a public vote of confidence in the company’s future. His $5 billion investment in preferred shares came with the option to convert those to common stock shares until 2021. The preferred shares paid $300 million annually in dividends.

Buffett’s common stock shares are currently worth about $17 billion, $12 billion more than the purchase price. Warren Buffett’s Berkshire Hathaway is now the biggest owner of two of the world’s largest banks: Bank of America and Wells Fargo.

Consumer spending rose modestly in May and inflation cooled, pointing to a slow-but-steady economic expansion. Consumer spending rose 0.1 percent last month. Consumer prices excluding food and energy rose 1.4 percent on a yearly basis, compared to a 1.5 percent gain in April.

The Fed’s preferred gauge of inflation, the personal consumption expenditures (PCE) price index fell 0.1 percent in May from April, dragged lower by drops in prices for consumer goods and energy. When food and energy were excluded, the index was up 0.1 percent.

The slowdown in inflation has boosted consumer spending power. After-tax personal income adjusted for inflation rose 0.6 percent in May, the largest gain since April 2015.

Even so, the University of Michigan’s consumer sentiment index fell to 95.1 this month, its lowest since November, according to a final reading for the gauge published today. The index has been rising steadily since 2008 and in November it hit its highest level since before the 2007-09 recession.

Senate Republicans still don’t have a healthcare deal. Senate Republicans headed home for a week-long recess without coming to an agreement on their bill, named the Better Care Reconciliation Act. This represents another delay for the Trump agenda.

Illinois is poised to enter its third straight fiscal year without a budget. The Illinois House adjourned on Friday, the last day of the budget year, without enacting a plan and will reconvene at 11 a.m. local time on Saturday. While negotiations continue, it signals the legislature will blow the midnight deadline and extend the unprecedented impasse that’s left Illinois without a full-year budget since mid-2015.

Without a deal around July 1, S&P Global Ratings has warned that the nation’s fifth-most-populous state will likely get downgraded again, losing its investment-grade status. The state of Illinois will be rated junk. Without a spending plan, the state has effectively been on autopilot, leaving it with a record $15 billion of unpaid bills as it spent over $6 billion more than it brought in over the past year.

The impasse has devastated social-service providers, shuttering services for the homeless, disabled and poor. The lack of state aid has wreaked havoc on universities, putting their accreditation at risk. If the standoff isn’t resolved, Illinois officials have said they won’t be able to pay contractors and road construction will shut down, putting thousands out of work.

The yields on the state’s bonds have risen as investors anticipate a downgrade. Without a budget that includes borrowing to pay down the bill backlog, Illinois by August will run out of money for key expenses. That means school funding, state payroll, and pension payments could be affected. This won’t jeopardize debt-service payments. Illinois hasn’t missed any bond payments and state law requires it to make monthly deposits to its debt-service funds.

President Trump says he is “sending in Federal help” to Chicago to help curb gun violence. The president tweeted early Friday that crime in Chicago has reached “epidemic proportions,” citing more than 1,700 shootings in the city so far, this year.

So, the Feds are sending in a strike force of 20 Alcohol, Tobacco, and Firearm, or ATF agents for what officials called a “laser focus” on the illegal trafficking of weapons. They join 41 ATF agents already in Chicago. The force will also focus on investigating and prosecuting repeat gun offenders. Don’t hold your breath.

This week saw a couple of important anniversaries. 20 years ago, the British handed over rule of Hong Kong to the Chinese. 10 years ago, the first iPhone was sold. Apple sold more than 50 million iPhones in the first three months of 2017 alone, bringing in $33.2 billion.

Drivers are set to pay the lowest Independence Day price for gasoline since 2005 — and for the first time on record, the Fourth of July holiday per-gallon cost will run below the price from New Year’s Day, according to GasBuddy.

Motorists on the road for the Fourth of July holiday weekend are expected to pay an average of $2.21 a gallon for gasoline, well below the 10-year average of $3.14. If you are driving, be careful out there, and have a great Independence Day.

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

Like a Bird on a Wire

Sinclair Noe — November 11, 2016

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

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DOW + 39 = 18,847
SPX – 3 = 2164
NAS + 28 = 5237
10 Y closed 2.12%
OIL – 1.21 = 44.15
GOLD – 31.00 = 1228.60

The Dow closed at a new all-time high. Milk and cookies for everyone. Or wine and Xanax – your choice. It was a wild ride. For the week, the Dow rose around 5.4 percent, marking its best weekly performance since December 2011. The S&P 500 gained 3.8 percent for the week. The Nasdaq Comp posted a 3.4 percent weekly gain.

While stock markets were open today for Veterans Day, bond markets were closed, after taking a beating over the past few sessions. The global bond sell-off continued; across the world, more than $1 trillion has been wiped off the value of bonds as President-Elect Trump’s policies are seen boosting inflation.

One bright spot in the bond market, TIPS, or Treasury Inflation Protected Securities, which are indexed to inflation, have enjoyed their largest eight-week inflow on record, attracting over $5 billion. Commodities and equities also proved big gainers.

Commodities funds attracted $1.5 billon inflows in the week to Wednesday, the largest in 14 weeks. Copper is eyeing its biggest weekly rally in 35 years and iron ore is heading for its biggest weekly gain on record, helped by a rosier outlook for Chinese demand and anticipation of infrastructure spending straight from the pseudo-Keynesian playbook.

Equities funds attracted $8.9 billion, the most in 17 weeks, but some $200 million was pulled from bond funds in the US. Healthcare stocks enjoyed their largest inflows since October 2015, attracting $700 million, but European equities continued to suffer outflows, with some $1.3 billion redeemed.

The financial sector has rallied 10% over the past 4 days. Just remember, early market strength after an election is not a guarantee of future long-term performance.

In addition to bonds and tech stocks, emerging markets are not faring so well in the election’s aftermath. That’s down to fears about how Trump will act on global trade. But it’s also about the prospect of higher U.S. interest rates – which is boosting the dollar and hitting far-flung currencies.

Fed Vice Chair Stanley Fischer said this morning that economic growth prospects appear strong enough for the Federal Reserve to proceed with a gradual increase in interest rates. The central bank’s second-in-command said the Fed was “reasonably close” to achieving its employment and inflation goals, and the case for tightening, thus, is “quite strong”.

Fischer did not mention the outcome of the presidential election in his remarks. Yesterday, Richmond Fed President Jeffrey Lacker said that if the next Congress passes a stimulus program, the Federal Reserve should respond with more interest-rate hikes.

The Bank of Korea kept policy on hold. The central bank held its key interest rate unchanged at 1.25%, as expected. The British pound is up – at $1.26, its highest level since the October 6 “flash crash,” but remains nearly 20% below its pre-Brexit level. Meanwhile, the dollar is off slightly this morning but still on course for its best week in a year, racking up another round of gains against the yuan and peso.

An organizational chart released by the Trump campaign detailing who will handle his transition into office is filled with Washington lobbyists, insiders, and GOP veterans. Vice President-elect Mike Pence will take over the Transition Team from Chris Christie, who will now serve as vice-chair. Other advisers will include: Ben Carson, Newt Gingrich, Rudy Giuliani, Reince Priebus, Stephen Bannon, Peter Thiel and Trump’s children Donald Jr., Eric and Ivanka.

Going through the chart, Bill Walton, chairman of the DC-based private equity firm Rappahannock Ventures, and David Malpass, an economist and former Reagan administration treasury official, will head Trump’s economic team. Dan DiMicco, the former CEO of the largest steel producer in the United States, Nucor, was listed as Trump’s trade representative on the transition team.

Former Securities and Exchange (SEC) Commissioner Paul Atkins will oversee “Independent Financial Agencies”. Atkins is now the CEO of Patomak Global Partners, a private DC firm that consults companies on how to navigate post-financial crisis Dodd-Frank financial regulatory overhaul, to which Atkins staunchly opposed.

Former congressman Mike Rogers is slated to lead the national-security transition. And former Ohio official and George W. Bush honorary campaign co-chair, Ken Blackwell, will oversee domestic issues, including health and human services, labor, and environmental protection.

The management and budget team is being jointly handled by former Attorney General Ed Meese and Kay Coles James, a former director of the Office of Personnel Management who served under George W. Bush. Trump’s Homeland Security team, for example, is being led by Cindy Hayden, a director at the US tobacco giant Altria. Jim Carter, an in-house lobbyist for the manufacturing company Emerson, has been tasked with overseeing tax reform policies.

Not exactly draining the swamp.

President-elect Donald Trump outlined some pieces of his health-care program. A document was posted on the presidential transition website, the first look at Trump’s plan since the election. It includes protecting “innocent human life from conception to natural death” and gives states a big role in regulating health insurance and in running their Medicaid health-insurance programs for the poor.

Whether the 15.7 million people who have gained access to Medicaid through the ACA expansion will keep it is not clear from Trump’s plan. Trump hinted at softening the coverage guarantee for those with pre-existing conditions under the ACA, saying high-risk pools – state insurance programs for individuals who are sick or otherwise unable to get coverage – would cover those with large medical expenses who have “not maintained continuous coverage.”

Maybe – and this is just a shot in the dark – rather than relying on private citizens’ employers to select individual insurance plans from third-party providers, the government could try buying one great big insurance plan that covers everybody when they get sick? Not sure if there’s a term for that.

Alibaba has set new records for its annual Singles’ Day event as sales reached $1 billion in the first five minutes and hit $17.7 billion, or about one-third more than last year’s total; and more than double Black Friday and Cyber Monday combined online sales in the US. The world’s biggest retail event features 6 million products from 30,000 brands sold by 40,000 merchants and is closely watched for clues on the health of China’s economy and its largest online retailer – Alibaba.

Disney said it expects modest earnings growth next year and an even more robust rise in 2018. The assuring message came after the media company reported weaker-than-expected third quarter earnings – hit by a drop in ad sales and subscribers at its struggling ESPN unit. New deals with Hulu and AT&T/DirecTV could also help Disney attract elusive millennial customers.

Allianz beat expectations in the third quarter, posting a 37% rise in net profit. Europe’s largest insurer saw improvements across all its businesses, including bond fund manager Pimco, which logged net inflows for the first time in three years. Quarterly operating profit also beat forecasts, rising 18% and helping Allianz reaffirm its full-year target.

J.C. Penney posted a decline in sales, citing softness in apparel, and lowered a key sales metric. The company’s same-store sales fell 0.8% in the quarter, down from 6.4% growth last year and well below estimates. For the quarter, Penney posted a loss of $67 million, or 22 cents a share. Revenue fell 1.4%.

Macy’s reported third-quarter sales and revenue that missed estimates. Macy’s also announced a series of real estate deals including the $250 million sale of the Union Square Men’s store in San Francisco – part of more than 100 planned store closures.

Nordstrom delivered an earnings beat , while Kors offered up a weak outlook. Nvidia soared on upbeat profits .

Saying it was too easy to spend their parents’ money, a judge in Seattle has set up a year-long process to reimburse customers whose children made Amazon in-app purchases without permission, but rejected an FTC request for a $26 million lump sum payout. The agency already settled similar cases against Apple and Google. All three companies now require a password for in-app purchases or an opt-in to enable purchases without a code.

Brazil has been plunged into a fresh bout of political uncertainty after lawyers for former president Dilma Rousseff presented evidence suggesting her successor, Michel Temer, accepted bribes from a construction company. If found guilty, Temer, a member of the Brazilian Democratic Movement Party, would also be removed from office.

Shari Redstone, vice chair of the board at CBS and Viacom now says: “I was never a great proponent  of the split of the two companies,” adding “Scale will matter to your advertisers, who more than ever have to reach the consumer on a number of platforms.” A decade ago, Sumner Redstone decided to divide the two into separate companies, and while CBS has thrived, Viacom has wrestled with falling ratings and declining ad sales. CBS and Viacom are now looking at the prospect of a re-merger.

The largest, brightest full moon in nearly seven decades – what is known as a “Super Moon” – will be on display in the coming days. The full moon will come nearer to Earth than at any time since 1948. On Monday, the moon will pass within 216,500 miles of Earth’s surface, about 22,000 miles closer than average. If skies are clear, the upcoming full moon will appear up to 14 percent bigger and 30 percent brighter than usual. The next time a full moon comes as close to Earth will be in 2034.

Today, of course is Veterans Day, marking the Armistice, on the 11^th hour of the 11^th day of the 11^th month of 1918 – the end of World War I, the war to end all wars. Veterans Day is intended to honor and thank all who served in the United States Armed Forces. I would like to give my thanks to all veterans. And I believe the best way to honor veterans is no more wars.

Financial Review

The Last Jobs Report of 2015

Sinclair Noe — January 8, 2016

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DOW – 167 = 16,346
SPX – 21 = 1922
NAS – 45 = 4643
10 Y – .02 = 2.13%
OIL – .34 = 32.93
GOLD – 4.60 = 1105.60

The economy added 292,000 new jobs in December, much higher than estimates of 205,000 to 215,000. The unemployment rate was unchanged at 5.0%. The October and November reports were revised higher to show an additional 50,000 new jobs. In the final three months of 2015, the U.S. added an average of 284,000 jobs. That’s the fastest pace in almost a year.

For the past year the economy added 2.7 million jobs. In 2014 the economy added 3.1 million jobs; that’s the best 2 years for job growth since the late 1990s. The economy has added jobs for 70 consecutive months; right at 14 million jobs during that time.  Over the past year the unemployment rate has dropped from 5.7% to the current 5%.

Hiring in December was led by professional firms. They added 73,000 jobs, though almost half were temporary. Construction companies added 45,000 new workers (but that might be more a sign of mild winter weather across much of the country in December, rather than a big upsurge in construction).

Over the year, construction added 263,000 jobs, compared with a gain of 338,000 jobs in 2014.
Health care employment rose by 39,000, with most of the increase occurring in ambulatory health care services (+23,000) and hospitals (+12,000). Job growth in health care averaged 40,000 per month in 2015, compared with 26,000 per month in 2014.

Food services and drinking places added 37,000 jobs in December. In 2015, the industry added 357,000 jobs.

Employment in transportation and warehousing rose by 23,000 in December, with a gain of 15,000 in couriers and messengers.

Manufacturing employment changed little in December, though its nondurable goods component added 14,000 jobs. In 2015, manufacturing employment was little changed (+30,000), following strong growth in 2014 (+215,000).

Employment in mining continued to decline in December (-8,000). After adding 41,000 jobs in 2014, mining lost 129,000 jobs in 2015, with most of the loss in support activities for mining. When we say mining, what we are really talking about is jobs in oil exploration and development as well as oilfield support services.

Speaking of oil, Goldman Sachs’ chief equity strategist David Kostin joins analysts who are now seeing the impacts from the drop in oil prices as more negative for the overall stock market than previously thought. Kostin cut his earnings outlook for the S&P 500, citing a nearly $2 negative impact from energy stocks with that sector likely to see negative twelve-month earnings for the first time since the firm’s data begins in 1967. Overall, Goldman now thinks earnings will fall 7% in 2015. Which also does not bode well for mining jobs.

State and local governments added 13,000 jobs in December and the federal government added 4,000 jobs in the month, and only 17,000 federal jobs were added for the year. This has been a notable distinction of the current job recovery – it has been private employment, and public employment is still down 549,000 from the peak.

Worker pay fell a penny to $25.24, marking the first decline in a year. For the year wage growth was 2.5%. In a stronger job market, we would expect wage growth around 3% to 4%, which is clearly what the Federal Reserve is expecting as the year goes on. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in December.

Nearly half a million people rejoined the labor force, a sign that more jobs were available. The Labor Force Participation Rate was up slightly, (just 0.1%) to 62.6%. In the key demographic of 25 to 54, or the prime working years, the participation rate is 80.8%. Looking at other demographic markers, the unemployment rate for men over the age of 20 is at 4.7%, and for women age 20-plus the unemployment rate is 4.4%.

The unemployment rate for workers with less than a high school diploma is declining; it’s still higher than for skilled, educated workers, but it is coming down, and this may be one of the signs that some of the slack in the market is starting to ooze out. These workers, who on paper are among the least-qualified in the workforce, are vulnerable when the economy is soft and have made huge gains over the last 18 months or so.

And so thinking about the idea that there is no wage growth (or at least not much) the force keeping wages down, in the broadest sense, is remaining slack in the market. But data showing the least-qualified workers find their way back into the workforce the balance of power clearly tipping towards workers and away from employers. This is the slack being taken up. Part of that leverage once-held by employers allowing them to keep wages down, appears to be falling away.

The U6 measure of unemployment was unchanged at 9.9%. The U6 includes unemployed and underutilized workers, or people working part-time even though they would like a full-time job. In December, there were 6 million people part-time for economic reason, down by almost 750,000 for the year. So the economy is trending to more full-time jobs.

There are still 2.08 million workers who have been unemployed for 6 months or more but are still looking for a job; that’s up slightly from 2.05 million in November. This is an important number to watch. When this number goes down substantially, it will be a good indication that the economy is actually getting closer to full employment. That in turn should finally start to push wages higher, another important number to watch.

Another factor that could affect wages is a change in the minimum wage. The country has gone more than 6 years without an increase in the federal minimum wage of $7.25 per hour, but as of January 1, 14 states and several cities are moving forward with their own increases. California and Massachusetts are highest among the states, both increasing from $9 to $10 an hour. At the low end is Arkansas, where the minimum wage is increasing from $7.50 to $8. The smallest increase, a nickel, comes in South Dakota, where the hourly minimum is now $8.55.

The increases come in the wake of a series of “living wage” protests across the country, including a November campaign in which thousands of protesters in 270 cities marched in support of a $15-an-hour minimum wage and union rights for fast food workers. Food service workers make up the largest group of minimum-wage earners. With the increases, the new average minimum wage across the 14 affected states rises from $8.50 an hour to just over $9.

Several cities are going even higher. Seattle is setting a sliding hourly minimum between $10.50 and $13 on Jan. 1, and Los Angeles and San Francisco are enacting similar increases in July, en route to $15 an hour phased in over six years.

Backers say a higher minimum wage helps combat poverty, but opponents worry about the potential impact on employment and company profits. Part of the answer is in the speed of increase; slow, incremental increase seem to have less impact on employment. Soon we’ll have actual data to apply to those theories.

So, with another strong jobs report providing momentum to the labor market, the question is whether that momentum can carry into the broader economy and the markets. The Federal Reserve certainly anticipates job growth will eventually lead to wage push inflation, and keeps the Fed on track for more rate hikes.

Traders who bet on rate hikes using fed funds futures contracts now project greater-than-even odds of a March rate hike, according to CME FedWatch. Odds of a rate hike in March had slipped below 50% chance earlier this week as stock markets plunged on concerns that economic weakness in China could spill over into the US.

Another concern has been fourth-quarter US GDP growth, which have been trending down to a 1% annual rate, down from a 2% rate in the third quarter. The first reading on fourth-quarter gross domestic product is due Jan. 29. The jobs report indicates that fourth quarter GDP won’t drop too much.

With economy activity appearing to have leaked modestly lower in recent months, expect some of this positive momentum to be surrendered in the coming months, though the economy is expected to continue creating jobs in a manner sufficient to absorb excess labor market slack. The Fed is unlikely to raise rates at its Jan. 26-27 meeting, but is probably on track to move again at its March 15-16 meeting.

And then there is the problem of the rest of the world. Or at least the emerging markets and China. It was another wild day in China. China’s Shanghai Composite surged to a gain of 3% before plunging to a loss of 2% within the first 15 minutes of trading. The bottom was put in amid speculation the country’s so-called national team came in to support stocks, and the Shanghai Composite finished up 2%.

And fear of volatility spilled over to Wall Street; most of the day Wall Street was slightly positive, on the back off the strong jobs report, but as we headed into the final couple of hours, discretion was the better part of valor and traders decided the best defense was to exit positions before the weekend, and what might be a wild Monday morning of trading in Shanghai.

Both the Dow and S&P 500 had their worst five-day starts to a New Year in history, with the Dow falling 6.2% for the week and S&P 500 sliding 6%. The Nasdaq was down 7.3% this week.

Financial Review

2015 Financial Review

Sinclair Noe — December 31, 2015

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

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DOW – 178 = 17,425
SPX – 19 = 2043
NAS – 58 = 5007
10 Y – .03 = 2.27%
OIL + .45 = 37.05
GOLD + .40 = 1060.20
SILV – .03 = 13.81

This is the final day of the year, and so it is appropriate to review where the markets stand; generally, it was ugly. We’ll take a look at stocks, bonds, the dollar and commodities. It was not an easy year for investors. Nearly 70% of investors lost money this year, according to Openfolio, an app that allows people to track their investment performance and compare their portfolio with other users.

Warren Buffett is seeing his worst year since 2008, with Berkshire Hathaway shares down more than 11% year to date. Bill Ackman of Pershing Square Capital sent a letter to investors in December that said 2015 may be the fund’s worst year since it was founded in 2004. 2008 was a terrible year in the stock market, but bonds were up 22%. But this year, not one major asset class had a good year.

If you went to sleep on December 31, 2014 and you just woke up today, you might think nothing happened in 2015. The S&P 500 index started the year at 2058, and closed at 2043, for a loss of 15 points or about 0.7%; with dividends reinvested the S&P 500 is up just about 2%. This follows three straight years of double digit gains for the S&P.

The best performing sector in the S&P was Consumer Discretionary with a gain of 9.5%. The worst performing S&P sector was Energy (no surprise there) down 23.8%, and materials down almost 10%. Netflix was the top performing stock in the S&P 500 with a gain of 139%; Amazon + 122%. Add in Google (now called Alphabet) + 49%, and Facebook + 36%. The big losers in the S&P were Chesapeake Energy, CONSOL Energy, and Southwestern Energy; all three down right at 77%.

So, if you avoided energy and went with the simple idea of the FANG stocks: Facebook, Amazon, Netflix, and Google; that simple formula makes you a stock picking genius. That doesn’t mean the FANG stocks will deliver in 2016. After all a trade can get crowded; case in point, Apple, the most widely held stock, lost 4% on the year.

The Dow Industrial Average started the year at 17,823 and closed at 17,425, for a loss of 398 points, or about 2.2%. Just a reminder, the Dow hit a record high of 18351 back in May and we did enjoy some milk and cookies this year; but it’s a long way from May to December.

The top performers in the Dow include Nike + 31% YTD, McDonald’s + 26%, Home Depot + 26%, and GE + 22%. The big losers on the Dow were Walmart – 28%, Caterpillar – 25%, American Express – 25%, and Chevron – 20%.

The Nasdaq Composite started the year at 4736 and closed the year at 5007 for a gain of 271 points or about 5.7%.

The Russell 2000 index started the year at 1204 and finished the year at 1135, down 69 points, or just under 6% negative for the year.

There are approximately 3,700 publicly traded companies on the US exchanges, and filtering out the S&P 500 stocks and the OTC stocks, the top performers included Eagle Pharmaceutical + 462%, Exelixis + 300%, Galapagos + 239%, and Prothena + 242%; all four are basically biotech companies. Great returns but long odds.

European markets ended the year mixed. Germany’s DAX gained 10%, while Italy’s MIB was the top performer, up 13%. On the downside, Britain’s FTSE lost 5% and Spain’s IBEX fell 7%. The major Asian indexes were mostly higher. Hong Kong’s Hang Seng lagged, losing 7%. Japan’s Nikkei gained 9%. And I’m sure you remember when China devalued the yuan in August and their stock market suffered massive losses; when all was said and done China’s Shanghai Composite finished the year with a 9% gain.

Jamaican stocks were a pretty good place to invest this year; the island nation’s index rose more than 80%. As for losers, political woes and lower oil prices have hurt the Ukrainian equities index, which has tumbled 56% year-to-date.

Morgan Stanley Institutional Growth is the top performing mutual fund of 2015, returning 11% so far this year; pretty good, but it is still below the fund’s own five-year average return of 14.6%.

The year’s best performing ETF position was VelocityShares 3x Inv Natural Gas ETN, a triple-leveraged ETF meant to track the inverse price movement of natural gas. Because natural gas prices fell 33% in the past year, this ETF climbed more than 200%.

Excluding leveraged ETFs, and those that track the inverse of a commodity or index, the best-performing ETF of 2015 is the Market Vectors ChinaAMC SME-ChiNext ETF, which emulates bonds issued by China.

As 2015 comes to an end, so does Q4. And that means corporate America will announce the financial results of their fourth quarter in a few weeks. According to FactSet, earnings for the S&P 500 are expected to have fallen 4.7% during the final three months of the year. If so, it would mark three consecutive quarters of year-over-year declines in earnings; something that hasn’t happened since 2009.

US Treasuries lost ground in 2015. Treasury yields put in their lows for the year in January.

The yield on the two-year surged to fresh six-year highs after the Federal Reserve announced an interest-rate increase in December. For the year, the two-year rallied 60 basis points to 1.07%. The 10-year yield put in its 2015 high of 2.48% in June before ending the year up 41 basis points at 2.27%. Selling at the long end caused the 30-year yield to rise 28 basis points to 3.03%. The yield on the long bond put in its 2015 peak of 3.24% in June. For the year the long bond lost 2%.  The 3-month Treasury bill returned 0.11%.

As for corporate bonds, high-yield debt sold by companies with more fragile balance sheets had a tough 2015. In particular, it was not a good year to hold bonds from Arch Coal, which took three of the bottom spots ahead of a potential bankruptcy filing.  Investment-grade corporate bonds sold by companies with relatively strong balance sheets fared better, but not by much. People are still avoiding high-yield debt from the energy sector, but elsewhere you’re seeing some stability. In a world where the 10-year Treasury is yielding 2.25%, 8% or 9% will still attract attention for someone willing to chase yield.

The US dollar rallied in 2015. The US Dollar Index climbed 9% in 2015. The Canadian dollar was the worst-performing major currency versus the greenback, plunging 16.4% to 1.38 per dollar as a result of the weakness in oil prices. The euro was also hit hard, falling 10% to 1.09 as the European Central Bank announced a policy of negative interest rates. The Swiss franc could be the lone major currency to gain versus the dollar.

In January, the Swiss National Bank removed its euro-franc floor, causing the Swiss franc to skyrocket. The currency hit a high of .83 per dollar, up 16%. By the middle of March, however, virtually the entire move had been erased. The franc is up 0.2% at .99 per dollar. The Brazilian real lost almost half its value and is looking like it has hit bottom, or at least it should within the next 6 months.

Commodities had a really ugly 2015. Precious metals saw some early strength in 2015 but sold off throughout the year after their January gains. Gold sank 10% to $1,060 an ounce and silver lost 12% to $13.80 an ounce. On the industrial side, copper plunged 25% to $2.13 a pound.

2015 has been the year of the double dip for crude oil. Prices were recovering until Greece voted to leave the Eurozone for a few minutes. Then after their banks were drained, they decided to stay just a little bit longer.

You also had the China stock market crash and OPEC started an old fashioned price war against US shale players, plus the supposed return of Iranian oil as sanctions are supposed to be lifted. But hold on, is it a done deal? The Wall Street Journal is reporting that the US is going to put more sanctions on Iran which may cause some problems for the return of Iranian oil back to the market.

For the year crude oil tumbled 31% to $37.05 a barrel as oil inventories swelled. An unseasonably warm fourth quarter pushed natural gas down to $1.75 per million British thermal units, but a late rally saw the energy component end 2015 down 19% at $2.37.

The Thomson Reuters CRB commodities index fell 24% to six-year lows. While coffee slumped 25 percent, cotton and sugar are in positive territory for 2015. Cocoa prices were up more than 18% on the year.

Next week’s economic calendar includes a couple of reports from the ISM and then next Friday we get the monthly jobs report for December. Also, we’ll start seeing some fourth quarter earnings reports trickle in.

Just because we can look back on 2015 doesn’t mean we can see the future. The only thing we know with any degree of certainty is that 2016 will be different. So good luck to you in the New Year.

Financial Review

Slip Sliding Away

Sinclair Noe — December 9, 2015

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

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DOW – 75 = 17,492
SPX – 15 – 2047
NAS – 75 = 5022
10 YR YLD – .03 = 2.21%
OIL – .28 = 37.24
GOLD – 2.10 = 1073.50

Stocks started the day in positive territory but then slipped, and the decline coincided with a drop in oil prices, which also went from positive to negative. Oil prices have buckled following the breakdown of OPEC talks last week. We have a price war breaking out between Saudi Arabia and Iran and US shale producers. At the same time, we have Russia, Venezuela, and Brazil all desperate for oil revenues.

But it’s not just oil; iron ore is moving in lockstep with oil, dropping to a 10-year low; Codelco, the Saudi Arabia of copper is refusing to cut output, betting it can outlast rivals and win market share. The major commodity indices have dropped to lows last seen in 1998.  While plummeting commodity prices can be a warning sign that the world economy is heading into recession, the latest sell-off has a different character. The slump is chiefly due to excess production, and amounts to a positive supply shock that should boost global recovery.

Dow Chemical and DuPont are in talks to combine, in what would be one of the largest deals of the year. Each company has a market value of about $60 billion and the combination would create the second-biggest chemical company in the world, after BASF, with more than $92 billion in annual sales. They are also talking about breaking up the merged company into three businesses – agricultural chemicals, specialty products, and materials like plastics. For the past year, both companies have been pressured by activist investors unhappy with their financial performance.

Yahoo will abandon its plans to spin off its $31 billion stake in Alibaba. Instead it will look at other options, like selling its core operations or spinning off its stake in Yahoo Japan. The decision is a repudiation of the strategy taken by Marissa Mayer, who was hired to turn the internet company around. She had planned to spin off the 15 percent stake in Alibaba and focus on the core business of selling advertising. But investors, led by the hedge fund Starboard Value, argued that the risk of capital gains tax was too great.

General Electric is in advanced talks to buy the drill-bits and drilling-services divisions of Halliburton, which is divesting assets to win antitrust approval for its takeover of Baker Hughes. GE is also exploring bids for other assets that Halliburton is seeking to unload, including parts of Baker Hughes’ operations.

Freeport-McMoRan said it will suspend its dividend and further reduce its capital spending. Freeport-McMoRan, the U.S.’s biggest miner and a major copper producer, said ending its annual dividend of 20 cents a share would save $240 million a year. The moves come as the company has been in turmoil as falling energy prices have exposed a disastrous investment in oil and gas drilling. A number of other miners have recently cut their dividends in a bid to improve liquidity.

As widely expected, Kinder Morgan has cut its 2016 quarterly dividend to $0.125/share from the current $0.51, marking the company’s first-ever dividend cut. The company said the move will enable it to use a significant portion of its cash flow to fund the equity portion of its expansion capital requirements, eliminate any need to access the equity market for the foreseeable future, and maintain a solid investment grade credit rating.

China cut the yuan’s reference rate to the weakest since 2011, fueling speculation that the central bank is trying to release pent-up depreciation pressure before a potential rate increase by the Federal Reserve. There are signs that the People’s Bank of China has started guiding the yuan lower before the Fed acts. An index of emerging-market currencies dropped to a record low yesterday on fears a Fed rate hike will spur capital outflows. Traders now put the odds of a Fed liftoff next week at 80 percent.

Puerto Rico Governor Alejandro Garcia Padilla is visiting Washington today to again ask for help as the U.S. commonwealth seeks to recover from a nearly decade-long recession. While the U.S. Treasury and some lawmakers have supported legislative fixes for Puerto Rico, the efforts have not gained momentum.

Brazil’s Congress delivered a blow to President Dilma Rousseff by picking members of a special committee that were opposed by her supporters. Rousseff is being accused of tampering with the national budget to illegally disguise poor fiscal performance. The special committee will now gather evidence against the president and hear her defense in the first phase of the impeachment process.

The bill for last month’s catastrophic Samarco dam failure in Brazil could be growing by the day, as the joint venture between Vale and BHP Billiton struggles to formulate an emergency plan demanded by local prosecutors in case of additional accidents. The disaster unleashed an avalanche of mud that killed at least 15 people, destroyed villages downstream, and polluted hundreds of miles of waterways in the Rio Doce basin.

Some of the world’s largest companies, including Unilever, Total, Bank of America, Patagonia and Ikea, announced their commitment on Tuesday to cutting carbon emissions and participating in practices that would support sustainable energy. The pledges came at The New York Times Energy for Tomorrow conference, being held in concurrence with the international climate talks outside Paris.

Secretary of State John Kerry announced Wednesday that the United States would double, to about $860 million a year, its grant-based support for vulnerable countries that need to adapt to climate change by 2020. In his first big speech at the United Nations global climate conference in Paris, Kerry talked about the need to pay attention to climate science and act in the interest of future generations. Throughout the Paris climate talks, developing nations have been asking for more money as world leaders work toward a new global climate agreement.

Pep Boys gave Bridgestone three days to top Carl Icahn’s $863 million takeover offer, saying its board had determined that the billionaire investor’s bid is superior to their earlier agreement.

Alphabet is making its biggest bet yet on spreading connectivity across the nation. On top of 20 other metro areas, Google Fiber now plans to come to Los Angeles and Chicago – the second and third-largest U.S. cities by population – if they pass a long review. The latest announcement follows the Alphabet restructuring, which puts Fiber in a separate division from core Google.

Apple has suspended plans to offer an online TV service, and will focus for now on helping media companies directly sell content via the App Store. Apple isn’t completely giving up on providing a live TV service, but notes its original plan to sell skinny bundles, or packages of about channels for $30-$40/month has “run into resistance from media companies that want more money for their programming”, or were unwillingly to un-bundle content.

For Apple, the idea was to create TV programming similar to iTunes, where you just buy the songs you want, not the entire album. If Apple gets its way, it means the traditional pay TV package, which averages around 100 channels, will get shrunk by nearly 80 percent. And while TV executives will say that they understand that consumers don’t want to pay for channels they don’t watch, all of them will argue that their channels are must-haves.

A class-action lawsuit in California that has the potential undermine Uber just got a whole lot bigger. The case was certified as class action in September but today a 9^th circuit judge expanded the scope of that class action. The suit challenges whether Uber drivers are independent contractors, as the company claims, or employees, which would entitle them to a host of benefits such as health insurance and require Uber to pay on-the-job expenses like gas and maintenance that drivers currently pay themselves.

Today’s ruling says that Uber drivers can take part in the California class action over their employment status even if they didn’t opt out of Uber’s arbitration clause. Chen also ruled that drivers in the class will be able to pursue expense reimbursement claims. Basically, that means the case is going to be much bigger.

According to a new study by the NPD Group, the all-day breakfast initiative at McDonald’s is bringing in new customers. The research firm found that 33% of all customers who ordered breakfast items past the normal cut-off time did not visit the restaurant chain in the thirty days before the launch.

Last month, Chipotle closed 43 restaurants in Washington and Oregon after health authorities linked an E. coli outbreak to six restaurants in the area. Since the initial problem, illnesses linked to the chain have been reported in seven more states. On Monday, 30 students at Boston College fell ill after eating at a local Chipotle, leading the company to close yet another restaurant; On Tuesday, the number grew to at least 80 students.

Although Boston health officials believe the food-borne illness is norovirus -not E. Coli – and is isolated to a single location, they won’t know for sure until test results are available in a few days. Norovirus is a highly contagious virus. It’s the leading cause of outbreaks from contaminated food in the US, making about 20 million people sick a year. Today comes word that more than 120 Boston College students may be ill from food at Chipotle.

German Chancellor Angela Merkel has been named Time’s Person of the Year, praised by the magazine for her leadership on everything from Syrian refugees to the Greek debt crisis. Time also cited Merkel’s strong response to “Vladimir Putin’s creeping theft of Ukraine.”