Financial Review

Milk and Cookies

Sinclair Noe — June 19, 2017

DOW + 144 = 21,528
SPX + 20 = 2453
NAS + 87 = 6239
RUT + 11 = 1418
10Y + .03 = 2.19%
OIL – .64 = 44.10
GOLD – 9.80 = 1244.60
BITCOIN + 1.34% = 2677.18 USD
ETHEREUM – 3.60% = 358.49

The Dow Industrial Average hit another record high today. The S&P 500 is up 9% so far, this year, hitting another record high close today.

Just 10 companies have accounted for almost half of the benchmark’s return this year. While stock bears have been stressing caution, some have gone as far as to compare the current environment to the dotcom bubble. The reality is that this concentration is not unusual; it happens in rallies.

On June 9, tech stocks in the S&P 500 dropped 2.7%. But that money mostly stayed in the stock market, flowing into energy and financial shares. Nasdaq’s biotechnology index rose 2.5 percent in its biggest one-day gain since February while the S&P’s healthcare index had a record-high close.

The S&P’s financial sector was also one of the benchmark’s strongest gainers with a 1% rise after New York Federal Reserve President William Dudley said U.S. inflation was a bit low but should rise alongside wages as the labor market continues to improve, allowing the Fed to continue gradually tightening monetary policy.

Dudley said: “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go. This is actually a pretty good place to be.” Apparently, the Fed sees underlying strength in the economy that the data doesn’t show right now. The Fed’s base case is that this is just kind of a soft patch and we will continue to cycle higher.

And Wall Street always seems to be optimistic when we have big merger and acquisition news – which we saw on Friday with the Amazon/Whole Foods deal. Not everybody loved the deal, Kroger lost 19% on Thursday when they announced a bad earnings report, then came news of Amazon, and Kroger dropped another 9%, losing $7 billion in market cap in just 2 days. Today, the bottom fishers came in and Kroger bounced 1.5%.

Also, Blue Apron started its IPO roadshow today, hoping that nobody paid any attention to anything last week. Blue Apron Holdings, a startup that offers cook-at-home preparation kits, expects shares to price between $15 and $17 in its initial public offering. With Amazon now casting an anticipatory shadow over the “Fresh food to urban yuppie home delivery” sector, Blue Apron is caught in a gnarly Catch 22.

Its IPO only makes sense if people believe that its business model can drive revenue and maybe create profit, but if that model can indeed drive revenue, what’s to stop Amazon from copying it, using 80 million Prime subscribers and the vast coverage of Whole Foods distribution network?

Resurgent growth is reviving one of the past decade’s hottest trades. Emerging-market investors are again piling into the so-called BRIC nations — Brazil, Russia, India and China — pushing monthly inflows and stock prices to almost two-year highs. Non-resident portfolio flows into BRIC nations rose to $166 billion last month, from $28 billion of outflows 12 months prior.

Oil fell, extending four weeks of declines, as U.S. drillers continue adding rigs and Libya boosts output. U.S. drillers added rigs for a 22nd straight week, the longest uninterrupted stretch of growth in three decades.

The Supreme Court just ruled that social media is a constitutional right. Today, the justices unanimously held that states can’t broadly limit access to social media because cyberspace “is one of the most important places to exchange views.”

In Packingham v. North Carolina, the justices were asked to review a North Carolina statute that bars sex offenders from accessing social media altogether and makes it a felony if they post on any platform. The case has implications for all members of American society, however, not just sex offenders, and the court appears to be extremely conscious of the broader effect.

Justice Anthony Kennedy wrote, “A fundamental First Amendment principle is that all persons have access to places where they can speak and listen, and then, after reflection, speak and listen once more.” Given the fact that social-media platforms allow for this kind of free communication, and that the constitution protects the right to exchange, the justices recognized this case was widely societally important.

North Carolina convicted over 1,000 sex offenders based on its statute barring access to all social platforms. That, according to the high court, simply isn’t acceptable considering the role Facebook, Twitter, Snapchat and others play in current public communication.

The Supreme Court agreed to consider whether there are constitutional limits to how far lawmakers can go in drawing electoral districts to maximize partisan political advantage, a case that could have profound implications for US elections.

The justices in a brief written order said they would review a redistricting case from Wisconsin, where a three-judge lower court last year invalidated a redistricting plan enacted by the Republican-controlled Wisconsin legislature in 2011. That court said Wisconsin lawmakers redrew the state’s legislative districts after the 2010 census to unlawfully maximize the number of Republicans elected and dilute the power of Democratic voters.

Democrats won a popular majority of assembly votes in 2012 and 2014, but Republicans managed to take 60 of the 99 assembly seats. The practice of redrawing electoral maps along partisan lines is known as “gerrymandering.” The Supreme Court has previously struck down gerrymandered maps that disadvantage minority voters, but has yet to prohibit a map because it unfairly advantages one political party over another.

Also today, the Supreme Court struck down part of a law that bans offensive trademarks, ruling in favor of an Asian-American rock band called the Slants and giving a major boost to the Washington Redskins in their separate legal fight over the team name.

The justices were unanimous in saying that the 71-year-old trademark law barring disparaging terms infringes free speech rights guaranteed in the Constitution’s First Amendment. Justice Samuel Alito said in his opinion for the court, “It offends a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.”

Silicon Valley went to Washington today. The White House has enlisted tech CEOs to improve government services, reform outdated information technology systems, cut fraud and government costs and improve services for taxpayers. It has cited an economic opportunity to save up to $1 trillion over 10 years through such measures.

Jared Kushner, Trump’s son-in-law, said before the sessions began that the administration wanted to “unleash the creativity of the private sector to provide citizen services in a way that has never happened before.”

French President Emmanuel Macron is poised to rearrange his Cabinet after his new centrist party won a solid majority in the country’s parliamentary election, enabling the government to quickly start passing its first big laws. President Macron flew opened the world’s biggest air show in Paris, today.

Boeing generated a burst of activity on the opening day by launching the 737 MAX 10. Boeing said it had more than 240 orders and commitments from at least 10 customers for the new 737, which can carry up to 230 people in a single-class configuration. Airbus immediately hit back with an order for 100 of its popular A320neo planes.

The Federal Trade Commission said it will seek to stop the merger of DraftKings and FanDuel, because the combined company would control more than 90 percent of the U.S. market for paid daily fantasy sports contests.

This is the latest setback for two companies, which have faced regulatory challenges in several states. They announced the deal in November 2016 as a merger of equals that would cut their legal bills. The companies said in a joint statement that they were considering their legal options.

Late Friday, we told you that CenturyLink had been sued in Arizona by a former employee for allegedly running a sales incentive scheme, by adding services to accounts without customer approval. The whistleblower was fired.

Now, the case is going to class action status in California, seeking damages up to $12 billion. CenturyLink is amid a $34 billion merger with Level 3 Communications.

Financial Review

Pick a Lane

Sinclair Noe — November 17, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 6 = 17,489
SPX – 2 = 2050
NAS + 1 = 4986
10 YR YLD – .01 = 2.26%
OIL – .95 = 40.79
GOLD – 12.30 = 1070.80
SILV – .06 = 14.29

Global equity markets moved higher today, following the rally yesterday on Wall Street and brushed off concerns related to Friday’s terror attacks in Paris. In their final communique from a summit in Turkey, the leaders of the world’s largest economies stuck to a goal of lifting their collective output by an extra 2% by 2018, even though growth remains uneven and weaker than expected globally. G20 leaders also endorsed plans to address Syria’s refugee crisis, taxation, climate change, cyber security and inequality.

France launched another set of airstrikes on the ISIS stronghold of Raqqa in Syria early Tuesday as the country steps up its response to last week’s deadly attacks. The bombings follow a second night of home searches in France and Belgium to catch those responsible and linked to the killings. President Francois Hollande is now looking to expand his powers under France’s state-of-emergency statute and has called on the U.S. and Russia to form a “big unified coalition” to destroy ISIS.

Meanwhile, Russian officials said they had found evidence that the passenger jet that crashed in Egypt last month was downed by a bomb, the first time those investigating the crash have cited proof of a terrorist attack. Russia’s military doubled its attacks in Syria on Tuesday. President Putin ordered Russian naval forces in the Mediterranean to work as allies with French warships in attacking ISIS targets in Syria; not necessarily a France-Russia alliance, but certainly greater military coordination.

The consumer price index increased by a seasonally adjusted 0.2% in October. The CPI measures prices at the retail level and is used to determine cost of living adjustments. The cost of housing and medical care, two of the biggest expenses for most families, climbed again and are running above a 3% annual rate. Rents rose 0.3% in October and medical care jumped 0.7%, the biggest increase in five months. Food prices, meanwhile, rose just 0.1%, marking the smallest gain in five months. Energy prices advanced 0.3%, even though the price of gasoline was down last month. The discrepancy comes from seasonal adjustments. Overall inflation is up 0.2% in the past year. Core prices, excluding food and energy, are up 1.9% in the past 12 months.

Separately, a new report from Aon Hewitt shows health insurance costs for employees of midsize and large companies averaged $4,700 in 2015; that’s up 130% from $2,001 in 2005. The report shows 38% of employers have increased their participants’ deductibles and/or copays in the last year, and another 46% may do so in the future. Employers are making cutbacks in health coverage in other ways, too. Some 18% of companies are reducing subsidies for covered dependents, and 17% are adding a surcharge for adult dependents who have access to other health coverage. Plus, 43% of companies are considering using unitized pricing, in which employees pay per person instead of individual versus family.

So there are some signs of inflation in some areas but no indication that inflation is overheating, at least according to the headline inflation numbers. Still, for most of us, it seems like there is inflation; housing and rents have increased, health care, education, and food prices seem to be on the rise. Even wages are starting to show gains. The economy has added jobs at a rapid pace over the past few years, putting some upward pressure on wages and reducing the unemployment rate to 5%. The government said real, or inflation-adjusted, hourly wages advanced 0.2% in October. Real wages have climbed 2.4% in the past 12 months.

You’re not just imagining it. Prices are going up, except for commodities. And the price of energy has an oversized influence on the annual inflation rate. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditures index, or PCE, which is running at a 1.3% annualized pace; still below the Fed’s target of 2% inflation but likely to rise quickly with expected increases to health care premiums over the next few months.

Now add fiscal policy to the mix. After years of gridlock the government has finally approved a 2 year budget, and it actually includes some spending; it will likely add 0.3% to gross domestic product, rather than subtracting 2% from growth; it might even result in a few government jobs, rather than cutting government jobs. And those government workers will go out and spend their paychecks on Main Street, adding to demand and circulating money through the economy. Next year will be the first since 2010 that fiscal policy adds to growth. For years, Fed Chair Bernanke (and more recently Chair Yellen) complained about headwinds from fiscal policy, or the lack thereof. Now we are about to see a shift from monetary policy alone to fiscal policy – a passing of the baton, which is always the most perilous part of a relay; too early or too late, and the race comes to a grinding halt.

The next concern is whether fiscal policy is capable of running with the baton (to extend the analogy), and staying in the correct lane. If government spending goes to projects that improve productivity – things like infrastructure and education – then it will likely improve growth. French President Francois Hollande said he will step up spending on security in the wake of the terrorist attacks in Paris, but this type of spending is not likely to result in economic growth. So, it’s not just a matter of changing from monetary policy to fiscal policy, it is important that something is actually accomplished with the stimulus. This has been the big drawback of monetary policy; the Fed dropped money on Wall Street but it never made it to Main Street.

A new Reuters analysis shows that corporate spending on buybacks and dividends has surged relative to investment in long-term growth through R&D and other forms of capital spending, in a troubling sign that corporate America may be undermining itself. Almost 60% of the 3,297 publicly traded non-financial U.S. companies examined bought back their shares since 2010. In fiscal 2014 alone, the total amount returned to shareholders (including share repurchases and dividends) reached $885 billion, way more than the companies’ combined net income of $847 billion. And the spending on buybacks, or financial engineering squeezes out investments in R&D, which has dropped.

Industrial production fell 0.2% in October but manufacturing output advanced 0.4% in October. Overall production was held down by a drop in mining and utility output. In addition, the Fed revised August production higher to a 0.1% gain from previous estimate of a 0.1% drop. As a result, industrial production was up at a 2.6% annual rate in the third quarter.

The National Association of Home Builders/Wells Fargo housing market index pulled back 3 points to 62, slightly below expectations but up from 58 a year ago. A reading over 50 signals improvement. Builders have reported strong results in the most recent earnings season. D.R. Horton, the largest US homebuilder, reported a 44% jump in profit in the most recent quarter, with orders up 19%. Lennar, the number-two builder by volume, also reported profit and revenue that were better than expected. Orders rose more than 10%.

Greece has reached a preliminary deal with its international lenders on home foreclosures reform, removing a major obstacle holding up fresh bailout loans for the debt-laden country. The changes will see Athens qualify for a €2-billion-euro sub-tranche of new financial aid to pay off state arrears and €10-billion-euro in funds to help recapitalize the country’s four main banks.

Walmart beats. Walmart earned $1.03 per share from continuing operations in the third quarter, but $0.99 excluding adjustments to its leases. Still, that was marginally higher than the $0.98 expected by analysts. Comparable-store sales, or sales at stores open at least a year, at Walmart’s US stores were up 1.5%. E-commerce sales were up by 10%.

Home Depot beats. The do-it-yourself home-improvement chain earned $1.36 per share in third quarter, beating expectations for $1.32. This was driven by a healthy 5.1% gain in comparable-store sales, which was better than the 4.6% expected by analysts.

Urban Outfitters missed. Urban Outfitters reported record third quarter sales that missed estimates, and earnings per share matched estimates, but comparable-store sales climbed by just 1% during the period, missing expectations for 3.4% growth. The news came after shares dropped 7.4% following the company’s announcement that it acquired a group of restaurants including the fast-casual chain Pizzeria Vetri. Apparently I’m not the only one who fails to see the synergy between retail clothing and pizza.

Shares of Dick’s Sporting Goods are getting clobbered. Dick’s reported third quarter adjusted earnings of $0.45 per share, missing expectations by a penny. Same-store sales, or sales at stores open at least a year, were up 0.4% in the quarter across the company, less than the 1.9% increase that was expected. And then the salt on the wound: the company lowered fourth quarter guidance.

A New York state judge denied a temporary restraining order sought by daily fantasy sports companies DraftKings and FanDuel in an effort to keep operating in the state after NY Attorney General Eric Schneiderman deemed the games to be illegal gambling. The government will now move for an injunction against the companies which will be heard in court on Nov. 25. DraftKings continues to operate as usual in New York despite the pressure from Schneiderman’s office, but FanDuel stopped taking new deposits from state players on Friday.

A US House of Representatives investigative panel plans to hold a 2016 hearing on skyrocketing drug costs. Earlier this month, the U.S. Senate Special Committee on Aging launched a probe into drug pricing at Valeant and Turing, signaling growing bipartisan agreement over the need to review prescription medicine costs across the nation.

Financial Review

Veterans Day 2015

Sinclair Noe — November 11, 2015

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW – 55 = 17,702
SPX – 6 = 2075
NAS – 16 = 5067
10 YR YLD closed 2.34%
OIL – 1.14 = 43.07
GOLD – 3.00 = 1087.20
SILV – .09 = 14.45

“To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…” Those were the words of President Wilson in 1919, one year after hostilities ended in World War I on this date in 1918, in the 11^th hour, of the 11^th day, of the 11^th month. Back then it was called Armistice Day. Today we call it Veterans Day. And for all the veterans – Thank you.

The 11^th day of November is celebrated in China as Singles Day, symbolized by the four lonely 1s of 11/11. Apparently, this is kind of the anti-Valentine’s Day. Alibaba broke its own record for sales on China’s Singles Day, the world’s largest Internet shopping event, generating more than $9.3 billion in gross merchandise volume by midday Wednesday. Sales now look on track to hit $13 billion. More records: In the first eight minutes of this year’s sale, the company posted more than $1 billion in sales, topping last year’s 17 minutes to hit the billion-dollar mark.

AB InBev has completed an agreement to buy SABMiller for $105 billion, one of the largest mergers in corporate history. Under terms of the deal, SABMiller will sell a 58% stake in its MillerCoors joint venture to partner Molson Coors for $12 billion. A combined AB Inbev-SABMiller would have controlled close to 70% of the U.S. beer market, so the sale of the U.S. division was seen as a concession to competition authorities. In other brewing news, shares in Carlsberg A/S rose as much as 8.7 percent after the beer-maker announced a cost-cutting plan which will see it shed about 2,000 employees.

Iraqi oil puts pressure on shale; 19 million barrels of oil are due to arrive by ship from Iraq in American ports this month, the biggest influx from that country since June 2012, as OPEC members continue to defend market share in the face of low oil prices. The tactic seems to be working as yesterday the Energy Information Administration cut its U.S. crude oil production forecast for 2016 by 1 percent to 8.77 million barrels a day. The American Petroleum Institute said Tuesday that inventories rose by 6.3 million barrels last week. This all adds to concerns about oversupply. Crude oil fell to the lowest level in nearly three months.

Britain’s relationship with the EU is working but the Bank of England Governor Mark Carney says they will do whatever is needed to adapt should Britons vote to leave the bloc in a referendum. Britain is due to vote to stay in the EU before the end of 2017. The announcement came as U.K. unemployment fell to the lowest level in more than seven years, dropping to 5.3% in the third quarter. Also on tap: ECB chief Mario Draghi will deliver a speech today at the Bank of England’s Open Forum.

Online orders for Apple’s iPad Pro started today. The 12.9 inch-screen tablet, aimed in large part at business users and creative pros, will start at $799 but costs more than $1,000 if buyers want a keyboard and stylus included. Yesterday, Apple shares fell 3.1% after a Credit Suisse report said Apple had cut its orders for iPhone 6 components by as much as 10%.

Meanwhile, Apple is in talks with banks in the US about creating its own mobile-to-mobile payments service that sounds a lot like PayPal’s Venmo app. The app would reportedly let people send payments to each other directly from their phones, and automatically take it out of their checking accounts on the back end. While Apple already has its own payments system thanks to Apple Pay, the service so far has been mobile-to-merchant, and the mobile-to-mobile space has largely been dominated by PayPal’s Venmo app, but there is competition from Facebook’s Messenger app, Snapchat, and Square.

Macy’s shares plunged by as much as 14% after the department-store chain said its sales growth was weak because of muted consumer demand. Macy’s also lowered its guidance for 2015 earnings per share. Sales fell 5% to $5.87 billion, below the expectation for $6.1 billion. Bad news for Macy’s could be great news for customers, the company’s revenues have plunged, which means year-end sales are likely to be fantastic.

The New York state attorney general has ordered the fantasy sports sites DraftKings and FanDuel to stop accepting bets in New York, saying that the operations were essentially illegal gambling. The AG said the fantasy sites were considered gambling because customers “are clearly placing bets on events outside of their control or influence, specifically on the real-game performance of professional athletes.” The state of Nevada took a similar action in mid-October, with the Nevada Gaming Control Board saying the companies had to cease operations in the state.

DraftKings and FanDuel have indicated they would continue to let customers play while they contest the order in New York. Four smaller daily fantasy sports sites: DailyMVP, DraftDay, DraftOps, and MondoGoal Trading say they will stop letting users from New York enter their paid contests.

Nomura lowered its price target on Valeant Pharmaceuticals to $175 from $220. Nomura had been one of the most bullish on the company. The analyst for Nomura wrote: “Valeant’s business update call did not address all our outstanding questions; however, management’s willingness to be as open as possible in its responses was a positive first step towards rebuilding credibility with investors.” Here’s the big problem though, share price has dropped from $263 to $78.90. Every now and then it is a good idea for Wall Street analysts to open their eyes before issuing a forecast.

Valeant’s biggest investor is Bill Ackman of Pershing Square; he doubled down when the bad news on Valeant first hit; after Citron Research, a short-selling firm led by Andrew Left, issued a report two weeks ago asking if the company was running an Enron-like fraud. The stock had already been under pressure after the company was scrutinized for raising the prices for two acquired drugs. The Citron report, though, focused on Valeant’s relationship with Philidor, a specialty pharmacy. Citron has accused Valeant of using Philidor to book “phantom sales.” Valeant is the largest holding in Pershing Sqaure, and that hedge fund is now down about 19% for the year.

And the hits keep coming. A U.S. judge said Valeant Pharmaceuticals and hedge fund manager William Ackman must face a lawsuit accusing them of insider trading in Allergan before making an unsuccessful takeover bid for the maker of Botox. The lawsuit was filed on behalf of investors who sold Allergan shares in the two months before the defendants on April 22, 2014 announced an unsolicited $51 billion bid for Allergan. Pershing had by then quietly amassed a 9.7 percent stake in Allergan, which soared in value after the bid was announced. Investors said Pershing bought those shares knowing that Valeant was preparing a bid that could, and later did, become hostile.

Who knows? Maybe Valeant is an extraordinary bargain at current prices, but I’m guessing it will take years therapy before anybody is able to laugh at this.

The U.S. Department of Transportation has denied an appeal by railroads challenging new “crude-by-rail” regulations on trains hauling hazardous flammable materials. The rules issued in May include the phasing in of tougher tank car standards over several years and require new expensive braking systems on trains hauling more than 70 cars of crude oil by 2021.

General Electric’s stock did something yesterday that it hasn’t done in seven years: it closed above $30/share. In the years since June 10, 2008, GE’s stock has struggled despite CEO Jeff Immelt’s efforts to reassure investors that the company was changing. The mood seems to have shifted over the past year as the company offloaded its finance business and completed its biggest acquisition of all-time with the purchase of Alstom’s energy assets.

On Nov. 11, 1915, exactly three years before the end of World War I, IBM listed for the first time on the New York Stock Exchange — its name then Computing-Tabulating-Recording Co. IBM isn’t making a big deal of Wednesday’s 100th anniversary, which comes at an inauspicious time. Its stock has been the second biggest drag on the Dow Jones Industrial Average this year. For really, really long-term investors, consider this: If you had bought one share of IBM when it first listed on the NYSE at $47, you would now own 11,879 shares with a value of $1.6 million, according to the company. That’s a 3.4 million percent return.