Financial Review

Number 9

Sinclair Noe — August 7, 2017

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DOW + 25 = 22,118
SPX + 4 = 2480
NAS + 32 = 6383
RUT + 1 = 1414
10 Y – .01 = 2.26%
OIL – .27 = 49.31
GOLD – 1.10 = 1258.30
BITCOIN + 0.47% = 3447.61 USD
ETHEREUM + 0.88% = 269.15

The Dow hit an early morning, intraday high, dipped into negative territory and then hit a fresh intraday high before drifting into the close. Good enough for the 9^th record high close in a row. We have a low-inflation environment, low interest rates, and corporate earnings have come in incredibly well.

Analysts, on average, expect S&P 500 earnings to have expanded 12 percent in the second quarter and project earnings up 9.3 percent for the third quarter. The S&P, which is up about 11 percent this year, is trading at 18 times expected earnings, compared to its 10-year average of 14.

How long can the Dow Industrial keep hitting all-time highs? Who knows.

But the markets never follow a straight line and eventually this will end.  The streak comes as August trading gets under way and with September looming—historically two of the worst months for investors. If you have cash, there really is no reason to rush out and buy at these levels, especially if you think there will be a sale next week.

Friday’s July employment report showed job growth, at 209,000, well above the estimates for 180,000 new jobs. The unemployment rate fell to 4.3 percent in July, a decline of 0.1 from June, and a 16-year low. Goldman Sachs economists say the outlook for jobs is even better than they thought, and unemployment could go as low as 3.8 percent next year.

The firm’s economists, in a note over the weekend, talked about a labor market “overshoot,” with the trend in job growth remaining in the 150,000 to 200,000 range. Looking at such measures as the long-term unemployment rate, job openings and quits, and reports of skill shortages, the Goldman analysts say “the labor market is about as tight as in the full-employment years 2006 and 1989, though not yet as overheated as in 2000.

They expect the wage growth to finally tick up to about 3% by the end of the year. The economists said it appears that the labor market is likely to “overshoot” full employment, a condition that has resulted in recessions in the past. Even so, they are sticking with their forecast for Fed rate hikes, saying: “Our subjective probability of a hike by the December meeting remains around 60 percent, and our baseline for 2018-2019 is quarterly hikes.”

The dollar drifted slightly lower.  St. Louis Fed President James Bullard said the Fed can leave interest rates where they are for now because inflation is not likely to rise much even if the job market continues to improve.

And Minneapolis Fed President Neel Kashkari at a speech in South Dakota today, took a shot at companies saying they have worker shortages, arguing that workers are available if the pay is higher. Kashkari said, “If you’re not raising wages, then it just sounds like whining.” Kashkari also said that reducing immigration to the United States will reduce economic growth.

Total consumer credit increased $12.4 billion in June to a record seasonally adjusted $3.86 trillion, posting an annual growth rate of 3.9%. The historical main source of credit growth, non-revolving credit, which covers loans for education and cars, rose at an annual rate of 4.9% in June, down from torrid 8.2% in May.

Revolving credit, which is mostly made up of credit-card loans, increased at an annual rate of 3.9% in June, down from 5.7% in May.

The U.N. Security Council on Saturday imposed its toughest round of sanctions yet against North Korea over its two intercontinental ballistic missile (ICBM) tests in July. The sanctions could further choke North Korea’s economy by cutting its $3 billion annual export revenue by a third.

At a summit of Southeast Asian countries, Secretary of State Rex Tillerson held a door open for dialogue, saying Washington was willing to talk to North Korea if it halted a series of recent missile test launches. In a statement Monday, North Korea said it would never place its nuclear program on the negotiating table if the United States maintained a hostile policy against the North.

German health-care provider Fresenius is making a big push into the US market, buying home dialysis company NxStage for $30 per share in a deal valued at $2 billion.  Shares are up 28% on the news.

United Technologies has submitted an offer for aircraft parts maker Rockwell Collins. Rumors that Rockwell Collins has been working with an investment bank sent the stock up 4%. United Technologies did not comment on the news.

Berkshire Hathaway on Friday reported a 15 percent drop in second-quarter profit and missed estimates, as lower investment gains and a loss from insurance underwriting offset improvement in its BNSF railroad business. Berkshire ended June with about $99.7 billion of cash and equivalents.

ON Semiconductor rose 4.6 percent on stronger-than-expected second-quarter earnings and revenue.

Tyson Foods reported stronger-than-expected quarterly results, sending its shares up 5 percent, and said it would ramp up chicken production in the face of record demand from U.S. consumers.

CBS Corp, owner of the most-watched U.S. TV network, reported a 9.4 percent rise in second-quarter revenue, driven by higher content licensing and subscription fees.

Marriott International will partner with China’s Alibaba Group to tap into the growing number of Chinese citizens who travel abroad. The world’s biggest hotel chain said the joint venture with Alibaba would allow Chinese travelers to book rooms at Marriott hotels via Alibaba’s travel service platform, Fliggy.

The partnership will connect Marriott and Alibaba’s loyalty programs. Tourists would be able to pay for their bookings using Alibaba’s online payments platform, Alipay. Marriott has nearly 300 hotels in China and around 300 hotels in the pipeline.

Last week, Tesla announced its quarterly numbers; and once again, Tesla announced a quarterly loss. As the company ramps up production capacity for the Model 3, it is burning through cash at a prodigious pace. So, once again, Tesla is raising money, but this time they are not issuing more shares of stock.

Tesla will try to raise about $1.5 billion through its first-ever high-yield junk bond offering. Standard & Poor’s reaffirmed its negative outlook for the automaker and assigned a “B-” rating for the bond issue – deep into junk credit territory.

Apple’s iPhone 8 has gone to mass production, according to reports. The smartphone is likely to meet launch in September, and one of the new features will include augmented reality. AR is essentially a graphical overlay of CGI, or computer generated imagery, elements onto real world elements, typically generated by a video feed.

Here’s what that means; if you want to buy a new chair for your living room, you could take of a photo of the living room and the chair, and see how the chair looks in the living room. Or how about this – for hundreds of years, maybe thousands, the only way to measure the room was with a tape measure. The new iPhone will have a virtual tape measure, very handy for measurements where the tape measure can’t reach.

It seems like some people have a phone glued to their hands, and when you think about all the other gadgets we use these days, you might think we are using more electricity than ever. But the U.S. Energy Information Administration reports overall residential electricity sales have declined 3 percent from 2010 to 2016, and 7 percent on a per capita basis.

Americans are using less electricity than we did 10 years ago. Our numerous gadgets are all getting more efficient, so they’re less of a drain on residential electric bills. And our devices are also getting smaller. Most TVs are now flat and require less energy to operate than the giant TVs of yesteryear.

Also, laptops and tablets are more efficient than those big desktop PCs. Eventually, however, the EIA figures the ubiquity of rechargeable devices will counter efficiency gains, causing a net electricity consumption to increase from 2030 to 2040.

The Wall Street Journal reports penalties levied against firms and individuals by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority in the first half of 2017 were down nearly two-thirds compared with the first half of 2016—putting regulators on track for the lowest annual level of fines since at least 2010.

Fines of $489 million in the first half of 2017 compared with $1.4 billion in the 2016 period.

Wink, wink, nod, nod.

Financial Review

Quads

Sinclair Noe — July 19, 2017

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

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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

A Deluge and an Eclipse

Sinclair Noe — April 27, 2017

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

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DOW + 6 = 20,981
SPX + 1 = 2388
NAS + 23 = 6048 (record high close)
RUT – 2 = 1417
10 Y – .02 = 2.29%
OIL – 1.01 = 48.61
GOLD – 5.50 = 1264.50

Today brought a deluge of earnings.

Google parent Alphabet posted a 29 percent rise in quarterly profit, driven by a surge in advertising on mobiles and its popular YouTube video service. Alphabet’s net income rose to $5.43 billion. The company’s consolidated revenue rose 22 percent to $24.75 billion.

Google’s ad revenue, which accounts for a lion’s share of its business, rose 18 percent to $21.4 billion in the first quarter. Revenue from its Google Other unit, which includes Pixel smartphone, Play Store and cloud business, rose 49 percent to $3.10 billion.

Alphabet sales from its moonshots projects like Fiber and Nest also grew to $244 million in the quarter, up from $165 million a year earlier. However, Google’s loss for these ambitious projects ticked up slightly to $855 million. Up 5% in after-hours trade.

Also, after the closing bell, Amazon reported revenue of $35.7 billion, versus Wall Street estimates of $35.3 billion. A nice beat. This compares to $29.1 billion a year ago. EPS of $1.48, versus estimates of $1.13 per share. A big beat.

Analysts were also closely watching the performance of Amazon’s cloud computing unit, Amazon Web Services. AWS reported $3.66 billion in sales, and 43% percent growth, which is not quite as strong as the growth seen in the past 3 quarters but it is still a big beat. Amazon up almost 5% in after-hours trade.

Microsoft net income rose to $4.8 billion, or 61 cents per share, from $3.7 billion, or 47 cents per share, a year earlier. That was an earnings miss. Revenue climbed 6 percent to $23.5 billion, missing estimates.

Microsoft said LinkedIn, which it bought for about $26 billion, contributed $975 million in revenue in the quarter. Revenue from Microsoft’s personal computing unit, its largest by revenue, fell 7.4 percent. Demand for its cloud computing services failed to offset weak growth in its personal computing division. Microsoft down about 2% in after-hours.

Intel reported lower-than-expected revenue for the first quarter. Intel still gets most of its revenue from selling PC chips, a business that returned to growth in 2016 due to stabilizing demand in the second half of the year.

Revenue from Intel’s higher-margin data center business rose 6 percent to $4.2 billion in the quarter, missing analysts’ expectations. Revenue from client computing rose 6 percent to $8 billion. Intel’s net income rose to $2.96 billion, or 61 cents per share, from $2.05 billion, or 42 cents per share, a year earlier. That was a miss of 4 cents per share. Intel dropped about 3.5% after-hours.

Starbucks reported fiscal second-quarter profit of $652 million, or 45 cents per share – in line with estimates. Revenue of $5.29 billion was a slight miss. Comparable-store sales rose 3%, below analysts’ forecast for 3.6%.

United Parcel Service reported a higher-than-expected quarterly net profit as revenue grew across its domestic and international package delivery segments and as well as freight and supply chain operations.

Often seen as a bellwether of US economic activity, UPS said revenue increased to $15.3 billion in the first quarter from $14.4 billion in the year-ago period. Revenue beat estimates. Net income rose 2.4% to $1.15, also beating estimates.  During the quarter, UPS invested to expand its new Saturday deliveries, with $35 million in increased costs.

Ford Motor’s first-quarter profit fell 35% from a year earlier to $1.6 billion, down from $2.5 billion in 2016’s first period, when strong demand for a newly redesigned F-150 pickup truck helped Ford post its best quarterly operating profit in history.

Earnings per share were 39 cents in the latest quarter, beating analysts’ consensus of 36 cents. Revenue for the first quarter rose 4% to $39.1 billion, driven by a favorable mix of pickup trucks and sport-utility vehicles. Ford plans to cut $3 billion in costs this year and expects profit to rebound in 2018, driven by continued strength in the pickup-truck market.

American Airlines Group has a healthy track record with respect to earnings. The company has delivered positive earnings surprises in three of the last four quarters, with an average beat of 20%. The first quarter down 60% from the year ago quarter but it was another beat. Adjusted earnings per share came in at 61 cents per share, beating estimates of 57 cents. American shares dropped about 5% today.

American Airlines announced it was increasing pilot and flight attendant salaries an average of 6.5 percent, or by a total of $930 million through 2019. A JPMorgan analyst described it as a “wealth transfer” to labor groups. American CEO Doug Parker described the higher wages as a correction to years of “incredibly difficult times” for airline employees. American employees had been underpaid compared to other airline employees. Parker called the pay hikes an “investment” in better service.

Southwest Airlines dropped about 2%, after the air carrier reported first-quarter profit and revenue that missed expectations. CEO Gary Kelly announced that Southwest will no longer overbook its flights, ending a practice that sometimes leaves paying passengers without a seat.

It’s impossible for an airline to guarantee it will never have to bump a passenger. Carriers still must transport other pilots and crew members to work, and an air marshal could also need a seat. But ending overbooking does make it less likely.

Comcast beat expectations ahead of the bell and jumped 3%, while Abbvie performed similarly. Those companies were joined by railroad company Union UNP, which also gained 3% in early trade, and another pharmaceutical giant, Bristol-Myers Squibb + 3.5%. Other post-earnings gainers included KKR +5% and Domino’s Pizza, up 2.5%.

European markets closed slightly lower Thursday. The European Central Bank kept interest rates unchanged. ECB President Mario Draghi surprised some investors by explicitly recognizing the bloc’s economic recovery.

The euro initially reached the day’s peak of $1.0930 as Draghi struck an optimistic tone when answering questions from reporters. The ECB maintained a deposit rate of -0.4% for banks, a base interest rate of 0.0%, and a quantitative easing (QE) program of up to €60 billion per month.

President Trump said he’ll give the re-negotiation of the North American Free Trade Agreement a “good, strong shot” but reiterated he would “terminate” U.S. participation if he doesn’t get what he called a fair deal. He said he decided to have talks since pulling out would be a “shock to the system.”

House Speaker Paul Ryan said he’s confident Congress will pass a “short-term extension” of current government funding that would keep operations going past Friday. Ryan did not give a time for a vote.

A gauge of pending home sales declined in March as inventory continued to tighten. The National Association of Realtors’ index fell 0.8% to a reading of 111.4. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed.

Thanks to a strong first quarter, the Realtors forecast sales in 2017 to rise 3.5% compared to 2016. But supply isn’t keeping up with demand. There were 3.8 months of supply in March, and properties stayed on the market an average of only 34 days. A balanced market is usually thought to have 6 months of supply.

West Virginia is coal country. Chris Beam, president of Appalachian Power, the state’s largest utility, is not a coal guy. Beam told the West Virginia Gazette-Mail he had a recent conversation with the governor of West Virginia, who asked him to burn more coal.  Beam responded, “That’s not going to happen.” And the reason is customers don’t want it.

Beam says the debate over climate change, and the role of coal in it, is essentially over. Appalachian Power’s parent company AES believes the regulation of carbon dioxide is inevitable. In the coming decades, renewable energy and natural gas are poised to dominate the fuel mix. Appalachian Power’s residential and industrial customers are now asking about switching to 100% renewables.

To get out in front of this growing demand, the utility, which serves more than a million customers across the US mid-Atlantic region, has begun preparing power plans that would allow customers to stop using fossil fuels. Appalachian Power estimates it will reduce its coal capacity from 60% of its energy mix to about 50% by 2020.

At the same time, wind and solar will rise from about 4% of capacity to 20% by 2031. And yes, West Virginia trails most of the rest of the country in its switch to renewables.

And we finish with a special note for the philatelists among us. The Postal Service will debut a new shape-shifting Forever stamp in June ahead of a rare solar eclipse set for Aug. 21. The new issue will transform from an image of a total solar eclipse into an image of the moon when you press it with your finger. The back will feature a U.S. map tracking when the eclipse will appear across the country.

It’s the first time a stamp will make use of thermochromic ink, which is sensitive to body heat (and changing temperatures — which means stamps should be kept away from direct sunlight). The stamp’s photo of the eclipse was taken in Libya in 2006 by an Arizona-based astrophysicist, Fred Espenak, aka Mr. Eclipse, of Portal, AZ.

Financial Review

Oh Canada

Sinclair Noe — April 25, 2017

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

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DOW + 232 = 20,996
SPX + 14 = 2388
NAS + 41 = 6,025
RUT + 13 = 1411
10 Y + .05 = 2.33%
OIL + .13 = 49.36
GOLD – 12.00 = 1265.00

This has been a very strong start to the week. The Dow Industrial Average has added about 460 points in the past two sessions and traded above 21,000. The S&P 500 has gained about 40 points. Both the Dow and the S&P are now back above their 50-day moving averages.

The Nasdaq Composite broke through 6,000 for a record high. To put this in perspective, the Nasdaq broke above the 5,000 milestone on March 9, 2000 – 17 years ago. Simple math tells you that the Nasdaq has returned just over 1% per year, on average, for the past 17 years. Of course, there was nothing average about the past 17 years.

The week started with somewhat positive news about the French elections, which translated to a risk-on trade for global markets; combined with easing geopolitical tensions; plus, the hope for some sort of tax cut measure to be announced tomorrow.

The threat of a US government shutdown this weekend appeared to recede after President Trump backed away from a demand that Congress include funding for his planned border wall with Mexico in a spending bill. However, even if the fight over wall funding is over, Republicans and Democrats still have some difficult issues to resolve as they face a Friday night deadline.

The big driver in the 2-day rally has been earnings, coming in much stronger than estimates. With half of the Dow 30 Industrial companies reporting earnings, with 11 beating earnings expectations, according to FactSet. That 73% beat rate is above the 5-year average of 68% for S&P 500 companies.

I know that is a little of an apples-to-oranges comparison, but still, it has been a good earnings reporting season so far.  The shares of the Dow companies that have revealed results have gained a combined total of $21.80 in price since the reports were released through Tuesday afternoon, with 10 winners rising a combined $36.33 and five losers falling $14.46.

The combined price gains are adding about 149 points to the Dow, which is a price-weighted index. That would represent about 36% of the Dow’s 417-point gain since earnings season started. The stocks of the five Dow companies that reported results today were adding about 125 points to the Dow’s price. Caterpillar and McDonald’s combined to add 100 points to the Dow today.

McDonald’s reported first-quarter earnings and sales that topped analysts’ most bullish estimates amid declining visits to restaurants industry-wide. McDonald’s cut prices and offered a smaller Big mac and a bigger Big Mac, plus they are doing well with all-day breakfast – that helped lift sales in the US by 1.7%. Global sales at stores open for at least one year — so-called comparable store sales — rose by 4%. Earnings and revenue beat estimates.

Caterpillar announced higher-than-expected earnings and revenue. In a press release, noted strong cost cutting measures, while downplaying guidance, writing: “While Caterpillar had strong first-quarter performance and is seeing signs of recovery in several of the industries it serves, geopolitical and market uncertainty along with volatility in commodity prices continue to present risks for the rest of the year.”

Coca-Cola reported a smaller-than-expected quarterly profit due to higher costs related to refranchising its North America bottling operations. Global soda sales fell 1 percent in the first quarter. Coke missed earnings estimates but beat revenue estimates.

AT&T’s quarterly revenue missed estimates on lower equipment sales, as customers held onto their phones longer and did not buy new replacement phones. AT&T lost 61,000 wireless subscribers who pay a monthly bill. Earnings also missed estimates. AT&T, which is in the process of acquiring Time Warner, also said it would no longer give a full-year revenue forecast due to the unpredictability of wireless handset sales.

3M, which makes Scotch tape and Post-it notes, raised its 2017 profit forecast and reported better-than-expected quarterly results, helped by growth across its major businesses. 3M beat earnings and revenue estimates.

Chipotle Mexican Grill reports same store sales rose almost 18 percent in the first quarter.  Sales by that measure had previously declined for five straight quarters following an E. coli outbreak and other food-poisoning incidents that began in 2015. Chipotle is still grappling with higher labor costs and a tight market for restaurant employees.

The chain raised menu prices at about 440 of its 2,200 locations earlier this month to cope with escalating expenses. Still, they managed to beat revenue and earnings estimates. Chipotle opened 57 new restaurants during the quarter, and it reiterated plans to add as many as 210 this year.

Panera Bread plans to hire 10,000 new employees by the end of the year as they expand their delivery services. Some 75 percent of the new hires will be delivery drivers, while the remaining 25 percent will be in-cafe jobs. Panera has already rolled out delivery to 15 percent of its system, including 20 percent of its company-owned locations.

By the end of 2017, it hopes to expand delivery to 35 percent to 40 percent of system-wide locations. The delivery option is expected to add about $250,000 in revenue per restaurant. Panera is in the process of being acquired by privately held JAB Holding in a deal valued at about $7.5 billion.

Earnings season kicked off with the big banks and today Wells Fargo and Citigroup held their annual shareholders’ meetings. It did not go well. Wells’ meeting ran nearly three hours, was repeatedly interrupted by angry shareholders seeking answers about how and why thousands of bank employees could open 2.1 million fake accounts in customers’ names without their permission.

Several shareholders were physically escorted out of the meeting. Proxy adviser Institutional Shareholder Services (ISS) argued the Wells Fargo directors failed in their oversight duties. All directors were re-elected but several, including Chairman Stephen Sanger, barely had a majority of votes. Hardly a show of confidence, and an indicator that we could see a shakeup in the board soon.

Citigroup is one of four lead banks in a group of 17 which have provided project financing for the Dakota Access Pipeline. The pipeline crosses land of the Standing Rock Sioux whose members are concerned about possible ground water contamination if the pipeline breaks.

Citigroup’s shareholder meeting was disrupted by protesters, prompting a rare apology from Chairman Mike O’Neill, who said, “We wish we could have a do-over on this.” CEO Mike Corbat said Citigroup had not given enough early consideration to the concerns of the indigenous people.

The Trump administration announced a 20% tariff on lumber imported from Canada, to be applied retroactively. The trade agreement that governed imports of Canadian lumber expired at the end of 2016, and prices have been on the rise since then. The National Association of Home Builders said higher input costs had already added almost $3,600 to the price of a new home, and the tariff will add $1236 to the price of the average single family home.

The NAHB also says the proposed tariff could cost as many as 8,241 jobs and over $350 million in taxes and other revenues for U.S. governments in 2017 alone. The US lumber industry alleges Canadian wood is heavily subsidized and imports are harming U.S. mills and workers. Canada is the world’s largest softwood lumber exporter, and the U.S. is its biggest market.

Canadian lumber companies called the tariff unfair and Canadian prime minister Justin Trudeau vowed to fight back. International tribunals have considered the issue of whether Canada provides unfair subsidies to lumber exports and ruled that it does not. Log costs are lower in some parts of the US than in some regions of Canada.

The US does not produce enough lumber to meet domestic demand. Homebuilders such as Lennar, Pulte, and DRHorton all dropped today. May lumber futures dropped $10.00 at $385.10, go figure.

Meanwhile, on the southern border, Mexico and the US have been fighting for years over dolphin safe tuna. Mexico says its fisherman play by the rules. The US government disagrees. Today, the World Trade Organization ruled in Mexico’s favor, allowing it to impose trade sanctions worth $163 million a year against the US. The WTO says that’s how much money Mexico has lost from the US unfairly penalizing Mexican tuna.

A US judge has blocked President Trump’s executive order that sought to withhold federal funds from sanctuary cities. The ruling said Trump’s order targeted broad categories of federal funding for sanctuary governments and that plaintiffs challenging the order were likely to succeed in proving it unconstitutional.

The Conference Board said its consumer confidence index fell to 120.3 this month from 124.9 in March, which was the highest reading since December 2000. The index in April was the second highest reading since 2000. Consumers’ assessment of labor market conditions was slightly less favorable than in March. That measure closely correlates to the unemployment rate in the Labor Department’s employment report.

House prices continued to show no signs of slowing, hitting their highest in nearly three years. The S&P/Case-Shiller 20-city index rose 5.9% in the three-month period ending in February compared to the same period a year ago, an acceleration from its 5.7% yearly increase in January. This is the highest rate since July 2014. The 20-city index was up 0.4% for the month, or a 0.7% gain when seasonally adjusted. Phoenix saw a 0.4% gain in the last month, and 5.3% over the past year.

The Commerce Department said new home sales jumped 5.8 percent to a seasonally adjusted annual rate of 621,00 units last month, the highest level since July 2016. New home sales were up 15.6 percent compared to March 2016. They have now increased for three straight months.

Financial Review

Nobody Knows Normalization

Sinclair Noe — February 12, 2016

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

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DOW + 313 = 15,973
SPX + 35 = 1864
NAS + 70 = 4337
10 Y + .10 = 1.75%
OIL + 2.77 = 28.98
GOLD – 9.40 = 1238.00

The Nikkei Stock Average finished down 11% for the week, its biggest weekly percentage drop since October 2008. For the day, the index ended off 4.8% at 14,952, the lowest since October 2014. The Nikkei is down 21% year-to-date.

Japanese Prime Minister Shinzo Abe held a meeting with his top financial diplomat today, as well as the BOJ’s governor, following a report that the “architect of Abenomics” called for a Group of 20-wide response to the recent market rout. Friday’s high-level gathering came as the country’s stock markets plunged again and the yen hit highs not seen since October 2014. Speculation is also rampant that Tokyo could conduct yen-selling intervention.

The Hang Seng China Enterprises Index of mainland Chinese companies trading in Hong Kong fell 2% Friday and was off 6.8% for the week. Trading was halted on the Kosdaq, the smaller cap, tech focused exchange in South Korea as the index dropped by more than 8%.

Here in the US, we’re not quite in bear territory for the major indices: The Nasdaq dropped 18% from last summer’s high; the S&P 500 dropped 15% from last year’s high.

And then we bounced today, not enough for weekly gains, but a bounce off the lows, as expected. For the week the Dow lost 1.4%, the S&P lost just under 1% after hitting a two-year low yesterday, and the Nasdaq lost just over a half a percent for the week. I’m just glad the markets will be closed Monday.

So, the very, very bad start to the New Year in the markets has carried over into February, and everybody is looking for a market bottom. And maybe yesterday marked a low; we can never really know until after the fact, but one day does not confirm a trend reversal. Add Bank of America to the list. The firm’s research team is the latest on Wall Street to lower expectations for the U.S. stock market in 2016, after one of the worst starts to a year on record wiped out more than $2 trillion in value.

The bank now expects the Standard & Poor’s 500 Index to end the year at 2,000. While the bank’s new target implies a 7.7 percent advance from the current level, it’s 9 percent lower than the prior target of 2,200. It would also mean a small annual loss. Of course, nobody knows where stocks will finish the year. You don’t know, Bank of America doesn’t know, I certainly don’t know, and the central bankers of the world have no clue.

So far, all attempts by central bankers to respond to the situation have not been working out. The People’s Bank of China has been selling dollars and substituting derivatives to prop up its balance sheet; a strategy that seems likely to result in devaluation of the Chinese currency.  Japan is fumbling around for answers and the yen has been getting stronger.

Europe has joined Japan with negative interest rates and it isn’t stimulating the economy, it is just leading banks, businesses and individuals to hoard cash. And Eurobanks are looking especially vulnerable right now. Deutsche Bank’s problems came into focus this week. The yield on Deutsche Bank’s 6% Contingent Convertible bonds, or CoCos, rose to more than 13% from 7.5% at the start of the year. The bank’s shares were down 40% in the same period.

When the debt of Germany’s biggest bank is trading like junk, it should catch your attention. As a side note, it would be high irony if Germany had to go begging to the EU to save its banking system. But Deutsche Bank is not the only Eurobank with problems.

Janet Yellen tried to normalize interest rates and instead the yield curve flattened. Fed Chair Janet Yellen wrapped up her testimony before Congress yesterday, stressing that the central bank was not on a “preset” path to return policy to “normal” and “wouldn’t take negative rates off the table.”

Yellen told lawmakers this week she was studying ways to “be prepared” in the event the current slide in world stock markets, concern about financial sector stress, and slowing economic growth all translate into a recession or another financial crisis. The growing consensus is that the Fed can’t raise rates again and a majority of money managers are calling for cuts.

What are the central banks going to do when another wave of bad news breaks over the markets? And will whatever they do work? The idea of the central bank “put” seems to be losing its punch, or even worse, backfiring. While the recent market volatility might just be an overblown response to the December rate hike by the Fed, you also have to question how one tiny little rate increase could cause this much damage, and if the real problem goes much deeper?

Retail sales rose 0.2% in January, as consumers boosted purchases of new cars as well as groceries and shopped more online. Sales in December were sharply revised higher to show a 0.2% gain instead of a 0.1% decline. Sales at gas stations dropped 3.1% in January.

Core sales – excluding autos, gas, building materials and food – rose an even stronger 0.6%. In an early sign of lackluster spending, Retail Metrics, a private research firm, said sales at stores open at least a year fell 0.9 percent in January from a year earlier. Meanwhile, business inventories climbed a seasonally adjusted 0.1% in December. To put it simply, sales are not strong enough to clear the shelves.

The University of Michigan’s preliminary February reading on consumer sentiment dropped to 90.7 from 92.0 in January. The expectations component fell from 82.7 to 81.0 during the month. The gauge of current conditions was down less, falling from 106.4 to 105.8. Consumer views of their financial situations improved, but largely because they expect lower inflation. In fact, respondents anticipated the lowest inflation rate on record in the January survey.

Sure enough. The Labor Department said import prices dropped 1.1% last month after decreasing 1.1% in December. Import prices have decreased in 17 of the last 19 months, reflecting the strong dollar and plunging oil prices.

A new report from the New York Federal Reserve shows older Americans have been ramping up their debt while younger Americans have not. In real terms, debt in the hands of Americans between 50 and 80 years of age has increased by 59% since 2003. At the same time, the aggregate debt of those age 39 and younger has dropped by 12%.

This is mainly a result of the housing market. Home-secured debt, per capita, has surged 47% for those age 65, for an increase of $11,191, while it’s dropped 28% to $8,195 for those aged 30. The same trend played out for auto loans as well; on a per-capita basis, auto debt is up 29% for those 65 years old, but it’s down 6% for those 30 years old. Overall, balances owed by households grew $288 billion in 2015, slightly less than the $306 billion increase seen in 2014.

Major world powers have agreed to a cessation of hostilities in Syria set to begin in a week and to provide humanitarian assistance to besieged areas, but failed to secure a complete ceasefire or an end to Russian bombing. The U.S., Russia and more than a dozen other nations also reaffirmed their commitment to a political transition when conditions on the ground improved, following a marathon meeting in Munich aimed at resurrecting peace talks.

Meanwhile, Saudi Arabia says it is willing to commit ground troops to fight ISIS in Syria; exactly how or when they might deploy, and what they intend to do if they deploy, and the extent of US involvement in any Saudi deployment – those are still open questions.

Oil prices were on a 6-day slide from February 4 until this morning; prices went from a high of 33.60 to a low of 26.05; or a 22% bear market in 6 days. Needless to say, there were some big bets on the short side, and when news of a hint of OPEC production cuts hit the wires, the shorts cashed in, which caused prices to pop, which squeezed the remaining short positions.

A big move up in oil prices today (10.5% and 12.3% intraday) but for the week, oil was down 4.7%. Most of the volatility in oil right now is due to speculators. At the same time, stocks have been moving in lockstep with oil; that correlation is not based on fundamentals; stocks and oil will disconnect eventually, just not today.

Christine Lagarde is set to win a second term as managing director of the International Monetary Fund, after a nominee deadline passed with no new candidates to challenge her. In a statement released Thursday, Treasury Secretary Jacob Lew said the U.S. supports her for a second term.

A full 76% of S&P 500 companies have reported fourth quarter earnings through early Friday. And the picture is not pretty. FactSet data show expectations for first-quarter per-share earnings have fallen to a decline of 6.3%, far wider than the decline of 5.5% they were showing as recently as Monday.  Back in September, that forecast was for growth of 4.8%.

By the end of December, it had fallen to growth of just 0.8%. The energy sector is looking worst, but all 10 S&P 500 sectors are facing lower expected earnings-growth rates for the first quarter than at the end of September

In case you missed it, Burger King announced this week that it will add hot dogs to its fast food menu. Proof positive that there is still some common sense in this world.

FINANCIAL REVIEW

Solid Guesses

Sinclair Noe — July 29, 2015

Audio Player

DOW + 121 = 17,751
SPX + 15 = 2108
NAS + 22 = 5111
10 YR YLD + .03 = 2.28%
OIL + .91 = 48.89
GOLD + 1.20 = 1097.70
SILV + .13 = 14.91

The Federal Reserve FOMC meeting wrapped up earlier today. They issued a statement but there was no press conference. The Fed did not change monetary policy; no surprise, nobody expected a change from this meeting.

The next FOMC meeting is in September and we might see changes then, or maybe December. There really weren’t many clues in the statement. There were a few subtle changes in wording of the statement; specifically on jobs, the Fed said: “The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year.” “Solid job gains” is a fairly strong phrase for the Fed. No indication of slack in the labor market.

The actual decision to raise rates will come when the Fed sees “some” further improvement in the labor market. The word “some” was new. What does “some” mean? You can give it whatever meaning you want but I think it means the labor market is headed in the right direction and as long as it stays on the tracks and continues to make a little progress, it is good.

The Fed kept language saying that “economic activity has been expanding moderately.” The Fed also said that housing has shown “additional” improvement. The Fed acknowledged that energy prices have remained low and that is causing inflation to run below the FOMC’s long-run inflation objectives. And while it may be hard to justify a rate increase with below-target inflation, we also know from Fed Chair Janet Yellen’s earlier testimony that she believes low energy prices are transitory.

In other words, there is nothing in the statement that would stop the Fed from raising rates in September, or December. I don’t think the Fed is certain exactly when they will raise rates, but absent an unexpected meltdown, we will see at least one rate hike before the end of the year. That’s my guess, and the fed funds futures markets support it; but if you are dovish or hawkish you could interpret the Fed statement to your liking.

The Chinese stock market snapped a three-day losing streak. The Shanghai Composite closed up 3.5%. The China Securities Regulatory Commission said that local governments will increase purchases of stocks, while the central bank injected cash into money markets and hinted at further monetary easing. The country’s securities regulator said it was investigating share dumping incidents.

Bill Gross, the former Pimco bond fund manager, now at Janus Capital, criticized the financial markets today, writing that “all global markets are a shell game now. Artificial prices, artificial manipulation. Where’s the real pea (price)?” Gross says the Chinese government, and all the central banks are manipulating markets and prices. He’s afraid that when they stop manipulating markets, prices will drop. What Gross fails to grasp is that there is no indication central banks will stop manipulating markets.

Standard & Poor’s has warned Brazil it could lose its investment-grade credit rating in the coming year if fallout from a number of corruption investigations further stymies economic growth and implementation of austerity measures. The agency has now put the country’s foreign currency rating, which is rated one notch above junk, on negative outlook for possible downgrade. The Brazilian real slid 2% to 3.43 per dollar following the announcement, its weakest level in more than 12 years.

A disorderly resolution to Puerto Rico’s debt problems would be costly not only for the territory but for the United States as a whole. Treasury Secretary Jack Lew said in a letter to the Senate Finance Committee that “The continued deterioration…has the potential to further harm retiree investment portfolios across the country.” Attempts to grant the commonwealth’s public authorities access to Chapter 9 bankruptcy provisions have so far made little progress.

Just a reminder that the global bond market is about twice the size of the global equities market. The bond market is supposed to be a place for safe money. Bond investors should be extremely nervous and very cautious. Most of the big money that flowed into Greek bonds and Puerto Rican bonds over the past few years came from institutional investors; in theory they are sophisticated investors.

If you make a bad investment, you are supposed to pay the full price, because if you don’t pay the full price, you will keep making bad investments. The only way to get the bond market back to its historic role is to make bondholders feel real fear that they might lose money if they make bad decisions. The market should reward bets that are economically wise, and it should punish the foolish players.

A gauge of pending home sales fell in June, pulling back from May’s reading, which was the highest in more than nine years. The index from the National Association of Realtors reached a seasonally adjusted 110.3 in June, down 1.8% from 112.3 in May, signaling that upcoming deals could slow. June is the first decrease in six months.

S&P 500 earnings for the first half of the year are expected to show a 0.7 percent contraction compared to a year ago, the weakest showing since 2009, according to numbers from FactSet research. Growth in the first quarter was just 1.1%, but the second quarter is more than offsetting that, expected to contract at a 2.2% rate.

Meanwhile, Thomson Reuters calculates first-quarter EPS growth at 2%, and currently pegs the second quarter at 0.3% growth. Whichever number you use, chew this over: Both rates, positive and negative, are nominal. They are not adjusted for inflation, and they don’t account for population growth either.

Facebook reported after the closing bell. Advertising revenue remains strong and the number of mobile users is growing. Revenue rose 39 percent to $4.04 billion, the social-media company said in a statement Wednesday, beating analysts’ average projection for $3.99 billion. Net income was $719 million, down from $791 million a year earlier. They beat estimates.

Whole Foods Market reported disappointing results and cut its annual sales forecast. The problem is that you can now find organic produce in most grocery stores.

After the close yesterday, Twitter announced results that beat estimates, but then they lowered guidance in a brutally frank way, saying execution had failed, new product initiatives were not going well; basically they stopped just short of saying you should never, ever tweet. Shares dropped 14% today.

Advancing its push for commercial drones, Amazon has laid out a proposal to slice U.S. airspace into different categories of aircraft. The plan describes a “high-speed transit zone” from 200-400 feet above the ground for advanced drones and a no-fly area between 400-500 feet to create a buffer zone with manned aircraft. Simple consumer drones would be restricted to a “low-speed” zone below 200 feet. The system also permits one person to oversee many automated drones well beyond his or her sight, but bans flights around airports.

Intel and Micron say they developed a new breed of memory chips that could bring dramatic performance gains to computers, smartphones and other kinds of high-tech products. The companies say the new chips will be up to 1,000 times faster than the NAND flash memory chips now used in most mobile devices. The chips won’t be as fast as DRAM but they will be able to store 10 times more data than dynamic random access memory, and they will retain data, even when powered down.

New hardware from Nokia. Jumping into the virtual reality space, the Finnish technology group has revealed a spherical ball-like camera called OZO that can capture 360-degree videos through eight optical image sensors. Advantages of Nokia’s new camera: Live monitoring – footage can be seen as it’s being shot. Rapid playback – recordings don’t need to be digitally stitched together before they’re viewed.

It’s Here: Microsoft’s Windows 10 Now Available As a Free Upgrade.  The new operating system is now available to download as a free upgrade for Windows 7 and 8 users. If you’re running an older version of Windows, the cost to upgrade is $119.

Chevron plans to eliminate 1,500 jobs across the globe amid the ongoing environment of low oil prices. Chevron said the cuts are aimed at increasing efficiency, reducing costs and focusing on work that directly supports business priorities, with $1 billion in targets coming through corporate center cost reductions.

California Senators Dianne Feinstein and Barbara Boxer introduced emergency drought legislation today aimed at helping communities facing severe water shortages and supporting new water projects in the parched state. Key provisions of the California Emergency Drought Relief Act will assist rural and disadvantaged drought-stricken communities with a new USDA program, seek federal support for desalination projects, promote the building of new reservoirs, support water recycling projects, and increase agriculture water conservation mandates.

The Senate ended debate on its long-term highway bill today. Meanwhile the House is going into recess today, and that means the Senate will have to take up a three-month extension of federal highway funding ahead of an end-of-the-week deadline to prevent a gap in infrastructure funds.

FINANCIAL REVIEW

Milk and Cookies in the Land of No Satisfaction

Sinclair Noe — November 5, 2014

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

Financial Review
DOW + 100 = 17,484
SPX + 11 = 2023
NAS – 2 = 4620
10 YR YLD un = 2.35%
OIL + 1.69 = 78.88
GOLD – 28.20 = 1141.00
SILV – .72 = 15.42

Record highs for the Dow Industrials and the S&P 500.

The midterm election is history, and it was a big night for the GOP. Republicans will have at least 52 Senate seats, a gain of 7. In the House, the GOP will now have at least 243 seats, a gain of 14. The GOP also gained 2 net governorships. So it was a big night. However, Obama was not on the ballot, even though some of the campaign ads made it sound that way; he’s got 2 more years and he still has veto power. It takes a two-thirds majority in both the House and Senate to override a veto. Republicans have nowhere near two-thirds of either chamber. So, get ready for 2 more years of gridlock.

One takeaway is that people are not satisfied with the economic progress of the past few years. While Wall Street is at record highs and the unemployment rate has dropped, that just isn’t enough. Fewer people participated in stock market gains and even though more people have jobs, the jobs aren’t paying what they used to. It doesn’t mean the numbers are wrong; the Dow closed at 17,484 and that is a real number, but the stocks in the Dow have used financial engineering to achieve price gains. The unemployment rate is 5.9%, not 32% (according to a survey released last week by Ipsos Mori, the average American guessed that the unemployment rate is 32%), but people have seen wages decline, they have seen their careers replaced by jobs. The top concerns of voters going into the midterms were economic growth and job creation.

According to national exit poll data, roughly half of the people interviewed as they left the polls said they expected life for the next generation of Americans to be “worse than life today.” Roughly four out of every five America voters were either “very worried” or “somewhat worried” about the direction of the economy in the next year, and just 22% said they were “not at all worried” or “not too worried”. Just 1% of voters felt the economy was “excellent.” Roughly 70% said the economy was “not so good” or “poor.” When asked whether the economy was getting better, getting worse, or roughly the same, voters were split evenly between the three choices. And when asked if a voter’s family financial situation had improved in the past two years, just 29% of respondents said it had. More than 60% of voters polled said they felt the US economic system “favors the wealthy.” On a side note, the new Credit Suisse 2014 Global Wealth Databook reports that each year since the recession, America’s richest 1% have made more than the cost of all US Social programs.

Since 1926, the S&P 500 has gained nearly 17% on average in Year 3 of presidential terms. The next-best years for stocks are presidential election years, when equities have gained 9.8% on average. The Stock Trader’s Almanac tells us that the Dow Jones industrial average has not suffered a third-year loss since 1939. Part of it has to do with the fact that the third year of an administration also tends to see the best growth in gross domestic product. Market strategists surmise that the party in power in the White House has a vested interest in stimulating the economy, and the markets as much as it can in the year before it faces re-election.

Researchers at Leuthold discovered that stocks have risen at an annualized rate of nearly 25% (including dividends) in the period that runs from the midterm elections in November to April of the following year. We are also moving into what is known as the best 6 months in the market; that November through April time is typically better than May through October. And then there is a tendency for an end of year, or Santa Claus rally. According to the Stock Traders’ Almanac, fourth quarters during years when midterm elections are held have produced an average gain of 8% over the past 65 years. They’ve been followed by rallies of almost that much in the next three months, making the average 16% two-quarter rally the best combination of the election cycles.

The S&P 500 has risen an average 15.1% in calendar years when a Democratic president has been opposed by a Republican-controlled Congress since 1945. These are tendencies and probabilities, not guarantees.

Let’s check the economic news. The Institute for Supply Management’s nonmanufacturing index dropped to 57.1% from 58.6% in September. New orders fell 1.9 points to 59.1% and production slipped 2.9 points to 60%. Yet the employment gauge, a sign of hiring intentions, rose 1.1 points to 59.6%, the highest level recorded since 2005.

ADP reports private employers added 230,000 jobs in October, the most since June. The monthly government jobs report is Friday, with most estimates around 225,000 net new jobs.

Productivity rose 1.5% in the third quarter, down from 2.3% in the spring. When workers and companies produce more and more goods and services with the same amount of labor and materials, firms make bigger profits and they can offer larger pay raises. The flip side of low productivity is that it’s often the result of companies that have too few workers to meet growing demand. So it’s usually a sign to hire more workers and rely less on overtime.

Bloomberg reports that of the S&P 500 members that have reported their latest quarterly results, 82% topped profit projections, while 61% exceeded sales estimates; that’s the fastest pace of earnings beats in 4 years.

Qualcomm reported a fiscal fourth-quarter profit of $1.89 billion, or $1.11 a share, on revenue of $6.69 billion. Both revenue and earnings missed estimates.

Chrysler reported a 32% increase in net income on stronger sales of SUV’s and pickup trucks.

Tesla reported third-quarter results that topped expectations after the close, but the electric car maker lowered its delivery forecast for 2014 to 33,000 cars (it had expected to deliver 35,000 cars).

SolarCity reported a 20% rise in quarterly revenue as it added more customers. SolarCity also reported a net loss of $70 million, wider than the $37 million loss it reported a year ago.

When Alibaba Group delivered its first quarterly report as a public company, they showed earnings of $1.1 billion, or 45 cents a share, up 15% from a year earlier; those numbers excluded some $490 million in expenses from Alibaba stock given to employees as part of their compensation. This stock-based compensation expense made up the vast bulk of items excluded from Alibaba’s preferred “adjusted” profit measure.
West Texas Intermediate crude rebounded from a three-year low, climbing to $78.88 a barrel after a government report showed that US oil supplies increased less than analysts expected last week, while refineries increased operating rates.

The recent plunge in oil (today’s move excluded) is propelling shares of airlines and truckers, and that has in turn pushed the transportation index to new highs. Dow theorists will tell you that the performance of the transports often indicates the market’s next move, as they are economically sensitive stocks. With the index at a record, though, some investors are asking a simple question: Is rally in the transports simply all about oil, or are they signaling a stronger economy ahead?

The Federal Reserve unveiled a final rule today designed to prevent large financial firms from becoming so big that their failure could shake the core of the financial markets. The final rule, required by the 2010 Dodd-Frank Wall Street reform law, prohibits banks and certain large financial firms from acquiring another company if that merger would cause their liabilities to exceed 10% of the total consolidated liabilities for all financial firms. The “too big to fail” rule applies to banks and to large financial firms who are designated as “systemic” by the Financial Stability Oversight Council. Richmond President Jeffrey Lacker delivered a speech today, saying that the Bankruptcy Code must be a viable option for large complex financial institutions to end the perception that some firms are too big to fail.

FINANCIAL REVIEW

The Only Winner is Gravity

Sinclair Noe — October 9, 2014

0 0 

   

Financial Review

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

DOW – 334 = 16,659
SPX– 40 = 1928
NAS – 90 =4378
10 YR YLD un 2.33%
OIL – 2.96 = 84.35
GOLD + 2.10 = 1224.60
SILV – .03 = 17.45

Triple-digit swings in the stock market have become common in recent days. Just this week, the Dow jumped 274 points Wednesday, reversing a 272-point decline on Tuesday. We’ll talk about volatility in just a moment.

In economic news:
Germany’s exports sank 5.8 percent in August, the biggest monthly drop in five years. The figure raised concerns that Europe’s largest economy may fall into recession. European Central Bank President Mario Draghi says Europe’s problems are structural, not cyclical and there can be no recovery without reforms. Draghi was speaking in New York; he said the Euro banking sector is still going through deleveraging; they are not lending; and there are limits to what the ECB can do to produce growth. And deflation is highly contagious.

The number of people who applied for U.S. unemployment benefits in the first week of October edged down by 1,000 to a seasonally adjusted 287,000, holding below 300,000 for the fourth straight week. Jobless claims are now 21% lower compared to one year ago. What we are starting to see is that so many businesses fired workers during the downturn and they have been very slow to rehire or hire new workers, which means not many people are losing jobs right now.

Wholesale inventories rose by 0.7% in August. Inventories of durable goods, such as autos and machinery, rose 0.8%, while inventories of nondurable goods rose 0.5%. Wholesale sales fell 0.7%, following a 0.4% gain in July.

The Bloomberg Consumer Comfort Index climbed to 36.8 in the period ended October 5 from a four-month low of 34.8. A gauge of attitudes about the world’s largest economy registered the biggest increase since 2007. According to Bloomberg, a pickup in hiring, more job openings and lower gasoline prices are combining to brighten Americans’ spirits even as the stock market languishes. While today’s figures showed confidence improved among the college educated, homeowners and almost all income groups, the weekly gain left sentiment close to its third-quarter average. Gas prices make US consumers happy, or at least semi-happy. And prices are falling.

Now, let’s take a look at volatility because this week the markets have been on a really wild roller coaster ride, and it looks like the only winner is gravity. All 30 stocks in the Dow Jones Industrial Average were down. The VIX, the volatility index jumped 24% to just over 18, which is its highest reading in 18 months but still below the 20-year average of about 20. Maybe the markets were just too complacent.

For now, volatility is back and it tells us the markets are uncertain. Traders and market makers and specialists are not sure about the next move, and when there is uncertainty there is a lack of bids. Typically, there are investors lined up to buy stocks, however when there is uncertainty, there are fewer traders in line. The spread between the bid and offer widens, and when prices drop fast, the bidders have two choices: widen the spread even further, or step away completely. The result can be a downward spiral. It works in both directions; spreads widen quickly both on down days when investors are anxious to get out at any price and on big up days when investors will pay up to get into a stock. For now, investors are getting out.

Maybe people forgot the Federal Reserve is in the process of exiting QE, the massive asset purchase plan that has poured trillions of dollars into the market over the past few years. Remember the taper tantrum? When the markets tanked at the mere thought of the Fed exiting QE; now it really is almost finished. The purchases are widely credited for fueling price increases of all kinds of investments.

Investors have had a lot of advance notice that the end is coming, and the hope is that the announcement won’t cause big markets swings given all the time they’ve had to prepare. Many mutual fund managers say their bigger concern is when the Fed will start raising short-term interest rates, which the central bank has said won’t be for a “considerable time.” Every time that the Fed has ended QE, rates have gone down, and stock prices have gone down; it happened in 2010 and 2011, and it looks like it’s happening again.

The Fed’s bond-buying program helped the stock market not only to surge but to do so in nearly uninterrupted fashion, even when the economy was improving only modestly. The last time investors saw a 10 percent drop for the Standard & Poor’s 500 index was three years ago. This week’s volatility may be a preview of things to come after QE ends.

Add in earnings season and you’ve got a lunch date with Pepto-Bismol. Now, here’s how CFO’s and CEO’s get ready for earnings season; they pull out the pots and pans and assorted crockpots and they turn the heat to medium high and they start cooking the books. A couple of years ago, Duke and Emory Universities conducted a survey of chief financial officers and they found that about one in 5 companies admitted to cooking the books, or “managing” earnings reports to mischaracterize economic performance. And about 60% try to pump up income.

The report found, “Earnings misrepresentation occurs most often in an attempt to influence stock price, because of outside and inside pressure to hit earnings benchmarks, and to avoid adverse compensation and career consequences for senior executives.” And the CFO’s admit that it is difficult to unravel the book cooking from the outside looking in.

Here are the expectations as we enter 3Q earnings season. Earnings growth is estimated from 4.5% to 5%, generally speaking. The telecom sector should come in with the highest earnings growth and consumer discretionary is expected to post year over year declines. (Think Sears and JC Penney). The healthcare sector is the only S&P 500 sector that saw earnings expectations increase during the quarter, rising to 10.6% from 9.4%.

Back in June growth expectations called for 8% to 9% growth, but that’s just part of the game; aim high and then ratchet down expectations. So far 82 S&P 500 companies have issued negative earnings per share guidance, while 27 have reported positive guidance. The current 12 month forward price to earnings ratio of the S&P 500 is 15.

The security breach and hack of JPMorgan Chase has raised more questions than it has provided answers. We still don’t know who was behind the hack. It looks like it came from Russia, but that’s not very specific. We still don’t know what the motive was. Was it plain old theft, or was it official government retaliation? Authorities believe that the hackers may have tried to infiltrate about a dozen financial institutions, but we don’t know how far they got, or the motives for the other hacks.

The FBI and the Secret Service have begun a criminal inquiry into the attacks, but the only thing we know for now is that the biggest, most fortified financial institutions in the world, entrusted to safeguard trillions of dollars of the nation’s wealth are in fact, clueless and extremely vulnerable.

A most entertaining trial has been taking place this week; this is the story of former AIG CEO Hank Greenberg, who mismanaged AIG, cooked the books, got involved in selling credit default swap insurance on almost every mortgage related security, which led to a near systemic catastrophe, and when AIG was about to go belly up, the government stepped in with a bailout. And now Greenberg says the terms of the bailout were a little too harsh for his liking.

The trial features all-star lawyers, two former Treasury Secretaries, and today, former Fed Chairman Ben Bernanke took the stand. Bernanke said allowing American International Group Inc. to go into bankruptcy would have been catastrophic; echoing comments earlier this week from Hank Paulson and Tim Geithner. Bernanke said he couldn’t recall whether federal officials discussed the interest rates and fees it charged the insurance giant in exchange for an $85 billion loan during the 2008 financial crisis.

Emails from Bernanke were introduced into court evidence, highlighting the government’s belief at the time that the restrictions on AIG should serve as a warning to other insurance firms that were allegedly acting irresponsibly. The emails also show that the Fed tried to keep the terms of the bailout secret from the public, because accountability and transparency were not the preferred currency of the crisis.

And we learned something very strange about Bernanke; he used to send emails under the alias of Edward Quince. An imaginary figure Bernanke created to send emails. Maybe he thought a pen name would give him a level of privacy. Maybe he thought this was some kind of cloak and dagger spy game. Maybe he was just a smidge schizophrenic. Maybe he thought a pseudonym would shield him from whatever he was doing. Maybe that’s how he plans to refinance his house. Nobody knows for sure.

Bernanke was scheduled to introduce ECB president Mario Draghi for the speech in New York, but the AIG trial made for a scheduling conflict. In the process, we learn that Bernanke now charges $200,000 for a speech, so his testimony today was expensive. It also raises the question of why he’s trying to refinance his house, when he could just make a couple of speeches and be done with it.

The Nobel Prize for literature has been awarded to Patrick Modiano; he is a French novelist who has written books, screenplays, and children’s’ books. And even though his work has been translated into several languages, I have never heard of him. If we lived in France, I’m sure I could tell you more.

http://www.ecb.europa.eu/press/key/date/2014/html/sp141009.en.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2103384