Financial Review

What Are the Odds?

Sinclair Noe — November 7, 2016

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DOW + 371 = 18,259
SPX + 46 = 2131
NAS + 119 = 5166
10 Y + .05 = 1.83%
OIL + .85 = 44.92
GOLD – 22.80 = 1282.20

Wall Street this week is all about the election. The FBI’s decision to bring no charges against Hillary Clinton appears to be giving some investors peace of mind. At least momentarily; at least enough to break a string of 9 consecutive declines on the S&P 500, the longest losing streak since 1980.

It was uncertain whether the FBI announcement came in time to change voters’ minds; it’s estimated that 42 million Americans have already cast early votes. Maybe the best news is that in a little over 24 hours, it will be over. Finally.

Until then, we can look at the bookies and the polling sites. Here is a quick rundown of the foreign bookies – so these are betting odds, not percentage of the vote.

PredictIt, an online trading platform jointly run by Victoria University in Wellington, New Zealand, and Washington, D.C.-based political consulting firm Aristotle International Inc: Clinton – 81 percent, Trump – 20 percent.

Iowa Electronic Markets, winner-takes-all trading market: Clinton – 71 percent, Trump – 28 percent.

UK-based Betfair, internet betting exchange: Clinton – 83 percent, Trump – 18 percent.

Ireland’s Paddy Power, bookmaker: Clinton – 83 percent, Trump – 18 percent.

Foreign gamblers can bet on more than the outcome. A survey of foreign betting sites comes up with some interesting ways to bet the election, including voter turnout, the over/under on toss-up states, and even the time of a concession speech, or for that matter, whether there will be a concession speech. But for American voters, the choice is more basic – pick one or the other.

Among the major news outlets: Fox News shows Clinton holds a 4-point lead over Trump among likely voters – 48 percent to 44 percent. A CBS News poll shows Clinton holding a 4-point lead over Trump – 45 percent to 41 percent.

A Washington Post/ABC poll released earlier on Monday also found Clinton with a 4-percentage point lead. A separate Bloomberg Politics-Selzer & Co poll found a 3-point lead for Clinton. NBC News|SurveyMonkey Weekly Election Tracking Poll shows Clinton with a 6-point lead over Trump.

Trump led by 5 points in the Los Angeles Times/USC daily tracking poll 48%-43%. And the IBD/TIPP tracking poll also had Trump ahead by 2 points.

Polling aggregators are also leaning toward Clinton. RealClearPolitics figures Clinton has a 2.2 percentage point lead in a four-way race. Clinton also leads in state polls. If every state voted according to its RCP average, she would win with 297 electoral votes to Trump’s 241, surpassing the needed 270.

Fivethirtyeight.com calculates Clinton has a 67 percent chance of winning compared to 32 percent for Trump, with Clinton taking 295 electoral votes compared to 241 for Trump. The Upshot gives Clinton an 84 percent chance to win.

Quinnipiac University released polls in Florida and North Carolina – two states where Clinton and Trump have been locked in tight races that could help decide the winner – show Clinton ahead by 1 point in Florida and 2 points in North Carolina. Both polls fall well within the 3.3-point margin of error and put the two candidates at a virtual tie. Meanwhile, a new CBS poll has Trump with a 1 percentage point lead in Ohio, and Florida is a tie.

After a long year of seemingly endless polling, the final batch of polls give a slim advantage to Clinton. Nobody calls it a slam dunk, even though Wall Street started the celebration a couple of days early. And then this sets up the Wall Street traders for the possibility of a Brexit-like come-uppance.

You will recall that the UK vote on a referendum to exit the Euro Union, while close among the polling firms, was considered a near impossibility by traders and betting parlors. You will also recall that financial markets had a sharp sell-off followed by a strong rebound.

Here is what we think we know: Clinton will probably win, possibly with a majority in the Senate but not the House. That is not a guarantee, I am just reporting on probabilities; and this is the scenario now priced into the markets. A Clinton sweep or a Trump sweep would likely result in a sell-off and then we wait for rebound, or not.

Typically, the day after the election sees a sell-off and today’s relief rally may be short-lived. In other words, trading based on the election is a big gamble right now. The worst-case scenario is that we don’t have a decision tomorrow night; the worst-case scenario involves recounts, (fivethirtyeight assigns an 8% chance of a recount in a state that decides the Electoral College), which would almost surely make its way to the Supreme Court, which is of course one justice shy and split 4-4.

Feel free to let your paranoia run wild and create your own variations.

Most likely, sometime Tuesday evening, we will have a new president-elect. The markets will probably react. You don’t have to jump into that initial reaction but you should be formulating some longer-term strategies, not based on emotional reaction. And don’t forget to follow the Fed; Fischer, Bullard, Evans, Kashkari and Williams are all slated to speak this week.

Stock markets in Asia and Europe moved higher to start the week. The US dollar index is stronger by roughly 0.5%. Volatility as measured by the VIX, which had surged on the recent downwards moves, dropped by 4 points to roughly 18.5, reversing all its jump over the past week. Gold dropped. Oil prices moved higher after 7 losing sessions.

Not much economic data today and certainly nothing to move markets. A Federal Reserve survey shows banks continued to tighten lending standards to commercial real estate loans in the third quarter. The Fed survey also found that demand for home mortgages strengthened over the third quarter. Demand for auto and credit card loans also rose. Standards for consumer loans were unchanged.

The largest U.S. gasoline pipeline restarted its main gasoline conduit Sunday morning after a deadly explosion shut Line 1 for six days and forced Gulf Coast refiners to cut rates. Colonial anticipates fuel products leaving the pipeline’s Houston origin to arrive in Linden, New Jersey, where the system ends, within approximately three days.

An earthquake with a preliminary magnitude of 5.0 struck near Cushing, Oklahoma, prompting evacuations, but there were no reports of injuries. Oil pipelines intersect in Cushing, which is considered a hub for crude shipments. Oil is sharply higher this morning after a statement said OPEC producers were committed to a deal made in September to cut crude output to try to boost the market.

Berkshire Hathaway missed estimates on earnings but beat on revenue. Other information in the report suggested the Warren Buffett-run firm maintained its 10 percent stake in Wells Fargo despite the bank’s sales practices scandal. The filing shows Warren Buffett is sitting on more cash than ever. Berkshire Hathaway had almost $85 billion on its books at the end of the quarter.

In other earnings news: HSBC posted a 46% drop in pretax profit following a big loss on the sale of its Brazilian business. Nissan Motor cut its first-half net income forecast as a strong yen offset rising sales, but maintained its full-year dividend plan. Softbank’s second quarter profit rose nearly 7%, boosted by a strong performance in its domestic telecoms division.

Oracle has narrowly overcome opposition to its $9.3 billion offer for NetSuite after threatening to walk away if stakeholders held out for a higher price. Nearly 56% of NetSuite shareholders who were eligible to vote chose to take its offer, laying the groundwork for the deal to close today. The tie-up will add nearly $1 billion to Oracle’s revenues from cloud software.

T. Rowe Price had pushed Oracle to pay more, arguing that Oracle’s executive chairman and CTO, Larry Ellison, had a conflict of interest that stopped NetSuite from getting alternative bids and top dollar. Instead, Oracle issued a take-it-or-leave-it offer deadline of Friday at midnight. And if the deal hadn’t gone through, NetSuite would have found itself competing increasingly with Oracle, which now has its own financial software cloud.

Looking to rebound from its Note 7 fiasco, Samsung Electronics plans to adopt a voice-based digital assistant for its upcoming Galaxy S8, scheduled for release next year. Last month, Samsung acquired  U.S.-based artificial-intelligence software company Viv Labs, which will outfit the Galaxy S8 with AI-enabled features “significantly differentiated” from those in the market, such as Apple’s Siri or Google.

While it didn’t invent China’s Singles Day sale, Alibaba made it a fixture of the retail calendar. Now the company plans to use the excitement around the event to launch itself beyond mainland China, catering to shoppers in Hong Kong and Taiwan. Last year, Alibaba sold over $14.3 billion on November 11, more than double the $5.8 billion in total U.S. e-commerce sales for Black Friday and Cyber Monday.

Financial Review

154 More Days

Sinclair Noe — June 8, 2016

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

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DOW + 66 = 18,005
SPX + 6 = 2119
NAS + 12 = 4974
10 Y – .01 = 1.70%
OIL + 1.01 = 51.37
GOLD + 18.90 = 1263.10

The Dow closed above 18,000 for the first time since April.

The European Central Bank’s corporate-bond buying program kicked off this morning with the bank buying debt issued by companies including Anheuser-Busch InBev, Telefonica, Siemens, and Renault. Borrowing costs in Europe had already fallen to unprecedented levels with the average yield on investment-grade company notes in euros dropping to 1 percent this week.

In the sovereign debt space, where the ECB also continues to be a buyer, the yield on Germany’s 10-year bund is within a hair of turning negative, falling to (yet another) record low of 0.033 percent this morning.

Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank. Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’s ultra-low rates. Although no decision has yet been taken, the lender has held discussions on the matter with German authorities.

The bulk of negative-yielding debt is concentrated in Japan and Europe. Globally, the total is now $10.4 trillion, according to Fitch Ratings. Individual European countries that do not use the euro are largely trying to weaken their respective currencies, as investors flock to safety.

The European Central Bank, which oversees the euro, introduced negative rates to stimulate growth in the Eurozone. The Bank of Japan also wants to stimulate growth, as well as weaken the yen. The goal is the same: Flood the financial sector with money, hoping that it chases yield into riskier investments.

But if the goal were to coax money into riskier assets, such as stocks, the plan has been a failure so far. European stocks were down 30% at one point after the introduction of negative rates. In Japan, stocks are up only slightly since the beginning of the BOJ’s experiment in January of this year.

Job openings hit 5.8 million at the end of April, up slightly from 5.76 million openings in March, according to the Job Openings and Labor Turnover Summary (JOLTS) report. The report beat analyst consensus estimates of 5.7 million job openings for the month. The job openings rate was 3.9 percent in April, with the biggest increase in wholesale trade, transportation, warehousing, and utilities at 65,000 openings.

Professional and business services saw the biggest decrease, down 274,000 openings. April hires fell to 5.1 million, slightly lower than the previous month’s 5.3 million. The hiring rate was 3.5 percent, little changed in the private sector and down 31,000 for government hires, according to the report. There were 5 million separations, which includes quits, layoffs and discharges.

Last week’s anemic jobs report for May pushed interest rates lower, but the desire for mortgages was already on the rise. Mortgage application volume jumped 9.3 percent last week from the previous week, according to the Mortgage Bankers Association. The volume may have been making up for a big drop two weeks ago, or reacting to a slight drop in interest rates.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.83 percent from 3.85 percent, with points decreasing to 0.33 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio loans.

The World Bank slashed its global growth forecast. The World Bank cut its global growth forecast for 2016 to 2.4% from 2.9% as a result of “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.” The bank sees “mounting risks” and expects a “further slowdown in major emerging markets.” Specifically, China’s growth is forecast to slow to 6.7% from 6.9% and both Russia and Brazil are expected to see “deeper recessions” than initially forecast. India’s growth is expected to hold at 7.6%.

While oil markets will start rebalancing after a slump next year, an oversupply in natural gas won’t disappear until the end of the decade, the IEA warned, slashing its gas demand outlook for a fourth straight year. “Slower generation growth, rock-bottom coal prices and robust deployment of renewables constrain gas’s ability to grow faster in today’s low-price environment.” Global consumption will expand by 1.5% annually until 2021, down from last year’s forecast of 2% growth through 2020.

Meanwhile, both Brent and WTI are holding strong above $51 per barrel, helped by industry data showing a larger-than-expected draw-down in U.S. crude inventories, worries about attacks on the Nigerian oil industry and strong Chinese demand. According to data from the API on Tuesday, oil stockpiles fell by 3.6 million barrels last week. Energy Information Administration figures released today show a 3.2-million-barrel drop in inventories.

The dollar declined against the yen. The euro edged up. The dollar index was down again today. The dollar has lost some of its strength after Friday’s disappointing jobs report. That has helped energy companies, as well as mining companies and chemicals and machinery makers and commodities in general; a weaker dollar makes American goods more affordable in other countries.

If the Fed were to raise rates or even suggest that the recent jobs number was just a transitory anomaly, then the lack of strong fundamental support could produce a rather pronounced correction to the down side. Consider that oil traded today at nearly a 100% increase off of the lows that were created just this February; that kind of price movement is not just a simple supply-demand story.

The International Energy Agency reports that 1.26 million electric cars, both battery and plug-in hybrid, were sold worldwide in 2015. Is that a lot? It depends on how you look at the numbers and who is asking the questions. The trend is certainly up. Keep in mind that there were only a few hundred electric cars on the road in 2008 and the current number is a lot higher than anyone would have expected back then. The number has tripled just since 2013.

The United States now has 400,000 electric vehicles on the road, a massive increase since 2010. But there is still a long road ahead, and that road is full of cars with gas engines. There are 1 billion vehicles on the road worldwide at present and that number is expected to increase dramatically in the next 20 years as demand in countries like India and China continues to soar.  For now, lower gasoline prices are an obstacle for more electric vehicle sales.

According to Fortune’s annual ranking of companies by revenue, Walmart is still the 800-pound gorilla. With $482 billion in revenue, it sells more than Apple, Amazon and Microsoft put together. It’s bigger than the No. 2 company, Exxon Mobil, and No. 3, Apple, combined. Its sales are greater than the GDP of Poland. That’s based on revenue. Forbes puts together a list of the 2000 biggest companies around the globe, and revenue is just one metric they use. According to Forbes, the top 3 spots on their list are held by Chinese banks.

Today’s top gainer was a micro-cap stock called Gevo, up 102%. On Tuesday, Alaska Air Group flew two flights using the company’s renewable alcohol to jet fuel. The flights departed using a mixture of traditional jet fuel and a 20% bio-fuel blend made from fermented corn. They flew from Seattle to San Francisco and then on to Washington DC. The airline estimates that the 20% bio-fuel blend will reduce greenhouse gas emissions by 50%.

Keurig Green Mountain is pulling the plug on Kold, its counter-top soda machine. Many consumers balked at the price of the device, which initially cost $369, and its pods, which had cost $1.25 to make an 8-ounce drink. The move comes 10 months after Keurig rolled out Kold and three months after JAB Holding, a major global coffee player, took the company private for about $14 billion.

When Aubrey McClendon drove his Chevy Tahoe into a bridge the day after he was indicted for allegedly rigging the price of oil and gas leases, suspicions arose that he had killed himself. But a two-month probe by Oklahoma Police has found nothing to suggest the Chesapeake Energy founder committed suicide.  Investigators found no information that this was anything other than a car accident, but also admitted: “we may never know 100% what happened.”

Reports of Roger Goodell’s death have been greatly exaggerated; actually his passing was an outright lie – the result of a computer hack. The National Football League became the latest high-profile victim of hackers as the league’s official Twitter account was intercepted and wrongly announced the passing of NFL Commissioner Roger Goodell. The tweet has been deleted. Goodell is alive and well.

The primary season effectively wrapped up last night. Both the Republicans and Democrats have a presumptive nominee. And what the primary season has taught us is that most states don’t know how to hold an election.

Whether it was a lack of polling places in Arizona, or voters scrubbed from voter rolls in New York, or far too many provisional ballots that will likely never be counted in Texas, or broken machines and polling sites that opened late in California, or a judge’s ruling today in Ohio striking down provisions of the state’s recently enacted voting laws; it all points to confusion and the potential for big problems. By the way, we have 154 days until the Election Day. Good luck.