Financial Review

The Mark Inside

Sinclair Noe — January 27, 2017

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DOW – 7 = 20,093
SPX – 1 = 2294
NAS + 5 = 5660
RUT – 5 = 1370
10 Y – .02 = 2.48%
OIL – .64 = 53.14
GOLD + 2.90 = 1192.20

Major market indices traded in a tight range today. The Nasdaq pulled out another record high close. Meanwhile the VIX, the volatility index closed at 10.52, a multi-year low, indicating a certain complacency among investors, not in all sectors for sure, but with regards to overall market risk.

Gross domestic product, the value of all goods and services produced, rose at a 1.9 percent annualized rate in the fourth quarter, following the prior quarter’s 3.5 percent rate of growth.

For the full year, the U.S. grew just 1.6%, down from a 2.6% clip in 2015; still, even if growth was a bit sluggish, it marks 7 straight years of growth. A wider trade deficit — a negative for GDP — was by far the biggest anchor in the fourth quarter. The economy would have topped 3% growth if the trade gap has basically been unchanged.

Consumers increased spending by a solid 2.5%, with strong purchases of big-ticket items such as new cars or computers. Businesses also ratcheted up overall spending, including the first increase in equipment purchases in five quarters.

Home builders boosted investment in new housing by just over 10%, marking the first advance in three quarters. Companies also stocked up more: the value of inventories jumped by $48.7 billion after barely any change in the spring and fall. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.

Today’s GDP report shows that there is still plenty of room for economic growth, and President Trump’s proposals for tax cuts and infrastructure spending could certainly bolster the economy in the short-term. But in economics, things tend to cut both ways. Expansionary fiscal policy would likely lead to a stronger dollar, which would harm US manufacturing.

We could also see a higher federal deficit. And then remember the Federal Reserve is standing by to make sure we maintain price stability; and even though the Fed is not expected to hike rates at their FOMC policy meeting next week, they anticipate 3 hikes this year, which would be much more likely in the face of fiscal accommodation.

Orders for long-lasting goods made in the U.S. fell in December for the second month in a row, largely because of a cutback in demand from the Pentagon. New orders for durable goods dropped 0.4% last month. Bookings for defense-related equipment, including jets and other major hardware, accounted for the unexpected decline. Orders were also weak for primary metals, fabricated parts and computers. One strong area: orders for new cars rose 2%.

Mexican President Enrique Pena Nieto scrapped a planned trip to meet with President Trump, who has repeatedly demanded that Mexico pay for a wall on the U.S. border. And then today, it was announced that Pena and Trump talked on the phone for about one hour but nothing new on a wall or how to pay for it.

White House spokesman Sean Spicer, in a not so internal monologue, told reporters Trump was considering a 20% tax on Mexican imports to pay for the wall’s construction; that was later corrected to be just one of a “buffet of options” on the table. Just a reminder, the US has a $68 billion trade deficit with Mexico and is our third largest trading partner.

Mexican billionaire Carlos Slim, who once opposed a Donald Trump presidency and later said it would be “very good for Mexico,” held a press conference today in Mexico City. Slim offered his services to help Pena negotiate with Trump and called on Mexicans from all political parties to unite behind President Pena in his discussions with Trump.

Slim says Trump’s plans to bring manufacturing jobs to the US would only result in higher prices for consumers. Slim is Mexico’s wealthiest man and one of the world’s richest people, with an empire that encompasses telecoms, mining, banking and construction.

Theresa May last night offered to help President Trump to prevent the West from being “eclipsed” by China as she urged him not to shirk his “obligation” to lead the world. The U.K. Prime Minister also hopes he can be an economic ally – after Britain’s divorce from Europe, she’ll need a trade deal with the US.

The pair met face-to-face today, making her the first foreign leader to step into Trump’s Oval Office, and then they held a very brief joint press conference. May said Trump had committed 100% to NATO. May said the UK was opposed to lifting sanctions on Russia. Trump said he believes in torture. They both said they thought they could have a friendly relationship.

The US is Britain’s biggest export destination after the EU, accounting for over 15% of the country’s exports. Last week, May confirmed that Britain would leave the EU’s single market and customs union, allowing it to sign trade agreements of its own after the process of exit is complete.

The process includes the “Brexit bill,” which Parliament must approve to empower the prime minister to start the two-year negotiation period for Britain to leave the 28-nation bloc. The EU is hanging tough on not starting any sort of Brexit talks until Britain pulls the Article 50 trigger. The EU treaty stipulates that departure happens in 24 months irrespective of whether an exodus includes neat and clean trade bills.

Pretty much everyone agrees that a Brexit by default rather than a negotiated Brexit would be worse for the UK. And while there is a mechanism for extension, it requires unanimous approval of the 27 remaining states. The UK is so widely disliked in the EU that no one expects an extension to be granted.

So, the importance of a UK-US trade deal becomes even more important, even though it can’t technically be negotiated just yet. At the very least, it means Prime Minister May is negotiating from a position of weakness.

Trump has scheduled a phone conversation with Russian President Vladimir Putin and German Chancellor Angela Merkel on Saturday – not a three-way call. Trump’s PR team has been laying the groundwork for possibly removing sanctions against Russia, imposed after Russia invaded Ukraine and annexed Crimea.  Today, Arizona Senator John McCain said easing sanctions was a “reckless course.”

Alphabet’s revenue beat analysts’ estimates, but its profits per share missed expectations due to the company paying a much larger tax rate than anticipated. Alphabet, along with Microsoft and Intel, which also reported results yesterday, continue to show that cloud services remain the biggest growth area in tech. Microsoft shares hit an all-time high in trading today, and market cap topped $500 billion for the first time in 17 years. Apple, Amazon, and Facebook report earnings next week.

Starbucks slashed its 2017 revenue forecast. Starbucks’ first-quarter results were mostly in line with estimates but said it saw 2017 revenue growth of 8% to 10%, down from its previous estimate of a double-digit rise.

Chevron missed profit and revenue estimates for the fourth quarter. CEO John Watson said the earnings reflect the low oil and gas prices during the past year. The company cut capital and operating costs by $14 billion in 2016.

In Europe, UBS Group kicked off a run of bank earnings releases this morning saying all its money-management units saw net redemptions in the last quarter. UBS investors pulled out $15.2 billion in the fourth quarter and margins at its wealth management business declined for a third straight quarter, even as rising stock markets and higher interest rates in the U.S. lifted earnings.

Sears tumbled more than 9% to under $8 per share on Thursday, sending the company’s stock to its lowest price since its merger with Kmart back in 2004. The decline piled on to a 7% drop in Sears’ shares a day earlier, when Fitch Ratings called attention to the chain’s “significant” cash burn. The company also ended up at the top of a Bloomberg Intelligence list of retailers with the highest risk of bankruptcy.

Iranian supertankers are sailing to Europe for the first time since sanctions were eased last year as one of the world’s biggest crude shippers moves to step up deliveries. While European refiners have been taking small cargoes of Iranian oil, these are the first vessels operated by the National Iranian Tanker Company rather than independent shippers. Each of the very large crude carriers can carry more than 2 million barrels.

Lunar New Year celebrations are underway. Markets in China and across much of Asia will be shuttered over the next week in celebration of the Lunar New Year.

Financial Review

Dilma’s Demise

Sinclair Noe — August 31, 2016

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

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DOW – 53 = 18,400
SPX – 5 = 2170
NAS – 9 = 5213
10 Y + .01 = 1.58%
OIL + .20 = 44.90
GOLD – 2.00 = 1309.50

Since the Dow Jones Industrial Average was created in the late 1890s, September has produced an average loss of 1.1%. The 11 other months of the calendar, in contrast, have produced an average gain of 0.8%. September has an impressively consistent record at or near the bottom of the rankings, not just one or two really horrible years. Just a reminder – correlation is not the same as causation.

The S&P 500 lost 3 points for the month of August. The Dow Industrials dropped 56 points for the month, but both indices hit record highs during the month. Speculative long contracts, or bets that stocks are going higher, on the Dow at the Chicago Board of Trade recently hit a record of 38,382; with long bets on the S&P 500 rising to the highest level in three years.

Gold fell again today, holding ground at the lowest levels in two months and down about $40 for the month, the first monthly loss since May.

Oil futures slid to their lowest levels in nearly three weeks, then recovered to post a small gain at the close. Data by industry group American Petroleum Institute late Tuesday showed U.S. crude stocks rose by 942,000 barrels in the week ended Aug. 26.

The EIA report Wednesday showed crude-oil and product exports totaling an estimated 4.976 million barrels a day, up from 4.578 million a week earlier. The report also showed a bigger-than-expected rise in crude supplies.

U.S. Treasuries posted their largest monthly loss since June 2015 after a slew of hawkish rhetoric from Fed officials almost doubled the probability of a September rate hike to 34% in the futures market. Fed Vice Chairman Stanley Fischer said that any increase will be data dependent, having previously pointed to employment figures on Friday as being of key importance.

ADP reports private-sector hiring stayed strong in August, as employers added 177,000 jobs.  ADP’s data gives us a hint about the Labor Department’s employment report, which will be released Friday and covers government jobs in addition to the private sector. The ADP report is not an exact match to the government report, and there can be significant differences in any given month, but they are usually pretty similar.

Fed Chair Yellen cited 190,000 as a three-month average in her speech and is likely a key number needed to see a rate hike in September. On August 5, just before the release of the July Jobs Report, the Wall Street Journal, reported the following: “The magic number in Friday’s jobs report is 200,000.

If the Labor Department reports that employers expanded payrolls by 200,000 or more in July, then that will likely keep alive the possibility of a Federal Reserve interest rate increase at its September policy meeting.”

We know the jobs reported last month came in way above 200,000 at 255,000. If above 200,000 for July’s NFP had a rate hike “alive” then another 200,000 for an additional month (August) should have it as a near “lock.”

The National Association of Realtors reports its pending home sales index rose 1.3% in July. It’s 1.4% above year-ago levels and the second-strongest reading since April. The index for the west rose to the highest level in over three years. A sale is listed as pending when the contract has been signed but the transaction has not closed.

The pending-home sales index typically represents about 20% of the transactions for existing-home sales so is a leading indicator for that series. The NAR forecast that existing home sales will reach 5.38 million this year, up 2.8% and the highest level since 2006.

Consumer price inflation in the Eurozone was stuck at 0.2% in August, leaving the ECB no closer to its inflation target than when it launched the first of a series of stimulus measures more than two years ago. Other data released by Eurostat showed the bloc’s unemployment rate unchanged at 10.1% (more than double the U.S.). The figures could push the ECB to launch additional stimulus at its next policy meeting on Sept. 8, like extending the duration of its bond-buying program by at least another six months.

Donald Trump will deliver his immigration policy in a speech in Phoenix later today. Earlier today he traveled to Mexico City to meet with Mexican President Enrique Peña Nieto. Standing on stage with Mexican President Enrique Peña Nieto after their brief meeting, Trump described the encounter between the two men as a “great honor” and sang the praises of Mexican-Americans.

Trump ticked off a list of five things that he described as shared goals between the US and Mexican governments. For his part, Peña Nieto emphasized the importance of the historic alliance, but did not hesitate to acknowledge the areas where the two leaders differ. In response to questions from reporters, Trump said, “We did discuss the wall. We did not discuss payment of the wall.”

Brazil’s Senate voted to impeach suspended President Dilma Rousseff. Rousseff is accused of mishandling Brazil’s budget and misrepresenting the state of the economy. Some of her accusers, as Rousseff noted in her testimony, are themselves accused or convicted of serious corruption charges.

She testified for 14 hours straight on Monday. Rousseff defended her innocence and characterized the impeachment as a coup. The most remarkable aspect of all of this – and what fundamentally distinguishes this process from impeachment in, say, the US – is that Dilma’s removal results in the empowerment of a completely different party that was not elected to the presidency.

Michel Temer the interim president who served as Ms. Rousseff’s vice president before breaking with her this year, is now expected to remain in office until the end of the current term in 2018. Several of the men Temer named to his cabinet have already resigned under the cloud of scandal, including his anticorruption minister and his planning minister, because of claims that they were trying to stymie investigations into the bribery engulfing the national oil company, Petrobras.

Temer is accused of accepting bribes and was recently found guilty of violating campaign finance limits, a conviction that could make him ineligible to run for office for eight years.

The first regularly scheduled commercial flight between the U.S. and Cuba since 1961 is set to fly today, as a JetBlue plane departs Fort Lauderdale for Santa Clara. Transportation Secretary Anthony Foxx will be on board. Other U.S. air carriers that are planning to begin airline service to Cuba include American Airlines, Frontier Airlines, Silver Airways, Southwest Airlines and Sun Country Airlines.

A seven-member board has been appointed to oversee a financial restructuring for Puerto Rico, which has been crippled by a $70 billion debt crisis. The idea of a fiscal control board, known colloquially as La Junta in Puerto Rico, is largely reviled on the island, which has a 45 percent poverty rate and whose chronic economic slump has helped spur rampant out-migration.

The board was created under the federal law known as PROMESA, passed earlier this year, which will bring Puerto Rico’s finances under federal oversight and give it the authority to restructure some of its debt. The board will be tasked with assessing and certifying annual budgets and a fiscal recovery plan presented by the island’s government, as well as facilitating debt restructuring talks on the island, possibly through a bankruptcy-like process.

SWIFT has disclosed new hacking attacks on its member banks as it pressured them to comply with security procedures instituted after February’s $81 million heist at the central bank of Bangladesh. The global financial messaging system said it might report institutions if they failed to meet a November 19 deadline for installing the latest version of software which includes a host of new security features.

A former Monsanto executive who tipped the Securities and Exchange Commission to accounting improprieties involving the company’s top-selling Roundup product has been awarded more than $22 million from the agency’s whistle-blower program. The award was tied to an $80 million settlement between the SEC and Monsanto in February.

The SEC said Monsanto lacked sufficient internal controls to account for millions of dollars in rebates that it offered to retailers and distributors. It ultimately booked a sizeable amount of revenue, but then failed to recognize the costs of the rebate programs on its books. That led Monsanto to “materially” misstate its consolidated earnings for a three-year period.

For-profit educator ITT Technical Institute announced today that it will no longer accept any new enrollments. The news came four days after the US Department of Education imposed sanctions on ITT Education Services, the college chain’s parent company, barring the school from enrolling students who use federal financial aid and requiring ITT to provide a letter of credit showing it’s sufficiently funded.

The sanctions prohibiting the enrollment of students who use financial aid struck such a blow to ITT Tech because, like most for-profit colleges, it’s highly dependent on federal aid. Last year, ITT fell into hot water with the Education Department because of its refusal to provide the proper accounting of federal grants it distributes to students dating back to 2009. The department then placed restrictions on federal financial aid at ITT. ITT Tech is under multiple federal and state investigations relating to the way the for-profit organization runs its operations.

“All hands on deck” may soon be a thing of the past. Ship designers, their operators and regulators are gearing up for a future in which cargo vessels sail the oceans autonomously with minimal or even no crew. British engine maker Rolls-Royce is among those leading the pack, with its Advanced Autonomous Waterborne Applications initiative involving other companies and universities. It predicts unmanned shipping to cut transport costs by 22%.