Financial Review

You’re Fired

Sinclair Noe — May 9, 2017

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DOW – 36 = 20,975
SPX – 2 = 2396
NAS + 17 = 6120
RUT + 0.22 = 1391
10 Y + .03 = 2.40%
OIL – .23 = 46.20
GOLD – 4.90 = 1222.10

President Trump has fired FBI Director James Comey. White House spokesman Sean Spicer said the president “terminated and removed” Comey from office “based on the clear recommendations of both Deputy Attorney General Rod Rosenstein and Attorney General Jeff Sessions.”

In Trump’s letter to Comey, the president said, “It is essential that we find new leadership for the FBI that restores public trust and confidence in its vital law enforcement mission.”

The FBI Director is appointed to a 10-year term and it is unusual for a director to be removed from the office before the term expires. Comey was appointed in 2013. Comey, who has led an investigation into Russia’s meddling during the 2016 election and possible links to Trump aides and associates, is only the second FBI chief to have been fired.

Earlier in the day, the FBI clarified a statement Comey made before a Senate panel that overstated the number of classified emails Hillary Clinton aide Huma Abedin forwarded to the personal computer of her husband, former Rep. Anthony Weiner.

Comey had come under fire from Democrats last year after announcing an investigation into Clinton’s emails right before the presidential election, while not disclosing until later a probe into ties between Donald Trump’s campaign team and Russian intelligence officials.

In a letter sent to Comey, Trump wrote: “While I greatly appreciate you informing me, on three separate occasions, that I am not under investigation, I nevertheless concur with judgment of the Department of Justice that you are not able to effectively lead the Bureau.”

Stocks trade at fresh highs (at least on the Nasdaq) and volatility across assets is so subdued it’s touching near-record lows (the VIX inched slightly higher at the close but is still in single digit territory and dipped as low as 9.56).

With the French election out of the way, investors have stopped paying what had been a five-month high in the cost of insuring against declines in the S&P 500 Index. The price of hedging against a 5 percent drop in the gauge over the next month is 36 percent below its five-year average.

For some, this sense of calm in the market is anxiety-inducing especially as valuations stretch to levels not seen since the aftermath of the 1990s-internet bubble. It has been a long time since we had a 5 or 10 percent correction, and the clock is ticking. Or maybe the bull market is just catching a breath, but the markets are almost never this calm.

Goldman CEO Lloyd Blankfein said today, “Every time I get accustomed to low volatility, like we were towards the end of the Greenspan era, and we think we have all the levers under the control … something erupts to remind us that the idea that anybody is in control of everything is hubris. I don’t know what brings us out of the doldrums, but I do know this is not a normal resting state.”

Fed funds futures pricing shows investors are almost universally expecting the Federal Reserve to raise overnight interest rates at its next meeting, with close to a 90 percent perceived chance of an increase next month. Yields on U.S. two-year notes, considered most sensitive to rate-hike expectations, rose to eight-week highs.

While the U.S. economy saw a marked deceleration in the first quarter, the overall outlook remains solid and the Fed is still widely expected to raise U.S. lending rates in June and likely again in September. The positive sentiment (or at least the ubiquitous complacency) and rising U.S. Treasury yields also boosted the dollar. The dollar index, which tracks the greenback’s value against six major currencies, rose to a three-week high, in line with the gains in yields.

Not everyone is cheerfully confident about economic growth. Commerce Secretary Wilbur Ross says the US economy won’t achieve the Trump administration’s 3 percent growth goal this year and not until all its tax, regulatory, trade and energy policies are fully in place.

US trading partners have been spooked by Trump’s vow to renegotiate or pull out of trade deals, such as the North American Free Trade Agreement. A possible rise in the use of tariffs to punish foreign companies deemed to be competing unfairly also has raised concerns of a wave of protectionism. Ross, however, insisted that the Trump administration was not aiming to restrict trade with its actions.

Kansas City Federal Reserve President Esther George said today the central bank should keep gradually raising short-term interest rates despite some economic indicators, like car sales, flashing “yellow”. Among the cautionary areas, auto sales are down from last year’s record pace, and first quarter GDP growth was up at only a 0.7% annual rate, George noted in a speech at the University of California, Santa Barbara.

But other indicators, like consumer sentiment, remain strong, and household balance sheets are, on average, healthy. And as labor markets continue to strengthen, “continuing the gradual removal of monetary accommodation is the appropriate course for the Fed,” George said. George said that rate hikes must be timed right and that a gradual pace seems appropriate. Going too fast risks derailing the economy, while moving too gradually can pose a risk to financial stability

Boston Federal Reserve President Eric Rosengren said today that efforts to overhaul Fannie Mae and Freddie Mac could lead to “a potential and significant shock” to the commercial real-estate sector.

The pair of mortgage-finance giants, which were bailed out by the U.S. government and placed in conservatorship in 2008 during the height of the financial crisis, have historically boasted outsize influence on the single-family mortgage market, but Rosengren expressed concern that the duo’s growing clout in the multifamily sector may pose risks, as the government considers new structures for the entities.

Job openings and hires moved sideways in March as economic momentum stalled out. The Labor Department says there were 5.74 million job openings, the same number as previously reported in February, which was cut to 5.68 million. Labor’s Job Openings and Labor Turnover Survey lags the closely watched monthly non-farm payroll data but provides more detail.

In March, the JOLTS report showed that the number of workers voluntarily leaving their jobs ticked up by 2.6%. That signals more worker confidence in the labor market.

South Korean liberal politician Moon Jae In has won the country’s presidential election. Moon’s win was fueled by a surge in liberal sympathy after the former conservative president, Park Geun Hye, was removed from office months ago. Park is now in a jail cell as she awaits trial on accusations she took about $52 million in bribes from major companies, including Samsung.

In light of the scandal with the former president, Moon was a seen as a clean candidate who would end corruption. The country’s National Election Commission said more than 33.8 million people voted in the election, a turnout of 77 percent, the highest in two decades. Moon has pushed for a more calm and conciliatory stance toward North Korea. Separately, the North Korean ambassador to the UK told Sky News the country will proceed with its sixth nuclear test.

Disney reported profits that topped expectations, but revenues that fell short of forecasts amid continued weakness at ESPN.  Disney said it earned $1.50 in adjusted earnings per share during its fiscal second quarter, and $13.3 billion in revenue. Revenues from Disney’s parks and resorts increased by 9% to $4.3 billion, helped by Shanghai Disney Resort.

Nvidia reported a 48 percent jump in quarterly revenue, helped by strong demand for its graphics chips and its diversification into fast-growing areas such as self-driving systems and artificial intelligence. Net income rose to $507 million, or 79 cents per share, from $208 million, or 35 cents per share, a year earlier. Nvidia’s revenue rose to $1.9 billion from $1.3 billion.

Yelp reported revenue of $197 million, just short of analysts’ estimates. Yelp cut it full-year 2017 estimates for revenue and earnings. Yelp was slammed – down 28%.

Passengers at an airport in Florida protested on Monday night after the cancellation of multiple flights, leading to a confrontation with airline employees and sheriff’s deputies who arrested three travelers while attempting to restore order. The airport altercation is only one skirmish in Spirit’s war, its customers’ discomfort a kind of collateral damage.

According to a federal lawsuit filed in the Southern District of Florida on Tuesday morning, the Miramar-based airline is accusing the Air Line Pilots Association, an AFL-CIO-affiliated labor union that represents more than 55,000 American and Canadian pilots, of arranging a pilot shortage and forcing Spirit to cancel flights to “purposely and unlawfully disrupting the airline’s operations” as retribution over ongoing pilot contract disputes.

In response to the Fort Lauderdale fracas, Spirit officials quickly passed the buck, blaming the incident on ALPA’s truant pilots. Spirit and ALPA have been at it since 2015, per CNN, but multiple contract negotiations have so far failed to produce an agreement. According to the lawsuit, Spirit has canceled about 300 flights in the past week alone.

A federal court granted Spirit Airlines a temporary restraining order today, compelling the pilots’ union to return to status quo. The pilots’ union said Spirit Airlines pilots will fully comply with the court to help restore normal operations.

Financial Review

Better Than We Thought

Sinclair Noe — August 27, 2015

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

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DOW + 369 = 16,654
SPX + 47 = 1987
NAS + 115 = 4812
10 YR YLD un = 2.17%
OIL + 4.03 = 42.63
GOLD + .10 = 1126.50
SILV + .41 = 14.62

Yesterday Wall Street cracked a six-day losing streak with its best rally in nearly four years. Today, traders piled on; the two-day total, 978 points on the Dow industrials and the best two-day percentage gain since the crisis of 2008; which wipes out Monday’s losses, but still leaves the Dow down from one week ago. On the longer-term charts, Monday and Tuesday dropped below the lows of last October at 15,855, compared to Monday’s low of 15,370, which basically matched the lows from February 2014 at 15,340. On a long-term chart this now provides a range of support. With today’s gains, the S&P has recovered about half of the 11-percent meltdown it suffered over a six-day losing streak.

China’s key stock market index surged 5.3 percent earlier today, for its biggest gain in eight weeks, and the first gain in five sessions. China has been selling down its holdings of US Treasuries; the idea is to put a floor under the devaluation of the yuan; also probably to raise some capital for stimulus. So far, it isn’t an asset dump and there is absolutely no evidence it is the source of economic pain for the US. Even if China wanted to dump Treasuries, there really isn’t a good alternative.

The bigger problem for China, and for the US as a trade partner with China, is the economic slowdown. China accounted for almost 40 percent of global growth last year. China takes in raw materials from emerging market countries and then ships out finished products to the US and Europe. In the age of globalization, any imbalance or excess with a major economy like China inevitably affects other countries. And as excesses in Chinese real estate rolled over to the Chinese stock markets, local investors panicked and that created a nasty case of jitters for global investors. Meanwhile, the Chinese government has been intervening, but they have been more reactive than proactive; trying to staunch the bleeding rather than fending off the wound. But don’t underestimate the power of the People’s Bank of China; it’s a central bank without much restraint.

The countries most at risk to a China slowdown are regional trading partners like South Korea, Vietnam, Thailand, and Indonesia; also emerging market countries like South Africa, Turkey, and Brazil; Europe has some vulnerability because its economy has been weak for some time. The US is largely insulated from China’s downturn. Exports to China amount to only 1 percent of US gross domestic product; and the US economy has been much stronger than almost all other global economies.

If this is beginning to sound a lot like the Asian Contagion of 1997, well, there are certainly similarities. And it might be a mistake to think that China’s economy could fall and drag down the emerging markets and we would walk away unscathed. One challenge is money moving to the safe haven of the US dollar; a stronger dollar makes US goods and services less competitive overseas. And an interest rate hike from the Fed would make the dollar even stronger.

And so today Fed policymakers meet with other central bankers and economists from around the world at an informal summit in Jackson Hole Wyoming. Janet Yellen will not attend. NY Fed President William Dudley said a September hike seemed “less compelling” given recent global economic uncertainty. Kansas City Fed President Esther George says the market turmoil “complicates” any decision to raise rates, but she repeated her long-held call for normalization. Typically, but not always, when the market drops 10%, the Fed follows by cutting interest rates. That isn’t an option, but it will make it much harder to hike rates.

The economy is in better shape than we thought. The Commerce Department has revised second quarter gross domestic product from an initial estimate of 2.3% growth to 3.7%. Businesses increased investment by 3.2% versus an initial drop of 0.6%, with spending on structures such as office buildings rising by 3.1% instead of a drop of 1.6%. One reason businesses might have invested more: Corporate profits jumped an estimated 2.4% in the second quarter after declining by 5.8% in the first quarter. And they boosted spending on equipment by 10.7%, rather than 7%. State and local government spending was boosted to 4.3% from 2.0%.

Then again, the economy might be in worse shape than we thought. The headline GDP number was strong, but we also saw a report showing gross domestic income increased at an annual rate of just 0.6 percent. GDP tracks all expenditures on final goods and services produced in the United States, whereas GDI tracks all income received by those who produced that output. And for the first time the Bureau of Economic Analysis released an average for the GDP and the Gross Domestic Income growth rates. That average came in at 2.1 percent after rounding, and that’s probably closer to the truth than either number alone. The scary part is that there is a big spread between GDP and GDI.

Oil prices spiked on the GDP report, up 10.4% on the day. Oil dropped below $40 this week as problems in China raised concerns about slowing economies and weak global demand. Prices are down about 32 percent from this year’s closing peak in June on speculation that a world supply glut will be prolonged. OPEC members are sustaining output while U.S. stockpiles remain more than 90 million barrels above the five-year seasonal average. So, why the big spike in oil today? Did the supply demand picture change radically from this time yesterday? Of course not. What we are seeing is casino-style speculation in oil markets. Good news, in the form of the GDP report, likely resulted in a short squeeze.

The National Association of Realtors reports contracts to buy previously owned homes rose less than expected in July, but continued to suggest upward momentum in the housing market recovery. Pending Home Sales Index, based on contracts signed last month, increased 0.5 percent to 110.9. Pending home contracts become sales after a month or two, and last month’s increase suggested further gains in home resales, which reached an 8-1/2-year high in July.

Filings for U.S. jobless benefits dropped to a three-week low. Unemployment applications dropped by 6,000 to 271,000 in the week ended Aug. 22. As the unemployment rate has dropped, demand for skilled workers is convincing hiring managers to keep staffing levels consistent with sales.

Arizona has the third-worst job market in the U.S., according to one measure used by the U.S. Bureau of Labor Statistics. Not only did the federal agency look at the official unemployment rates for U.S. states, but also the number of discouraged jobless workers who have stopped looking for positions and the number of part-time workers who would prefer full-time hours. Arizona and its two neighbors, California and Nevada, have the highest unemployed and underemployed rates in the country. Arizona’s jobless and underemployed rate is 13.8 percent. Arizona’s official and traditional unemployment rate is 6.1 percent for July, that’s up 0.2% from June. That ranks 41st. Arizona’s economy lost 7,200 non-farm jobs last month.

CVS Health is jumping further into tele-health with a partnership that will expand patients’ remote access to doctors. Three leading tele-health companies – American Well, Teladoc and Doctor On Demand – will begin receiving referred CVS customers, as well as referring their own customers to 150 CVS walk-in clinics, in six states by the fourth quarter. The new move also underscores CVS’s push to position itself as a broader healthcare services company, and not just medications.

Boeing has agreed to a preliminary deal to settle a long-running lawsuit accusing the company of mishandling its 401(k) plans it offered to its employees. The class-action accused Boeing of failing to uphold its fiduciary duties by allowing excessive fees to go unchecked, choosing higher-cost retail mutual funds over cheaper options, and improperly making 401(k) plan decisions to benefit vendors.

A bankruptcy judge has approved Corinthian Colleges’ liquidation plan, which sets aside millions of dollars in debt relief for former students. Late last year, Corinthian sold off more than half its campuses following multiple probes into whether it misled investors and students about its finances and job placement rates. Corinthian abruptly closed its remaining 28 schools in April, becoming the largest failure in for-profit higher education.

If you’re looking for a new car, you might want to check the rating on that car. The new Tesla P85D just earned a ranking of 103 out of a possible 100 from Consumer Reports. One reason for the high ranking is that the car is very fast, zero to 60 in 3.5 seconds. Despite the record score, the magazine criticized the $127,820 test vehicle for the quality of its interior materials compared with other luxury models, as well as a ride that is firmer and louder than the base Model S.

Markets Were Full Of Sound And Fury, Signifying ... Not Much?

Financial Review

Sound and Fury

Sinclair Noe — July 10, 2015

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

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DOW + 211 = 17,760
SPX + 25 = 2076
NAS + 75 = 4997
10 YR YLD + .11 = 2.41%
OIL + .04 = 52.82
GOLD + 3.50 = 1163.80
SILV + .23 = 15.72

For the week, the Dow rose 0.17 percent while the S&P fell 0.01 percent and the Nasdaq ended down 0.23 percent in its third straight weekly decline. The markets were full of sound and fury, signifying nothing, perhaps.

Greece faces a Sunday deadline to reach a deal with its creditors. Yesterday, Greek Prime Minister Alexis Tsipras submitted a proposal that appears to meet most creditor demands in exchange for a new €53 billion-euro bailout. The package of spending cuts, pension savings and tax increases almost mirrors that from creditors on June 26, which was rejected by Greek voters in a July 5 referendum. Eurozone decision makers are set to assess the plan during crisis meetings on Saturday and Sunday. Meanwhile, Tsipras took the proposal to the Greek parliament to see if they will stand behind the deal. Outside, anti-austerity protestors rallied against the deal; which makes sense; last week a strong majority voted against the very type of deal Tsipras is now trying to sell. The Greek blueprint for pension cuts and VAT increases is essentially copied word-for-word from the June 24 European proposal; it does not appear to include debt relief. The unsustainable Greek debt from 2 weeks ago still seems unsustainable today.

The euro and stocks surged on the prospect of a resolution to end a near-six-month standoff. We are still waiting to see if this deal will stick with the IMF, the ECB, the Greek parliament, the Greek people, and of course, the Germans. And even if a deal is struck, the bigger question is whether Greece will be able to pull itself out of economic decline. But for now, movement. We’ll have to wait and see if that movement equates to progress.

Chinese stocks rose sharply for a second day today. Chinese Regulators ordered listed companies to submit plans to stabilize their stock prices, via measures such as share buybacks and employee shareholding plans. However, it still remains to be seen whether the rally can overcome the steep declines that wiped out $3.9 trillion in value from Chinese equities over the past four weeks. The Shanghai Composite closed up 4.6% (although it’s still off 25% from its June high).

So, Greece might be nearing a deal and China bounces back with 2 days of solid gains following a month long meltdown. Everything is coming up roses. Not so fast. The Greek deal could still fall apart or if they take the deal, Greece could fall apart; for all we know, Tsipras may have just destroyed Greece and the Eurozone. Chinese markets could still stumble and crash and bring down much of Asia as they fall. Or not. Even if we get past both of these problems, it will likely take some time to work through details and mop up excesses. The global system has the ability to manage through each of these shocks, though not without some stress. It could even handle them both together, provided nothing else goes wrong. Yet success is not guaranteed. It requires much better coordinated and more comprehensive policy responses. And should such responses continue to struggle, asset prices will converge down towards the lower levels warranted by fundamentals

Federal Reserve Chair Janet Yellen deliver a speech today in Cleveland. Yellen maintained her call for an interest rate increase this year, saying: “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” Yellen said the job market had not fully recovered but the overall assessment of the economy was upbeat. She made no mention of China in her speech, and only a passing reference to Greece. Absent an unexpected meltdown, Yellen was prepping the markets for a rate hike.

Kansas City Fed President Esther George spoke yesterday, saying: improvement in the job market and stable inflation suggest that “modestly higher” short-term interest rates are appropriate, and “Economic trends and experience suggest…we would be wise to act modestly but act now.”

The Commerce Department reports that wholesale inventories rose 0.8% in May.  Inventories of durable goods, such as autos and machinery, increased 0.6%. Meanwhile, inventories of nondurable goods rose 1.2%. Wholesale sales rose 0.3% in May, following growth of 1.7% in April. At May’s sales pace, the inventory-to-sales ratio remained at 1.29.

The International Energy Agency has warned in its widely followed monthly report that the rebalancing of the oil market that started last year has yet to run its course and a bottom in prices “may still be ahead”, because the world remains “massively oversupplied.” In its first oil-consumption assessment for next year, the IEA, which advises industrialized nations on their energy policies, said global oil demand growth is forecast to slow to 1.2 million barrels a day in 2016. That compares with an average 1.4 million barrels a day this year.  In a bearish assessment of market conditions, the IEA said the adjustment process would “extend well into 2016″.

IDC estimates global PC shipments fell to 66.1 million in the second quarter; that follows a 6.7% drop in PC sales in the first quarter.  Gartner is offering their own analysis, estimating shipments fell 9.5% to 68.4 million. Factors blamed for the decline: Inventory reductions ahead of the Windows 10 launch (set for July 29), a strong dollar (which has led to higher overseas prices), and the end of Windows XP support.

Apple’s Mac continues to be one of the few bright spots in the PC industry. Mac shipments reached 5.1 million during the second quarter, representing 16% year-over-year growth. Apple was the only of IDC’s top six global PC makers to grow shipments last quarter. The global leader in the PC world is…Lenovo, with a 20% market share.

U.S. quarterly earnings season kicked off earlier this week, with Pepsi and Alcoa reporting better-than- expected sales. However, corporate earnings are estimated to have fallen 3.1 percent in the second quarter, according to Thomson Reuters data.

Investors poured $14.1 billion into stock funds in the past week, according to tracking firm Lipper. This marks the biggest inflows since mid-December. The inflows were the first in three weeks. Funds that specialize in U.S. shares attracted most of the new cash, at $12.6 billion, while funds that specialize in foreign shares attracted $1.6 billion to reverse the prior week’s $1.1 billion in outflows.

The NYSE shutdown this week was probably just a glitch. When trading shutdown for 3 hours, it generated all kinds of cyberterrorism, hacky kind of conspiracy theories. It happened on the same day as United Airlines suffered a glitch, and those hundreds of grounded flights are most likely a preview of things to come. As airlines switch to electronic luggage tags and more travelers swap paper tickets for boarding passes stored on smartphones, industry consultants say the impact of technology disruptions will keep growing. The airlines are just a big flying computer. It was most likely just a software glitch. The problem is that software now runs the world, and that software was built fast and cheap; and it has been patched over and over and over.

Our dominant operating systems, our way of working, and our common approach to developing, auditing and debugging software, and spending (or not) money on its maintenance, has not yet reached the requirements of the 21st century. You know we have infrastructure problems; failing bridges, dangerous railroad intersections, potholes, crumbling water pipes. Turns out, our cyber-infrastructure is also a mess. And we are on the verge of transitioning to the “internet of things”; which is kind of like building a high rise on top of a Quonset hut. The NYSE shutdown this week was probably just a glitch, which is really, really scary.

Checking in on the Libor trial in London, former UBS and Citigroup trader Tom Hayes has been testifying that he was open about his attempts to influence rates and that his managers were aware of it and that the practice was widespread in the industry. Hayes said he had been made a scapegoat to protect more senior figures, accusing UBS of “sheer hypocrisy” for disowning him when regulators got involved, even though senior managers at the bank had known all about his trading practices.
Checking in on Eric Holder, the former US Attorney General has landed on his feet; actually he landed back at his old job at Covington & Burling, a high powered law firm that regularly represents some of the biggest financial firms in the country; he even landed back in his old office, which the firm kept empty, waiting for his return. Holder will settle into a $2.5 million a year contract; not bad for a guy who could not get a single conviction in court for any crimes related to the financial crisis.

Right now a piano-sized spacecraft is barreling through space at over 36,000 mph. The target is Pluto. So far the New Horizons spacecraft has traveled nearly 3 billion miles. This week it got close, by space standards, just a few million miles away; which was close enough to snap a few good photos. The new pictures show some details we have never seen before. Pluto has distinctive contrasting dark and light colors on its surface. A large light colored region, about 1,000 miles across, is kind of shaped like an enormous heart.  NASA has carefully calibrated the spacecraft to fly within 7,600 miles of Pluto on Tuesday. The spacecraft should be able to tell if there are impact craters on Pluto’s moon, and close enough to take detailed pictures of something the size of a football field; just in case someone is playing football on Pluto.