Financial Review

Never Ending Pi

Sinclair Noe — March 14, 2017

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DOW – 44 = 20,837
SPX – 8 = 2365
NAS – 18 = 5865
RUT – 7 = 1362
10Y – .02 = 2.59%
OIL – .45 – 47.95
GOLD – 5.10 1199.60

The Federal Reserve Federal Open Market Committee is meeting today and tomorrow to determine monetary policy. Fed policymakers have clearly indicated they will raise the overnight benchmark interest rate by 25 basis points to a range of 0.75 percent and 1.00 percent,  and may signal there could be even more than the three rate rises they have forecast for this year.

While the Fed meeting is the focus for markets this week, investors also have to assess the impact of central bank meetings in Britain and Japan, a gathering of G20 finance chiefs, President Trump’s first budget and an election in the Netherlands.

The dollar index rose 0.3%. Yields on benchmark 10-year German government bonds briefly hit 14-month highs above 0.5%, before reversing. Oil fell to 3-1/2-month lows after Saudi Arabia announced it has reversed about one-third of its production cuts and the Organization of the Petroleum Exporting Countries (OPEC) reported oil stocks were still rising despite agreed output cuts.

US producer prices increased 0.3% in February after rising 0.6% in January; and the year-on-year gain was the largest in nearly five years. In the 12 months through February, the PPI jumped 2.2 percent, the biggest advance since March 2012. The core PPI, a key gauge of underlying producer price pressures that excludes food, energy and trade services increased 0.3 percent in February, the biggest gain since April 2016. Core PPI increased 1.8 percent in the 12 months through February.

Small-business owner optimism dipped in February but stayed near long-time highs. The sentiment gauge from the National Federation of Independent Business fell 0.6 points to 105.3. The stronger economy increasingly seems to come at a price for small-business owners. The NFIB wrote in its release: “This is one of the tightest labor markets in the 43-year history of the NFIB survey.”

FDIC Vice Chairman Thomas Hoenig rolled out what he called “a comprehensive plan for reforming bank oversight, calling on the biggest lenders to further separate investment banking activities and accept stricter capital requirements in exchange for fewer regulations. It would require large, complex, universal banks to separately capitalize and manage their traditional commercial banking activities and their nontraditional activities, such as investment banking.  In other words, a variation on the Glass-Steagall Act.

Wall Street seems largely unfazed by political turmoil and uncertainty. The major indices are still very close to record highs, and the VIX, the volatility index, is near long-time lows; closing today at 12.23. There are a couple of possible explanations: the global economy has been in recovery mode – a slow, sluggish and boring uptrend.

Per the World Bank, annual global growth since 2011 has hovered in a narrow 2.3 to 3 percent range. The International Monetary Fund’s measure pegs it in an even tighter 3.1 to 3.5 percent range since 2012. And if both institutions’ estimates are met, 2017 will be yet another year of growth being stuck within these narrow parameters. Global company earnings volatility has been low throughout the post-crisis recovery – consistently 5 percent or lower over the past five years.

In the past 20 years, there have been only two significant bouts of earnings volatility of 15 percent and higher, or global recessions. They coincided with the market crashes of 2000-02 and 2007-09. The other reason is that in a low interest rate environment investors don’t have much alternative. You ride out the risk. So, we have strong data but uncertain politics, and they seem to balance out, at least for now.

Luxury fashion retailer Neiman Marcus Group said it was exploring strategic alternatives, including a sale of the company. The move comes about two months after the company pulled its IPO. Neiman Marcus also reported a 6.1 percent drop in second-quarter revenue as issues in its new merchandising and distribution system forced the company to take additional markdowns. Hudson’s Bay has emerged as the most prominent suitor.

MoneyGram International has received a buyout bid from Euronet Worldwide that is 15% higher than MoneyGram’s current buyout deal with Ant Financial Services Group. Euronet’s bid of $15.20 a share in cash will value the company at over $1 billion. The Ant Financial bid MoneyGram agreed to in January was $13.25 a share. MoneyGram’s stock has doubled over the past 12 months through Monday.

Ruby Tuesday it was putting itself up for sale, as the casual dining industry’s slump shows no signs of ebbing. The Tennessee-based company said it’s considering “strategic alternatives,” including a potential sale or merger. The move was paired with an announcement that the company’s sales at restaurants open at least a year tumbled about 4% in the period ended Feb. 28. The chain’s quarterly revenue also fell nearly 17%, compared to a year earlier, to $225.7 million.

Networking software company Citrix Systems has been exploring strategic alternatives including a potential sale. Citrix, which gave activist hedge fund Elliott Management a board seat in 2015, has looked at selling itself in the past, before embarking on spin-offs and sales of smaller business units. It now has a market capitalization of $13.2 billion.

You might not be able to get there from here. A powerful nor’easter is hitting the mid-Atlantic and the Northeast with heavy snow, sleet and rain, prompting more than 6,000 flight cancellations today and more than 2,500 delayed flights, resulting in bad news for the airline stocks. The NYSE Arca Airline index lost about 2% today, dropping to a 4-month low. Plus, the storm resulted in school closures, power outages, and warnings from officials to stay off the roads – and that is bad news for trucking stocks

Brexit is coming. UK Prime Minister Theresa May has been granted the power to trigger Article 50; however, she’s not expected to begin the formal process of the UK’s exit from the European Union until the end of the month.

The New York attorney general accused Exxon Mobil of withholding documents from his office as it investigates whether the energy company misrepresented its understanding of climate change to investors and the public.

Lawyers for Attorney General Eric Schneiderman’s office said in court documents that Exxon hadn’t disclosed that Rex Tillerson, the former chairman and chief executive, used an alias email address to discuss risk-management issues related to climate change. Tillerson, now the U.S. secretary of state, used the pseudonym “Wayne Tracker” from at least 2008 to 2015.

The Trump administration is weighing even deeper cuts to the Environmental Protection Agency than previous versions of their budget outline suggested. In its first budget draft last month, the White House proposed a 25% cut to the EPA budget. But wait there’s more; officials are now considering cutting the agency’s $8.1 billion budget even further.

The ax looks set to fall hardest on EPA’s climate change programs, with the staff there expected to leave the agency. The EPA budget proposal is likely to run into opposition in Congress, and it is already running into opposition from mayors.

Los Angeles Mayor Eric Garcetti is coordinating the effort with dozens of other cities to purchase up to $10 billion worth of electric vehicles. Thirty cities including New York and Chicago jointly asked automakers for the cost and feasibility of providing 114,000 electric vehicles, including police cruisers, street sweepers and trash haulers. That would be comparable to about 72% of total US plug-in vehicle sales last year.

The auto makers have been fighting CAFÉ rules which set fuel efficiency standards and complaining that there is not enough demand to justify developing more efficient electric vehicles. The mayors say they would like to have more electric vehicles on the streets, including some that haven’t been developed yet, such as plug-in fire trucks and street sweepers. While the initiative would probably be spread out over several years, it would provide electric vehicle manufacturers reliable demand.

Alphabet’s Executive Chairman Eric Schmidt announced today via Twitter that “John Goodenough, inventor of the lithium battery, has developed the first all-solid-state battery cells.” And that is a pretty big deal. Goodenough’s batteries reportedly have three times as much energy density as today’s lithium-ion batteries. They store and transmit energy at temperatures lower than traditional lithium-ion packs and can be made using globally abundant supplies of sodium.

The research could result in “a safe, low-cost all-solid-state cell with a huge capacity giving a large energy density and a long cycle life suitable for powering an all-electric road vehicle or for storing electric power from wind or solar energy.” Goodenough and his team of researchers at the University of Texas have applied for patents on the solid-state battery technology and it may be a while till the batteries move to production.

Goodenough is a National Medal of Science laureate, and by the way, he is 94 years old.

Today, March 14, or 3-14, is Pi Day. Pi is the ratio of the circumference of a circle to its diameter and it is represented by the irrational number that never ends. Math enthusiasts know all about it, and the rest of the population is probably hoping for cherry pie, or maybe pizza.

Financial Review

Shut Up

Sinclair Noe — February 24, 2017

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

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DOW + 11 = 20,821
SPX + 3 = 2367
NAS + 9 = 5845
RUT – 0.1 = 1394
10 Y – .07 = 2.32%
OIL – .42 = 54.03
GOLD + 7.60 = 1257.90

11 days of record breaking closes, the best streak of positive sessions since 1993. The longest streak of record breaking sessions is 14 in a row – back in 1897.

For most of the day, the major indices were in negative territory; Dow futures dropped more than 100 points early in the morning, and then, in the final 17 seconds, buyers jumped in again. The Dow Industrial Average is up more than1,000 points since January 1 and almost 3,000 points since the election.

This was the third up week in a row for the Dow, and the fifth straight positive week for the S&P and Nasdaq. The 10-year Treasury note has its best week since last June. Gold is up 8 of the last 9 weeks and at its highest level since October.

In economic news, U.S. new home sales rose 3.7 percent in January, below the expected increase of 6.3 percent. Meanwhile, consumer sentiment in the U.S. hit 96.3 in February, slightly above an estimate of 96. Earnings season, which is coming to an end, has been much stronger than anticipated.

Per Thomson Reuters, fourth quarter earnings growth is tracking about 7.5%. It seems US equity funds are where the world is parking its money for the time being, with over $25 billion coming into market coffers since January 1.

President Trump spoke before the Conservative Political Action Committee today, and he ramped up his attack against the news media, charging that “fake news” outlets are “the enemy of the people.” And later in the day, the White House fired a shot across the bow, blocking CNN, the New York Times, the Los Angeles Times, Politico and BuzzFeed from an off-camera White House press briefing conducted by White House press secretary Sean Spicer.

The Associated Press and Time magazine boycotted the briefing because of how it was handled. The White House Correspondents Association also protested the move.

Spicer only allowed in reporters from a handpicked group of news organizations that, the White House said, had been previously confirmed. The press session, known as a gaggle, was scheduled as a no-camera event, less formal than his usual briefings that are carried live on cable news. But past administrations have not hand-selected outlets that can attend such sessions.

Two of the barred outlets, CNN and The Times, have been a focus of Mr. Trump’s ire. And during the presidential campaign, some journalists from BuzzFeed News and Politico were prohibited from attending Trump rallies. Representatives of the barred news organizations made clear that they believed the White House’s actions were punitive.

Oil investors have placed the biggest bet in history that prices will rise. Fund managers now hold more Brent oil futures and options contracts than at any time on record, equivalent to some 480 million barrels of oil and nearly double the amount held just two months ago.

The Brent April contract now commands a premium of $1.50 over the December 2018, a condition known as backwardation. Crude inventories held in the world’s richest nations are still high, but they have begun to drain, and traders expect demand for oil to improve to the point where it overtakes supply.

Meanwhile, industry executives, analysts and investors sizing up Saudi Aramco say it may be worth nowhere near the $2 trillion that’s been touted. For example, Wood Mackenzie came up with a rough valuation of Aramco’s core business of $400 billion.

While that is significantly more than Exxon Mobil, with a market cap just under $340 billion; it is not enough to provide the capital the Saudis require to run the national budget. That’s just a guess at valuation because Saudi Aramco has never revealed financial statements.

For the Saudis, the writing is on the wall. Demand for oil will peak in the next 10 to 12 years, according to Royal Dutch Shell projections, as alternative fuels and electric cars gain popularity, putting Middle East energy producers on shakier footing.

Saudi Aramco valuations are premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields, and multiply by $8 (a benchmark used to value reserves). By that logic, though, Russian producer Rosneft’s market capitalization would be $272 billion instead of $64 billion, and the valuation of Exxon Mobil would be 53 percent smaller than it is.

Another factor for valuation – those reserves might not be all that they’re cracked up to be. Consider that Exxon Mobil just lost 4.3 billion barrels of reserves this week. Not lost really, just removed from their books. The reserves are still under the ground and controlled by Exxon Mobil but for accounting purposes, they no longer meet the SEC’s criteria for being economic to produce anytime soon, chiefly because oil prices have collapsed. Higher prices could push those reserves back onto the books, but lower demand could keep prices much lower for much longer.

Exxon Mobil CEO Darren Woods (he’s the guy who replaced Rex Tillerson) – Woods is calling for a nationwide carbon tax to discourage use of polluting fuels. In a blog post, Woods writes: It “would promote greater energy efficiency and the use of today’s lower-carbon options, avoid further burdening the economy, and provide incentives for markets to develop additional low-carbon energy solutions for the future.”

In a memo signed Feb. 21 but published late on Thursday, US Attorney General Jeff Sessions rescinded a six-month-old order that was to phase out the use of private prisons by the federal government. CoreCivic and Geo Group, two of the largest for-profit prison operators, both rose in after-hours trading. The companies have more than recovered the steep losses their shares suffered after the former administration’s September directive.

JC Penney will shutter two distribution centers and 130 to 140 stores. The closures announced Friday represent 13% to 14% of the company’s store portfolio, less than 5% of total annual sales and 0% of net income. The company is starting an early retirement program for about 6,000 eligible associates. Chief Executive Marvin Ellison said closing stores will allow Penney to adjust its business to “effectively compete against the growing threat of online retailers.”

Department store operators Kohl’s and Macy’s are betting on a potential money-spinner – carving out prime space within their sprawling stores and leasing them to other retailers. The move underscores the pressing need for the two chains to better monetize their real estate assets at a time when fewer people are visiting malls.

Meanwhile, retailers have been lobbying against a border-tax proposal that would increase the tax bite on any company that imports goods into the US. Retailers would be among the biggest losers if such a proposal were implemented in full, as much of their sales are of imported goods.

Retailers and other critics say the planned 20 percent tax on imports could be passed along in higher prices to consumers, including manufacturers that rely on imported goods to make their products. Some critics have warned of a potential global trade war which would sharply curtail US and world economic growth.

Advocates say U.S. exporters will gain as their revenues will be excluded from federal taxes. They say the tax on imports will encourage domestic production and cause the already strong dollar to rise, offsetting upward pressure on import prices. Yesterday, Trump spoke positively about a border-tax.

Today, Gary Cohn, the president’s chief economic adviser, told a group of executives at a private event in Washington that the White House does not support this initiative. If the administration can’t find unanimity in a tax plan, imagine what happens when an actual plan is subjected to public scrutiny.

Royal Bank of Scotland reported a sharp rise in losses, $8.8 billion for the full-year, marked by higher legal penalties and restructuring costs. RBS took charges to set aside money to cover legal cases in the US where analysts expect it to pay the biggest regulatory penalty in its history for mis-selling US securities backed by toxic mortgage loans.

RBS was the only British lender to fail the Bank of England’s stress test in 2016. The British government, which owns more than 70 percent of RBS, has said it will not resume selling its stake until the bank settles its US fine and resolves its state aid requirements.

MacDonald Dettwiler and Associates has agreed to buy US-based DigitalGlobe for about $2.4 billion to strengthen its position in the satellite imagery market.

China’s state-owned Sinochem is in early talks to buy an equity stake in Noble Group. And now, Iceberg Research has issued critical report that raises concerns about Noble’s accounting practices, claiming the commodity firm is not worth its book value. Noble shares are down about 17% on the news.

Google and Uber started off as friends, then became competitors, and are now adversaries in a bitter legal fight to control the future of transportation. Waymo, the Google self-driving-car group, has accused Uber of using stolen technology to advance its own autonomous-car development. Google filed a lawsuit, claiming that a team of ex-Google engineers stole the company’s design for the lidar laser sensor that allows self-driving cars to map the environment around them.

A software bug leaked encrypted personal data from hundreds of thousands of web-pages hosted by Cloudflare. The company said the bug was fixed quickly and there was no sign that the leak was exploited by hackers.

Foot Locker reported better-than-expected earnings in the fourth quarter despite a slowdown in the retail industry. Same store sales were up 5%, topping expectations.

HP Enterprise’s revenues drops 10%. Sales fell in the first quarter, which ended January 31, with sluggish demand for its storage equipment and servers.

Samsung Electronics is tightening board oversight on donations, as the conglomerate struggles with the fallout from a graft scandal. The flagship of South Korea’s top conglomerate Samsung Group has been at the center of an influence-peddling scandal that led South Korea’s parliament to impeach President Park Geun-hye in December.

Jay Y. Lee, leader of Samsung Group and Samsung Electronics’ vice chairman, was arrested last week after being named a suspect by the South Korean special prosecutor’s office. The Samsung board of directors will now vote on any financial payment of $886,000 or more and disclose any such payments publicly.

Financial Review

Count Your Pants and Shirts

Sinclair Noe — February 23, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW + 34 = 20,810
SPX + 0.99 = 2362
NAS – 25 = 5835
RUT – 9 = 1394
10 Y – .03 = 2.39%
OIL + .77 = 54.36
GOLD + 12.10 = 1250.30

The Dow Industrial Average hit another record high close, its 10^th record in a row, its longest run of record closes since 1987. Not counting record closes, the last time the Dow logged gains for 10 straight sessions was March 2013. The S&P 500 finished up a fraction of a point and just short of Tuesday’s closing record of 2,365. The benchmark index set an intraday record of 2,368.00 before retreating.

Treasury Secretary Steven Mnuchin said today that he has asked his staff to explore having the U.S. government issue debt maturities as long as 50 years or 100 years. In an interview on CNBC, Mnuchin said he was not ready to make a “formal announcement” of a 50-year or a 100-year bond.

Mnuchin repeated it was the Trump administration’s goal to have Congress complete work on a tax-reform package by August. Trump has promised a “phenomenal” tax plan by early March to cut business taxes. Paying for that “phenomenal” tax plan could require an equally phenomenal rate of economic growth that experts, including the non-partisan Congressional Budget Office, say may not be possible.

Mnuchin said the administration is aiming for a 3% or higher annual growth rate, but said it make take a couple of years, probably 2018, before we see an “engine of growth” from tax reform and regulatory relief.

Mnuchin says the Treasury has no plans now to label China a currency manipulator. Later in the day, Trump called China a “grand champion” in currency manipulation.  Mnuchin also agreed with the sentiment that the stock market is a report card for how the Trump administration is doing. “Absolutely,” he said, “It’s a mark-to-market business.”

And in the first month, the administration gets the grade of a solid A. Of course, it still has a long way to go to match the 17.4% annual gains sported by the Clinton Administration. And Mnuchin should be wise enough to realize the market is fickle.

Axios reported that President Trump‘s infrastructure plans may be pushed back until 2018. Axios, citing Republican sources, said that putting off any consideration of these plans would give lawmakers on Capitol Hill more breathing room to deal with a legislative calendar that already includes a Supreme Court nomination, tax reform and repealing Obamacare.

Several construction stocks did not fare well today. Shares of Fluor, Eagle Materials, Quanta Services and Vulcan Materials all dropped at least 1.5 percent. U.S. Steel’s stock dropped more than 7 percent.

The Justice Department has rescinded a memo issued by the Obama administration that phased out the use of private contractors to run federal prisons.

The president met today with company executives to discuss how to create jobs, which is nothing unusual, except that five of those companies are laying off thousands of workers as they shift production abroad. Those companies include General Electric, Caterpillar, 3M, United Technologies and Dana. The big idea from the execs was to cut the business tax rate.

The number of Americans filing for unemployment benefits rose slightly more than expected last week, but the four-week average of claims fell to its lowest level since 1973. Initial claims for state unemployment benefits increased 6,000 to a seasonally adjusted 244,000 for the week ended Feb. 18. The four-week moving average of claims, which smooths out week-to-week volatility, fell 4,000 to 241,000 last week.

The American Petroleum Institute reported an 884,000-barrel decline in U.S. crude supplies last week, a 893,000-barrel decline in gasoline stocks and a 4.2 million barrel decrease in distillate inventories.

Official inventory data from the U.S. Energy Information Administration shows a build of 600,000 barrels, that was less than expected. Last week, EIA’s report put crude stockpiles at a record high of 518.1 million barrels. This week’s figures were for a total inventory size of 518.7 million barrels, still above seasonal limits.

Oil producers, in and outside of OPEC, have largely kept their promise to reduce collective output by 1.8 million barrels a day starting in January to tackle a global supply glut. However, a steady increase in US crude production and inventories is stoking concerns that global supply remains bloated despite these cuts.

The United States is expected to become a net exporter of natural gas on an average annual basis by 2018, per a recently released Annual Energy Outlook update from the U.S. Energy Information Administration.

The transition to net exporter is driven by declining pipeline imports, growing pipeline exports, and increasing exports of liquefied natural gas (LNG). The United States is also projected to become a net exporter of total energy in the 2020s, in large part because of increasing natural gas exports.

Low energy prices during 2016 forced Exxon Mobil to lower its estimate of its proved oil and gas reserves. The company had to shave off nearly 15%, or 3.3 billion barrels of oil equivalent, of untapped crude. It comes a day after ConocoPhillips de-booked more than a billion barrels of its oil sands bitumen reserves, citing weak global energy prices.

Wind plant manufacturing is the fastest growing job sector in the U.S. economy — and this employment has been concentrated in the “Rust-Belt” states, pivotal in swinging the presidential election. Similarly, domestic solar companies are growing 12 times faster than the overall job creation rate in the U.S. economy.

In total, renewable energy sector employment in the United States grew 6 percent in 2016 to 769,000 jobs, while employment in gas, coal and oil exploration and extraction combined fell 18 percent, to 375,000 jobs.

European budget carrier Norwegian Air Shuttle said it would begin flying single-aisle planes nonstop from the U.S. to Europe starting in June. The initial flights will connect Edinburgh, Scotland to Stewart International Airport in New York, Green Airport in Providence, Rhode Island, and Bradley International Airport near Hartford, Connecticut.  The airline is promising fares as low as $65.

McDonald’s diners will soon be able to quench their thirst for as little as a dollar. Starting in April, soft drinks of any size will cost a buck, while McCafe specialty drinks will sell for $2. McDonald’s has been looking for ways to boost profits and sales, making its popular breakfast items available all day, and recently rolling out a smaller and jumbo-sized version of its iconic Big Mac.

Jack In The Box missed estimates by 7 cents with adjusted quarterly profit of $1.18 per share, and the restaurant chain’s revenue fell short of forecasts as well.

The Model 3 electric sedan remains on schedule and will reach production of about 5,000 units per week by the end of the year. Tesla reported a wider-than-expected loss of 69 cents per share, compared with the consensus estimate for a 43-cent loss. CEO Elon Musk also announced he will likely seek more capital from investors.

Carlos Ghosn, longtime CEO of Nissan who saved the automaker from near-collapse, will leave his current post to oversee Nissan’s alliances with Renault and Mitsubishi Motors.

Square lost 4 cents per share for its latest quarter, smaller than the 9 cents forecast by analysts, while the mobile payments company’s revenue came in slightly above estimates. Square saw a better than 34 percent jump in payment volume compared with a year earlier.

Nvidia shares closed down 9.3% after a round of bearish analyst comments prompted investors to take profits from the high-flying chip maker, which has more than tripled over the past 12 months. Instinet downgraded the stock to reduce from buy, while BMO Capital Markets cut its price target to $85 from $100.

Shares of HP Inc. rallied 8.6% after quarterly results topped Wall Street estimates.

Also, shares of First Solar led S&P 500 gainers, rising 11%.

Shares of L Brands sank 16% after the Victoria’s Secret parent late Wednesday issued weaker-than-forecast guidance for 2017. Might be feeling the pain from slowing mall traffic.

Hormel Foods shares lost 5.4% after the food company cut its earnings forecast for the year following a sharp decline in profit from its Jennie-O turkey brand.

Kohl’s Corp. shares, which had traded higher earlier after earnings beating forecasts, closed down 2.1%.

The Powerball lottery jackpot reached $435 million last night. A winning ticket was sold in Indiana. For the rest of us – back to work.

Financial Review

Take the Overs

Sinclair Noe — October 28, 2016

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

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DOW – 8 = 18,161
SPX – 6 = 2126
NAS – 25 = 5190
10 Y un = 1.85%
OIL – 1.03 = 48.69
GOLD + 6.50 = 1,276.00

The Federal Bureau of Investigation is reopening its inquiry into Hillary Clinton’s use of private e-mail while secretary of state, a politically explosive development less than two weeks before the presidential election. Stocks erased gains on the news.

FBI Director James Comey sent a letter to a Congressional committee saying, “In connection with an unrelated case, the FBI has learned of the existence of emails that appear to be pertinent to the investigation,” and so he is reopening the investigation.

Comey gave lawmakers no indication in his letter about the importance of the new information. We have learned that the FBI found new emails which were not found on private email server in Clinton residence. The newly discovered emails under FBI investigation were found on separate device in unrelated probe.

Apparently, the device in question belonged to Clinton aide Huma Abedin and her husband Anthony Weiner, and was part of an FBI investigation into Weiner’s sexting problems. The Clinton campaign has asked the FBI to provide more details about the discovery. Hillary Clinton has not made a public comment on the issue.

At this point we do not know any more specifics – so, let the wild speculation begin. And if you are wondering if Election 2016 can get any more sleazier, I don’t know but I would take the “overs”.

The U.S. economy grew at its fastest pace in two years in the third quarter as a surge in exports and a rebound in inventory investment offset a slowdown in consumer spending. Gross domestic product increased at a 2.9 percent annual rate after rising at a 1.4 percent pace in the second quarter. That was the strongest growth rate since the third quarter of 2014 and beat economists’ expectations for a 2.5 percent expansion pace.

Business investment improved last quarter, though spending on equipment remained weak. Business spending on equipment slipped at a 2.7 percent rate, dropping for a fourth straight quarter, but businesses increased spending to restock after running down inventories in the second quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.1 percent rate.

Labor costs rose 0.6 percent in the third quarter after a similar gain in the second quarter, leaving the year-on-year rate of increase at 2.3 percent.

The standout number in the GDP report was a 10 percent surge in exports, which can be linked to soybean exports and is not something that carries over to the fourth quarter. This reading of 2.9 percent GDP is the first estimate and subject to a couple of revisions but it certainly bolsters the case for a Federal Reserve rate increase in December.

The University of Michigan said Friday that its final index of consumer sentiment fell to 87.2 from 91.2 in September. The drop in sentiment suggests that consumer spending may continue to moderate.

October has a reputation as being a nasty month in the stock market, and even though we didn’t see a market crash this month, it wasn’t pretty. For the month: the Dow lost 147 points or 0.8%, the S&P lost 42 points or 1.9%, and the Nasdaq dropped 122 points or 2.2%.

Bonds worldwide have lost 2.9 percent in October; the worst monthly performance since 2013 and the days of the Taper Tantrum. The yield on the US 10-year Treasury note went from 1.61% to 1.85% in October. There’s potential for more turbulence ahead. Next week brings interest-rate decisions from the Bank of Japan, the Fed and the Bank of England. Then on Nov. 8, Americans go to the polls to choose a new president.

The eve of a presidential election is typically a time when companies put merger plans on hold and wait for clarity on matters like antitrust policy. Not this year. U.S. companies have struck a total of $249 billion in merger agreements this month, surpassing the previous record of $240 billion in July 2015.

More on the way? New reports suggest CenturyLink is eyeing a $30 billion merger with L3 Communications. Also, GE is discussing an oil & gas combination with Baker Hughes for roughly the same amount; this might take the form of a partnership rather than an acquisition.

Amazon reported earnings that missed estimates. While the 29% sales growth is impressive, shares fell 5% today, wiping out about $20 billion in market cap.

Alphabet beat on the top and bottom lines. The parent company of Google beat earnings estimates by 5% – a notable figure given the size and coverage of the stock – and still posted 20% revenue growth.

Earlier in the week, Google Fiber said it was delaying fiber-to-home service in eight cities, including Dallas, Los Angeles, and Phoenix, to focus on the 12 urban markets where it is already working. The CEO of Access, the unit that includes Google Fiber, stepped down, and 9% of its 1,500 employees will be laid off. It looked like the end of the road for Google Fiber. Maybe not.

Fiber faces challenges; it is a big investment in infrastructure, it is still a developing market, and there is competition from slower internet providers, but Google Fiber is profitable; it just won’t be fast to return a big profit. Deploying a municipal fiber network can take at least five to seven years.

For a Silicon Valley company accustomed to growth measured in months, the slow pace likely pushed Google Fiber’s capital expenditures far beyond what newly cost-conscious parent company Alphabet would countenance. The company is now returning to its original plan: proving that gigabit-speed residential internet is feasible and profitable in just a few major cities, and then expand from there.

Exxon‘s profit keeps shrinking because of lower oil prices, and the company is responding by sharply cutting investment in future production. Exxon Mobil said third-quarter income fell 38 percent to $2.65 billion. Still, it was the company’s best quarter this year. The profit was higher than analysts expected, although revenue was sharply below forecasts.

Exxon Mobil’s dividend payments continue to exceed profits, which means the company is borrowing and selling assets to finance its payments to shareholders. At the same time, cuts in capital spending are hurting the company’s ability to maintain production.

Perhaps more important than the third quarter numbers, Exxon acknowledged that it faced what could be the biggest accounting revision of reserves in its history. Exxon Mobil might have to concede that 3.6 billion barrels of oil-sand reserves and one billion barrels of other North American reserves are currently not profitable to produce.

The way Exxon Mobil accounts for the value of assets still in the ground has made the company a target of inquiries by the Securities and Exchange Commission, as well as the New York attorney general, Eric Schneiderman. Exxon Mobil has been criticized for being slow to consider the impact of anticipated future government actions to curb climate change, which may force energy companies to leave at least some fossil fuels untapped in the ground.

Other oil and gas companies, including Chevron and Royal Dutch Shell, have lowered valuations by more than $50 billion since oil prices plunged from over $100 a barrel in 2014 to the current price of around $50 a barrel. In contrast, Exxon Mobil resisted write-downs, saying that it conservatively valued its assets on a long-term basis and that price volatility was normal in commodity markets.

Chevron returned to profit, reporting huge quarterly earnings beat as the company continued to cut costs. The oil company reported third-quarter earnings of $1.3 billion, or 68 cents a share, on revenues of $30 billion. That profit was down 37 percent from a year ago, when Chevron reported earnings of $2 billion, or $1.09 a share, on revenue of $34 billion.

Anheuser Busch InBev lowered its revenue forecast. The world’s largest brewer had a rough quarter thanks to weakness in its Brazil business and lowered its revenue growth per hectoliter to be in line with inflation after previously suggesting it would outpace inflation.

MasterCard reported net income for the quarter came in at $1.2 billion, or $1.08 per share, compared with $977 million, or 86 cents during the same period a year ago. Revenue hit $2.9 billion, compared with $2.5 billion. MasterCard beat earnings and revenue estimates. MasterCard said purchase volume was up 5% in the quarter.

Amgen beat estimates on both the top and bottom lines, with the biotech giant raising its full-year forecast. Amgen’s results were being helped by sales of newer medicines.

Prescription drug distributor McKesson plunged 22 percent, to a three-year low after its revenue fell about $1.5 billion short of estimates. The company cut its annual outlook because of changes in drug prices.

Mylan’s price hikes on EpiPens have added millions to Department of Defense spending since 2008 as the agency covered more prescriptions for the lifesaving allergy injections at near-retail prices. That may change. Both the Pentagon and Mylan told Reuters that discussions are underway that could extend a military discount to EpiPens filled at retail pharmacies using rebates.

Investors expect the third quarter to mark the end of a year-long earnings recession as more companies beat expectations. Profits at S&P 500 companies are expected to rise 2.6 percent, helped largely by financial companies, according to Thomson Reuters. However, energy companies are expected to take the biggest hit.

FactSet reports that blended earnings rate is 1.6%, which is above the year-over-year blended decline of -0.5% at the end of last week and the year-over-year estimated decline of -2.2% at the end of the third quarter. Blended earnings refers to companies that have already reported plus estimates of companies yet to report.

Financial Review

Groovin

Sinclair Noe — July 29, 2016

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

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DOW – 24 = 18,432
SPX + 3 = 2173
NAS + 7 = 5162
10 Y – .06 = 1.45%
OIL + .24 = 41.38
GOLD + 15.80 = 1351.40

The S&P 500 index hitting a record intraday high for the seventh time this month as gains in tech heavyweights Alphabet and Amazon more than made up for losses in energy shares. The S&P 500 index rose as much as 0.3 percent, touching an all-time high of 2,177.09, and completed its fifth straight month of gains. For the week, the Dow fell 0.75 percent, the S&P edged down 0.07 percent and the Nasdaq rose 1.2 percent. In July, the Dow rose 2.8 percent, the S&P climbed 3.6 percent and the Nasdaq gained 6.6 percent.

The U.S. economy grew far less than expected in the second quarter. Gross domestic product increased at a 1.2 percent annual rate after rising by a downwardly revised 0.8 percent pace in the first quarter. The economy was previously reported to have expanded at a 1.1 percent pace in the first quarter. This is the first estimate on second quarter GDP, but economists had forecast growth rising at a 2.6 percent rate.

Inventory investment fell for the first time in nearly five years. Once the impact of a downward inventory adjustment is considered, the underlying pace of growth looks healthier than the headline GDP number. Excluding inventories, the economy grew at a 2.4 percent rate. Consumer spending, which makes up more than two-thirds of U.S. economic activity, increased at a 4.2 percent rate – the fastest since the fourth quarter of 2014. In the second quarter, income at the disposal of households after adjusting for inflation increased to a $13.92 billion rate from a $13.81 billion pace early in the year.

An index that measures what it costs a business to employ a worker — how much Americans earn in wages and benefits — rose 0.6% in the second quarter. The ECI has risen 2.3% in the past 12 months, the fastest pace since early 2015. In the first quarter, wages increased 0.6%. Benefits increased 0.5%.

The Bank of Japan held interest rates steady and offered up only a mild dose of stimulus. The central bank announced it would purchase ¥6 trillion-yen ($57 billion) worth of exchange-traded stock funds annually, an increase from the prior amount ¥3.3 trillion-yen. The size of a key lending program was also doubled to $24 billion. But those moves were far less than expected. And the Bank of Japan left interest rates at 0.1%, which disappointed many investors.

After more than three years of pumping out wave after wave of cheap money that’s failed to secure its inflation target, the Bank of Japan policymakers declared it was time to assess the impact of their policies. Maybe that’s an admission that their policies aren’t working; maybe it is an acknowledgement that they are running out of tools. Or maybe it’s just uncertainty of diving into negative interest rates.

Or maybe this is the setup for an experiment in helicopter money, which is very different from quantitative easing. QE means new money is swapped for assets in the reserve accounts of banks, leaving liquidity trapped on bank balance sheets. This frees up new money for borrowing, which increases money circulating through the economy – at least in theory. QE still requires borrowing to take place, and if there is no demand for borrowing, QE won’t really work. Money is created when loans are made, and it is extinguished when they are paid off. When loan repayment exceeds borrowing, the money supply “deflates” or shrinks.

The alternative is to do what governments arguably should have been doing all along: issue the money directly to fund their budgets. Having exhausted other options, some central bankers are now calling for this form of helicopter money. The problem, at least one of the problems, is that helicopter money is illegal under Japanese law. That doesn’t mean it won’t happen. It just means they will need to devise creative ways to fly the helicopter.

The Nikkei Stock Index closed 0.6% higher after a volatile session. The yen jumped and Japanese government bond yields rose the most in eight years, lifting global sovereign borrowing costs. The dollar’s fall against the yen, its steepest in a month and fourth steepest this year, pulled it down against other currencies, putting the trade-weighted dollar exchange rate on course for its biggest weekly fall in two months.

The University of Michigan Index of Consumer Sentiment hit 90 in July, down from 93.5 in June’s final reading. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates.

Meanwhile of poll of British consumers saw the biggest drop in consumer confidence in 26 years in July, following the Brexit vote. A separate survey of manufacturing companies, also published on Friday, paints a similar picture. Manufacturers said that the sector’s recovery was under threat and business confidence had fallen in every region of England and Wales. The report on household reactions to the Brexit vote adds to evidence that consumers could rein in spending amid higher uncertainty about jobs, pay and the UK’s economic health.

Eurozone flash inflation increased to 0.2% in July to top the 0.1% pace seen in June and expected by economists. Eurozone flash GDP rose 0.3% in the second quarter to match estimates. The pace was only half of the growth rate from the first quarter. Inflation was at 0.2% for the quarter, and the unemployment rate was unchanged at 10.1%. European stocks were mixed across the continent after the data dump.

The European Banking Authority and the European Central Bank released the results of stress tests on the region’s major banks. The tests look at 51 major lenders, but they do not assign a pass or fail grade – rather they identify common equity tier 1 capital ratio, a measure of its resilience. The legal minimum for all banks is a CET1 ratio of 4.5 percent, plus 3.5 percent of risk-weighted assets in subordinated debt, as well as a series of buffers, which are made up of common equity. So, 8 percent is where they should be, but they are grading on a curve.

The European Central Bank, which supervises 37 of the lenders in the test, has said it will use a 5.5 percent ratio in the stressed scenario as an informal benchmark for lenders’ resilience. The final requirement set will move up or down from that level to take account of banks’ individual business models. The worst performer was Italy’s Banca Monte dei Paschi, with a negative 2.2 CET1 ratio. Monte Paschi Friday approved a plan to tap investors for the third time in two years by selling stock to replenish capital. While Monte Paschi is seeking to raise funds through private means, Italy has held talks with the European Commission seeking approval to back the bank’s recapitalization with state funds.

After the closing bell Thursday, Alphabet, the parent of Google posted earnings and revenue that beat estimates. Also, Amazon.com reported record profit for the third consecutive quarter- beating estimates – but a wave of spending could stop that streak. Amazon was long known for spending its way to a loss no matter how much revenue it brought in, but the second quarter was its fifth straight that showed a profit. Apple, Microsoft and Facebook, as well as Alphabet and Amazon, all blew past Wall Street expectations for both profit and revenue. As good as the quarter was for big tech, it was bad for big oil.

Exxon Mobil, the world’s largest publicly traded oil producer, posted a lower-than-expected quarterly profit due to weak crude prices and refining income. Net income slumped to $1.7 billion, or 41 cents per share, in the second quarter, from $4.19 billion, or $1 per share, in the year-ago period. Analysts expected earnings of 64 cents per share.

Chevron, the second largest U.S.-based oil producer, posted a second-quarter loss, its largest since 2001. It was Chevron’s third straight quarterly loss, the longest slump for the company since at least 1989. The company lost $1.47 billion, or $1.07 per share, in the quarter, compared with a net profit of $571 million, or 30 cents per share, in the year-ago period. Excluding one-time items, Chevron earned 35 cents per share. By that measure, analysts expected a profit of 32 cents per share.

Crude oil for September delivery dropped under $41 a barrel. Prices are down almost 8% for the week, and down 16% for the month. The U.S. oil benchmark is now down 20.6% from its recent high of $51.23 in June. That reflects a bear market, which is defined as a downturn of 20% or more.

NextEra Energy agreed to buy Energy Future Holdings’ Oncor Electric Delivery Co. LLC, adding the largest electric transmission operator in Texas in a deal valued at about $18.4 billion. The agreement is part of a reorganization plan designed to allow Energy Future to emerge from bankruptcy after restructuring $50 billion in debt. A takeover by Florida-based NextEra would require the approval from the court handling Energy Future’s Chapter 11 case and from Texas regulators.

SABMiller’s board unanimously recommended Anheuser-Busch InBev’s improved $104 billion takeover offer. Chinese regulators approved the merger, the last regulatory hurdle to the deal. The mega merger still requires shareholder approval. AB InBev gave in to some investors when it raised its bid once more this week to factor in the pound’s plunge in the wake of the U.K.’s Brexit vote that put minority and institutional shareholders at a disadvantage.

Financial Review

Seven Straight

Sinclair Noe — July 18, 2016

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

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DOW + 16 = 18,533
SPX + 5 = 2166
NAS + 26 – 5055
10 Y – .02 = 1.58%
OIL – .73 = 45.22
GOLD- 8.60 = 1329.50

The Dow is on a seven-session winning streak, capped by another record close. The S&P 500 is on a record setting streak as well. This tells us two things: first, the markets are strong, and second, the markets are overbought and due for a breather. Just because a market is overbought, it does not mean it can’t continue to climb higher. The markets can be irrational longer than you can be solvent.

Financial markets have shown resilience after Friday’s failed coup attempt in Turkey, although Turkey’s Borsa Istanbul 100 Index sank 7.1% and Turkish bonds sold off, pushing yields up about 7%. Still, the Turkish lira rallied 3% today. Despite the complacency and thousands of arrests, the turmoil is far from finished.

More than 90 of the biggest U.S. companies will report results this week, giving a clearer picture of an earnings recession. Based on analysts’ forecasts for companies in the S&P 500 index, Thomson Reuters predicts adjusted earnings per share for the second quarter will be down 4.7% from a year earlier, following a 5% drop in Q1.

Bank of America said its quarterly profit fell to $4.2 billion, down from $5.1 billion. Revenue also fell, but results beat expectations; which seems to be a recurring trend with the financial stocks’ earnings reports this season.

Hasbro posted second-quarter earnings per share of 41 cents, up from 33 cents in the same period a year earlier. The results beat estimates of 39 cents. But Hasbro shares dropped 7% today. Hasbro sales are closely tied to movies, such as Frozen and Star Wars, and sales results show Star Wars toys may have peaked.

After the close, Netflix reported sales grew to $2.1 billion, up 28 percent more than a year ago. Netflix reported EPS of 9 cents a share, a gain from 6 cents a year ago. But Netflix earnings reports are all about subscriber growth and that proved a disappointment. The company added 1.52 million new customers overseas, compared with an April projection of 2 million. Netflix also added 160,000 in the U.S., bringing the company total to 83.2 million. The company had predicted about 500,000 new domestic customers. Shares dropped 17% in after-hours trade.

Yahoo’s quarterly revenue exceeded analysts’ estimates, even as it declined. Profit missed estimates. The company is expected to stop taking bids and make a decision about a potential sale of the company. Suitors so far have included Verizon, AT&T and private equity firms; and earlier offers have ranged in price from about $3.75 billion to $6 billion, depending on what assets are part of the bid.

The National Association of Home Builders’ index fell to 59. Any reading over 50 signals improvement. All three of the index’s sub-gauges slipped. The index of current conditions eased one point to 63, while the gauge for the upcoming six months fell three points to 66. Buyer traffic was down one point to 45. Builder confidence hit a ten-year high last fall but fell back after that. Builders continue to report trouble finding lots and labor.

Japanese telecommunications company Softbank has agreed to purchase ARM Holdings for $32 billion. The proposed acquisition represents a 43 percent premium over the company’s closing share price last week. If you own a smartphone, you almost certainly own a product designed by ARM Holdings.  It has designed the chips for more than 95% of the world’s smartphones. The Cambridge, England-based firm is strictly a designer and not a manufacturer. The 4,000-employee outfit draws up the blueprint for microprocessors for smartphones and other devices and then charges partners such as Qualcomm for using those schematics. ARM was founded in 1990, a spinoff of a collaboration between Apple and Acorn Computer. ARM focused on designing chips that consumed the least energy.

The deal is believed to be the largest acquisition ever of a European tech company. The deal is the first major cross-border transaction in Britain since the Brexit vote. Worries over the British economy have weakened the value of the pound sterling and made it cheaper for foreign companies like SoftBank to hunt for deals there. Compared with this same time in 2015, for example, pound-denominated assets are 30 percent cheaper for buyers holding yen. The deal is seen as a bet on the “internet of things,” a new stage in the evolution of network technology, when cars, buildings and household items may be connected through embedded electronics.

ExxonMobil is getting into a bidding war. ExxonMobil Corp has made a bid worth at least $2.2 billion for InterOil Corp and its stake in a rich Papua New Guinea gasfield, winning the support of its target and topping an offer from Australia’s Oil Search Ltd. Exxon is a partner with Oil Search in the country’s only liquefied natural gas terminal, PNG LNG. Oil Search is also a partner, along with InterOil and Total, in another proposed gas export project, Papua LNG.

When Oil Search made its $2.2 billion offer for InterOil in May in conjunction with Total, it did so with the idea that it could save money and increase returns by integrating the two projects. Having Exxon take InterOil’s place in Papua LNG would accomplish the same goal at none of the cost. Exxon’s bid values InterOil at $2.5 billion.

Berkshire Hathaway agreed to buy Medical Liability Mutual Insurance. The target company is the largest underwriter of medical professional liability insurance in New York and will convert from a policyholder-owned to a stock business. Terms were not disclosed.

Due to a Hawaiian regulatory order dismissing the companies’ merger application, NextEra Energy and Hawaiian Electric have announced the termination of their plans to combine. Under the merger agreement’s conditions, NextEra will pay Hawaiian Electric a $90 million break-up fee and up to $5 million for reimbursement of expenses associated with the transaction.

Volkswagen executives in the U.S. have pledged to compensate 650 American franchise dealers who have been dented by the carmaker’s emissions crisis. The decision, which came at a meeting on Friday, marked the first time VW acknowledged that dealers would get compensation for the economic damage they suffered from the scandal.

Fiat Chrysler Automobiles is under investigation by the U.S. Justice Department for fraud, according to Bloomberg news. Prosecutors are scrutinizing whether the car-maker violated U.S. securities laws, although details of the investigation are still sketchy at this time. A civil lawsuit against Fiat Chrysler may provide clues about what prosecutors are looking at.

A Chicago-area dealer alleges the company inflated its U.S. car sales by paying dealers to report selling more vehicles than they actually did. Fiat Chrysler is also fighting investor claims that the auto maker played down the economic impact of manufacturing problems that led to expensive recalls. A lawsuit, filed in September in federal court in Manhattan by a group of investors, alleges the company made false and misleading statements about flaws in its manufacturing process and quality control that led to at least 11 million vehicles being recalled.

Financial Review

Two Days!

Sinclair Noe — May 25, 2016

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

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DOW + 145 = 17,851
SPX + 14 = 2090
NAS + 33 = 4894
10 Y + .01 = 1.87
OIL + .94 = 49.56
GOLD – 2.90 = 1225.00

A 2-day rally on Wall Street. The S&P 500 moved back above its 50 day moving average. Still the S&P is trading in a fairly tight range; it isn’t breaking down but it isn’t breaking out, either.

According to the American Association of Individual Investors Sentiment Survey released last week, neutral sentiment among investors has been above 40 percent for 10 straight weeks; neutrality has been above its historical average of 31 percent for 68 weeks out of the past 72. Over the past 2 years, the S&P has traded between 2135 and 1810; until it takes out the high or low, there is no reason to be anything but neutral.

Oil is at a 7-month high. West Texas Intermediate crude oil touched a high of $49.75 a barrel, the highest since the middle of October, and it comes after the Tuesday-evening release of American Petroleum Institute data that showed a drawdown of supply by 5 million barrels, double market expectations, and today the US energy department reported that crude stocks fell by 4.2 million barrels in the last week.

Exxon Mobil and Chevron held their annual shareholder meetings today. There was a resolution from activist shareholders to have the companies curtail exploration for new oil fields and funnel the money to investors in the form of higher dividends and share buybacks. Environmental critics as diverse as state pension funds and religious orders said future climate rules will soon make it unprofitable for Exxon and Chevron to harvest their reserves. The companies countered that there doesn’t yet exist a renewable fuel that can replace gasoline or diesel, and that demand for petroleum-based fuels will grow for decades, even if carbon limits are imposed. The resolution was defeated; the drilling and exploration will continue.

St. Louis Fed President James Bullard told CNBC a rate hike in June or July is not set in stone, but labor data suggests it’s time to pull the trigger.

U.S. home prices rose 5.7% in the first quarter from a year earlier; prices climbed 1.3% from the fourth quarter. It was the 19th quarter of price increases for the Federal Housing Finance Agency’s index, which tracks purchases of homes with mortgages backed by Fannie Mae or Freddie Mac. Home-price appreciation had been flat but now appears, after yesterday’s very strong new home sales report and today’s FHFA house price report, to be trending higher.

So far in 2016, Chinese companies have purchased or are buying 47 U.S. properties worth $9.3 billion, according to deal tracker Real Capital Analytics. That makes them the most active foreign buyers in the U.S., with more than double Canada’s $4.2 billion worth of deals. By contrast, for all of last year Chinese investors did 71 U.S. deals worth $6 billion.

A Federal Reserve annual survey of the financial condition of American families was released today. Almost half of American families say they would struggle to pay for emergency expenses and those with a high school degree or less are most likely to say their well-being has declined. Despite some signs of improvement overall, 46 percent say they would struggle to meet emergency expenses of $400, and 22 percent of workers say they are juggling two or more jobs. Only 23 percent of respondents said they expected their income to be higher in the year after the survey, down from 29 percent at the time of the prior survey. Among the positives were fewer Americans reporting going without medical care because they could not afford it.

Greece and its creditors reached a deal. The deal paves the way for Greece to receive €10-billion-euro from its creditors along with debt relief once the current deal ends in 2018. While it is unclear how exactly a deal will look, it could reduce the International Monetary Fund’s exposure to the country by buying back up to €14-billion-euro of its loans. Greek bond yields slid to six-month lows following the announcement.

The ECB will aim to start small when it begins buying corporate debt next month, seeking first to lure new issuers and then slowly raise the monthly pace of purchases to €5-10-billion-euro. Investment-grade corporate bonds issued in euros are the latest addition to a growing list of assets the central bank is buying as part of its effort to boost Eurozone economic growth via lower borrowing costs.

An early look at U.S. trade patterns suggest the nation’s deficit rose slightly in April, as trade remained a drag on the economy early in the second quarter. The trade gap in goods — services are excluded — rose to $57.5 billion last month from a final reading of $57.1 billion. The total trade deficit in March was $40.4 billion, a decline of almost 14% from the prior month. The government will release the full trade numbers in early June.

Alibaba Group said it was being investigated by the U.S. Securities and Exchange Commission over whether the Chinese e-commerce company’s accounting practices violated any federal laws.

U.S. antitrust officials are investigating Anheuser-Busch InBev over its new incentives that encourage independent distributors to sell more of its own beer brands at the expense of competing craft brews. Budweiser owner AB InBev has 46% of the U.S. beer market but has seen sales dwindle at least partially because of rising craft beer sales. The U.S. Department of Justice last year probed AB InBev’s plan to buy distributors in response to craft brewers’ complaints that it aimed to curb competition.

Citigroup has agreed to pay $425 million to resolve civil charges the bank attempted to manipulate several key benchmarks, including the U.S. dollar ISDAFIX, the Yen Libor and the Euroyen TIBOR. The bank was also charged with false reporting in connection with ISDAFIX benchmark rates and with false reporting of U.S. dollar Libor rates during the financial crisis to protect its reputation.

The International Swaps and Derivatives Fix publishes daily rates for various interest rate derivatives contracts. Citigroup “made false reports” that skewed its submissions, the trading commission said. The bank’s motive, the agency said, was to benefit its own trading positions at the expense of its trading partners and clients. At the time of the misconduct, which ran from 2007 to 2012, Citigroup sat on a panel of banks that each submitted what was supposed to be a reasonable bid for interest rate derivatives. An average of those submissions formed the ISDAFIX benchmark rate for that day.

Last year, the Commodity Futures Trading Commission and the Justice Department announced civil and criminal charges against four of the world’s biggest banks, Citigroup included, for a scheme to manipulate the value of the world’s currencies. And then today, despite a wealth of emails and other culpatory documentation, Citi faces no criminal charges, just a civil penalty.

Hewlett Packard Enterprise plans to spin off most of its technology services operations and merge them with those of Computer Sciences Corp., in an $8.5 billion transaction.  HP Enterprise will shed a business that accounts for roughly 100,000 employees, or two-thirds of their workforce. The deal will create a corporate technology services specialist that will be led by Computer Sciences executives and have roughly $26 billion in annual revenue.  The remaining HP Enterprise operations will concentrate mainly on software, server systems, networking and storage hardware.

So, they are splitting off their consulting unit, Enterprise Services, which was already part of a spinoff, dumping it on competitor CSC, and then HP Enterprises will own half that company. And just to make it a little more twisted, Enterprise Services was part of the old EDS, which HP acquired for about $14 billion in 2008. Over the past 7 years, HP has been spending about $1 billion a year cutting jobs. Just in case you were wondering what HP does….

Nasdaq has rejected a listing application by cannabis social networking company MassRoots on the grounds that it may aid in the use and dealing of an illegal substance. The rejection may insert roadblocks ahead of other cannabis-related companies seeking to list on a national stock exchange and make “it more difficult for cannabis entrepreneurs to raise capital.”

The SEC is concerned about the way Valeant Pharmaceuticals has been disclosing its “non-GAAP” financial measures, stripping away acquisition-related expenses from its adjusted metrics despite fueling growth through frenzied deal making. The company is also facing mounting scrutiny over its drug pricing, business practices and other methods of accounting.

Apple is upping its game in the field of intelligent assistants. After years of internal debate and discussion about how to do so, the company is preparing to open up Siri to apps made by others. The Information reports that Apple is also working on an Amazon Echo-like device with a speaker and microphone that people can use to turn on music, get news headlines or set a timer.

Microsoft announced layoffs in its smartphone business. The company says it would eliminate nearly 2,000 jobs as it looks to streamline its smartphone hardware business. About 1,350 of the job cuts will occur in Finland as Microsoft shutters its phone design and production businesses in the country. Microsoft will take a restructuring charge of about $950 million.

The next time you buy a new iPhone, it’s possible that it will have been made by a robot. Foxconn, the manufacturing company that builds electronic devices for a range of companies including Apple, Samsung and Microsoft, has reportedly replaced 60,000 human workers from one of its factories in China with robots. Foxconn still employs 50,000 humans at the factory… for now.

MasterCard has inked a deal with Pizza Hut to bring Softbank’s robot companion, Pepper, to restaurants across Asia by the end of 2016. The move is intended to push the MasterPass digital wallet, which Pizza Hut patrons can use by either tapping the Pepper icon within the app or by scanning a QR code on Pepper’s display. Besides taking payments, the robot can chat with customers, take orders and make recommendations.

Financial Review

Illusion of Growth

Sinclair Noe — May 17, 2016

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

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DOW – 180 = 17,529
SPX – 19 = 2047
NAS – 59 = 4715
10 Y + .01 = 1.76%
OIL + .78 = 48.50
GOLD + 5.10 = 1280.10

One day up, one day down. If you can spot a trend, give yourself a pat on the back.

Prices at the retail level increased in April at the fast pace in more than 3 years.  The CPI, or consumer price index, rose a seasonally adjusted 0.4% last month. Americans paid more for medical care, food, recreation, tobacco, motor vehicle insurance, airline fares and grooming. Much of the recent increase has been driven by higher oil prices.

A spike in gas pushed the energy index up by 3.4% in April. Food prices also rose 0.2% last month, though the cost of groceries has fallen in the past year. Stripping out food and energy, so-called core consumer prices rose 0.2% in April. The CPI has risen just 1.1% in the past 12 months. The core CPI increased 2.1% in the 12 months ending in April.

So, we really are pretty close to the Fed’s target of 2%, depending on which numbers you, or the Fed, consider important. And so several Fed officials have been talking up the idea of a June rate hike, which just kills the mood on an otherwise beautiful Tuesday.  Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams said the Fed’s decision on whether to hike rates at the June FOMC meeting depends on the data, but June is “certainly” on the table.

The Fed has said that the effect of low oil prices was “transitory” and with a big jump in the CPI last month, it looks like we are seeing the transition. This means expectations for a rate hike are now being pulled forward, which probably means weaker markets. Tomorrow, we get the minutes from the April FOMC meeting. If the policymakers are strategic, they will have been clever enough to have included a serious debate about hiking rates in June.

Construction on new houses rebounded in April after a sharp dip in the prior month. Housing starts climbed 6.6% last month to an annual pace of 1.17 million. Construction on apartments, condos and other buildings with at least five units surged 10.7%. Single-family home starts advanced a smaller 3.3%. Permits are running 5.3% below year-ago levels.

Industrial production grew 0.7% in April – the fastest monthly rate in 17 months, bouncing back after two straight monthly declines as auto production rebounded and cooler temperatures boosted utility output. This was only the second increase in industrial production in eight months. Compared to a year ago, production was down 1.1%.

US companies stepped up big to support their own shares at the start of the year, making the first quarter potentially one of the best ever for share buybacks. Based on preliminary data, share repurchases are 20 per cent higher in the first three months of the year versus the fourth quarter and 31 per cent above the year-ago period. Among the biggest buyers of their own shares were Apple, General Electric, McDonald’s and Boeing, while ExxonMobil has significantly cut back on its share repurchases after falling oil prices have hit the energy industry.

Companies have been big buyers of their own stock for the past few years, helping to boost earnings per share as revenue growth has shriveled.  Activist investors pushed for better returns; over the long-term you improve returns by re-investing in the business, improving innovation and productivity; the quick fix is to buy back shares.

Coming into 2016, rising rates were expected to curtail share repurchases as it would become more expensive to borrow to fund them, and better uses would be found for cash. However, the downturn in the market and expectations for fewer rate rises combined to create a nice scenario for buybacks. The question is, how long can this continue? For the past 7 years, the market has been propped up with easy money from the Fed, the market has grown dependent on finance as an engine of growth, or finance as the illusion of growth.

The IMF is pressing the Eurozone to let Greece skip paying interest or principal on bailout loans until 2040. The IMF is also pressing for Greece’s interest rate on its Eurozone loans to be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due. Eurozone governments, led by Germany, are reluctant to make such major concessions on their loans to Athens, which currently total over €200-billion-euro, but they also want the IMF to rejoin the bailout as a lender to boost the program’s credibility.

A compromise between Germany and the IMF is needed by June, when Greece is in danger of running out of money to pay its bills, and definitely by July, when major debts fall due. This is all happening as the UK considers a referendum to exit the Euro Union.

Greece is entering the seventh year of its troubled bailout still struggling to begin a recovery. The country has largely closed the gaping budget deficit that triggered its debt crisis. But the IMF-European bailout—including austerity measures that in total have amounted to more than 30% of GDP so far—contributed to a 25% decline in the country’s economic output since before the debt crisis.

Portions of Hong Kong have been shut down as part of a drastic security increase as the city prepares for a rare visit by National People’s Congress Chairman Zhang Dejiang. He will be the first senior Chinese official to come to Hong Kong since the 2014 Occupy pro-democracy demonstrations which shut down the territory’s financial hub for months. Zhang is scheduled to speak at an economic conference, but will also meet with a small group of pro-democracy legislators' tomorrow evening.

Warren Buffett has several rules for investing. The first rule is don’t lose money. The second rule is don’t forget the first rule. Also, Warren Buffett does not bid in auctions. Warren Buffett does not invest in technology. More like guidelines than hard and fast rules. Buffett announced a nearly $1 billion stake in Apple, and he’s already lost about a $100-million (give or take); he also announced he’s financing a bid for Yahoo!’s internet assets as part of a group along with Quicken Loans founder Dan Gilbert. Refer back to Rule number one.

Jack Dorsey is making it easier for Twitter users to stick more stuff in their tweets. Not by dropping the service’s famous 140-character limit – an idea the company had previously floated – but by expanding it, in a way: Twitter won’t count the characters used to insert photos, links or other media into tweets. The change could happen in the next two weeks.

LendingClub, which plunged 51 percent last week with the surprise departure of its leader and disclosure of faulty internal controls, dropped again this morning following a regulatory filing from the company that said strategies to restore investor confidence and obtain new capital for loans might include equity or debt sales, fee changes or other moves that could be “costly or dilutive” to shareholders. Lending Club has received a subpoena from the DOJ, and says it “intends to cooperate” with the department.

Phone book publisher Dex Media has filed for bankruptcy protection after reaching a restructuring deal with creditors. The Chapter 11 announcement marks the fifth time in seven years the firm or its predecessors have found themselves in a bankruptcy court as yellow-pages companies struggle with the move of advertisers and consumers to the Internet.

Picture an 18-wheel truck barreling down the highway with 80,000 pounds of cargo and no one but a robot at the wheel. A team of former Alphabet executives is launching a start-up called Otto, O-T-T-O, focused on self-driving trucks, in an attempt to improve driverless technologies in the long-haul trucking industry. Otto plans to sell kits to retrofit existing trucks with autonomous platforms, but has not disclosed when they will go on sale. The technology will only work on highways for now, with human drivers required off-highway, potentially allowing the vehicles to travel much greater distances.

The Supreme Court has rejected Exxon Mobil Corp’s appeal of a $236 million judgment against the oil company in a case brought by the state of New Hampshire over groundwater contamination linked to a gasoline additive. The justices left in place the New Hampshire Supreme Court’s 2015 ruling upholding the judgment by a jury that in 2013 rejected Exxon’s claims that the contamination linked to its fuel additive was not its fault but rather the fault of the local gas stations and storage facilities that spilled it.

Exxon argued in its appeal that its due process rights were violated because New Hampshire had not proved the company’s liability for the alleged pollution at each individual site. The additive at the center of the case is called methyl tertiary butyl ether, or MTBE. It is an oxygen-containing substance that was added to gasoline to promote more complete combustion and reduce air pollution. It was one of several additives that had been recommended by regulators to reduce emissions but has now largely been phased out of the U.S. fuel supply because of the hazard it poses to groundwater. New Hampshire officials called the $236 million judgment the largest MTBE-related verdict since states and other agencies began making claims for remediation and other damages.

The court agreed to hear exactly zero new cases, continuing to set a sparse stage for its next term, which may see the lightest caseload in its already-light recent history. So far, only 12 cases are on the court’s docket for the October 2016 term, which runs through June 2017. The most likely reason for the slowdown is that there are now just 8 justices (split 4-4) and the court is reluctant to take on an issue in which it might not be able to provide a clear answer.