Financial Review

Up and Down the Chain

Sinclair Noe — June 23, 2017

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DOW – 2 = 21,394
SPX + 3 = 2438
NAS + 28 = 6265
RUT + 10 = 1414
10 Y – .01 = 2.14%
OIL + .43 = 43.17
GOLD + 6.60 = 1257.60
BITCOIN + 0.27% = 2745.66 USD
ETHEREUM – 3.55 % = 329.50

Energy stocks led the S&P 500 higher, posting its only positive session of the week. Overall, U.S. stocks closed little changed for the week, with the Dow and S&P posting small gains in the period.

The Nasdaq posted a 1.8% gain for the week. Health care stocks pulled back about 0.1 percent today, but the sector still notched a weekly gain of 3.7 percent to outperform the other spaces.

Today is a Russell Rebalancing Day. That is the annual reconstitution of the Russell Indexes, where the index provider makes rule-based changes to composition of its indexes, to ensure that changes in market value or investment styles, like shares of companies deemed value or growth, for example, are properly accounted.

Total market capitalization for Russell components increased more than 10% to around $27 trillion since last year. Rebalancing day typically results in a little extra trading volume but not much effect on price action for the overall market.

Yesterday, the Senate unveiled its version of Trumpcare, or the Better Care Reconciliation Act. Four GOP senators announced they would not support the bill. Rand Paul, Ted Cruz, Mike Lee, and Ron Johnson said the legislation did not go far enough in its repeal of Obamacare.

Today, Nevada Senator Dean Heller said he would not support the legislation. Heller is up for reelection in 2018 in a state won by Hillary Clinton in last year’s presidential election. Nevada also expanded the Medicaid program under the Affordable Care Act, or Obamacare, and the Senate bill would phase out that expansion starting in 2020. Heller said he can’t support a bill “that takes insurance away from tens of millions of Americans and hundreds of thousands of Nevadans.”

Several other senators are leaning toward opposition, including Portman of Ohio, Murkowski of Alaska, and Collins from Maine. Look for lots of deal making and arm twisting.

Sales of newly-constructed homes rebounded in May, and government data was revised to show a stronger spring selling season than had been previously reported. New-home sales ran at a seasonally adjusted annual rate of 610,000. That was 2.9% higher than in April and 8.9% higher than a year ago.

So far in 2017, 271,000 new homes have been sold, which is 12% higher than during the same period last year. The median sales price in May was $345,800, up from $310,200 in April and $296,000 in May 2016. At the current pace of sales, it would take 4.6 months to exhaust available supply.

About a week ago, Amazon it would acquire Whole Foods, then followed that with news it will start selling Nike products directly online. Once again, Amazon is shaking up the retail universe. Amazon stock has been on a nice run the past week, adding $18 billion in market capitalization.

In contrast, $31 billion in competitor market cap has been wiped out in the same period. Walmart and Costco have been hit the hardest, both losing more than $8 billion in value since the Whole Foods deal was announced on June 16. Whole Foods stock has been trading above Amazon’s offer of $42 a share, however, signaling that investors believe a bidding war could emerge and drive up the final price for Whole Foods.

Competitors like Target, Costco, and Kroger have been rumored as potential suitors, and they would do anything to make this deal harder for Amazon. Walmart is probably the only retailer that can truly compete with Amazon, but today they said they will not bid.

At the same time, Morgan Stanley said in a research note that the retail drug space could experience a wave of M&A action as companies try to outflank Amazon. Basically, any link in the supply chain is now subject to the influence of Amazon.

Meanwhile, outdoor gear retailer Eddie Bauer has hired investment banks to explore strategic alternatives, including a potential sale of the company. Also, today, Sears Holdings is closing an additional 20 money-losing stores. The move includes 18 Sears stores and two Kmart stores. Sears is hardly the only retailer shuttering locations.

There have been about 5,300 store closing announcements so far, this year, according to Fung Global Retail & Technology, a retail think tank.

Meanwhile, Amazon has filed for a patent for beehive-like towers that would serve as multi-level fulfillment centers for its delivery drones to take off and land. The facilities would be built vertically to blend in with high rises in urban areas. Amazon envisions each city would have one. The patent application features several drawings of these buildings, such as the beehive, a cylinder-shaped center and one that looks like a UFO.

The Brexit vote happened one year ago. Britain’s stock market, the FTSE 100, has gained nearly 17% since the UK’s June 23, 2016, vote to leave the European Union. The divorce talks between Brussels and Britain finally kicked off this week, but the outcome of the final agreement remains extremely uncertain.

The government will be working against the clock to hammer out a deal before the deadline of March 29, 2019, two years after UK Prime Minister Theresa May triggered the so-called Article 50 that officially set off the Brexit process. Little progress has been made in the three months since the Brexit clock started ticking. The UK is in a weak negotiating position.

And nobody is sure what Brexit means or what it will ultimately look like.

Qatar has 10 days to meet 13 demands from the Gulf states. Qatar is being ordered to reduce diplomatic ties with Iran, sever ties with terrorist organizations, and shut down Al Jazeera and affiliated networks, among other things, before the Gulf states will lift their blockade on the country.

Another day of Fedspeak. Cleveland Federal Reserve Bank President Loretta Mester said that recent inflation weakness was likely temporary and it should not delay another interest-rate hike this year, even though there is no “immediate need” to tighten policy. Mester is considered one of the more hawkish policymakers.

St. Louis Fed president James Bullard says the Fed can afford to stop raising short-term interest rates and wait and see how economic developments and Washington policy debates play out in coming quarters. Bullard says optimism about the economy has faded since March with economic data surprising to the downside. Bullard is considered one of the more dovish policymakers, calling for rates to remain flat through 2019.

By raising interest rates for the second time this year, Federal Reserve officials doubled down on their long-held belief that inflation will level out at their 2% target, even though the numbers hint at another story.

The Fed has been singing the same tune on inflation for nearly the entirety of this decade, and one could be forgiven for wondering how much inflation is really playing into the Fed’s decision-making process at this point. Yellen and friends made the move to lift rates to between 1% and 1.25% even though most inflation readings have drifted away from its long-run target of 2% in recent months.

Instead, it seems that a marginally improved labor market, and a desire for more wiggle room to cut rates for a slowdown that is becoming increasingly mathematically inevitable, are motivating the push to tighten policy. That includes the Fed’s outline for reducing its balance sheet, the manner of which but not the timing, was unveiled alongside the rate hike.

Treasury yields have fallen from their 2017 highs recently, with the benchmark 10-year yield trading around 2.15 percent. In March, it traded around 2.6 percent. The bond market doesn’t see inflation coming in the near term, and so far, it’s been right.

Adding to the deflationary ledger – oil prices dropped about 4% this week.

Today, SpaceX successfully fired up a Falcon 9 rocket for the eighth time this year, matching its flight total for all of last year. Its next launch is scheduled just two days later, with the ramped-up cadence putting the company on track to achieve the 20 to 24 total missions it’s targeting for the year.

The launch used a “flight proven” Falcon 9 rocket booster, which means it’s flown to space previously and been returned and refurbished. The rocket carried a Bulgarian communications satellite destined for geostationary orbit.

It launched from the historic 39A pad at NASA Kennedy Space Center in Florida, where Neil Armstrong left from before landing on the moon in 1969. On Sunday, SpaceX will launch 10 satellites for Iridium Communications from Vandenberg Air Force Base on California’s central coast.

Remember Blackberry? Once upon a time, about 8 to 10 years ago, Blackberry was the mobile phone of choice. The company reported earnings of $0.02 per share, compared to an estimated zero, but revenue fell to $235 million from $400 million from the year before. The company outsourced the manufacturing of Blackberry hardware in late 2016 in order to focus on software and services. Shares were up about 50% this year, until today – down 12%.

If you use Google’s Gmail, you may have noticed a that anything in your emails is likely to pop up as an ad. It’s not just a coincidence. Gmail scans and analyzes emails – or at least they did. They will stop the practice, due to privacy concerns and the general creepiness.

But this doesn’t mean you won’t see targeted ads in Gmail. Instead, they’ll be personalized with information gleaned from other sources. For example, Google collects data about you based on the YouTube videos you watch or the searches you make.

Financial Review

London Calling

Sinclair Noe — March 29, 2017

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DOW – 42 = 20,659
SPX + 2 = 2361
NAS + 22 = 5897
RUT + 4 = 1371
10 Y – .02 = 2.39%
OIL + 1.23 = 49.60
GOLD + 2.10 = 1254.40

Brexit is Brexit. Prime Minister Theresa May formally began Britain’s divorce from the European Union today, declaring there was no turning back. With the simple hand-off of a letter in Brussels, the British government became the first to trigger Article 50 — the mechanism for nations to exit the European Union.

The UK now has two years to negotiate the terms of the exit before it comes into effect in late March 2019. Over the next 2 years, the Brits will negotiate with 27 other EU states on finance, trade, security and other complex issues.

As the BBC points out: “Unpicking 43 years of treaties and agreements covering thousands of different subjects was never going to be a straightforward task. It is further complicated by the fact that it has never been done before and negotiators will, to some extent, be making it up as they go along.

The post-Brexit trade deal is likely to be the most complex part of the negotiation because it needs the unanimous approval of more than 30 national and regional parliaments across Europe, some of whom may want to hold referendums.” The outcome of the negotiations will shape the future of Britain’s $2.6 trillion economy, the world’s fifth biggest, and determine whether London can keep its place as one of the top two global financial centers.

For the EU, already reeling from successive crises over debt and refugees, the loss of Britain is the biggest blow yet to 60 years of efforts to forge European unity in the wake of two world wars. Its leaders say they do not want to punish Britain.

But they are expected to take a hard stand, in hopes of discouraging other member states possibly considering a similar break away. German Chancellor Angela Merkel has rejected one of Theresa May’s key Brexit demands, insisting negotiations on Britain’s exit from the European Union cannot run in parallel with talks on the future UK-EU relationship.

Meanwhile, Prime Minister May is trying to hold the UK together. Nicola Sturgeon has pledged to press on with a fresh independence referendum after dismissing Theresa May’s promise of substantial new powers for Scotland after Brexit. The first minister said May’s decision to trigger article 50, was one of the most destructive acts by a British leader in modern history, threatening hundreds of thousands of jobs across the UK.

Donald Tusk, the president of the European council, warned after receiving May’s letter that there would be “no winners” from Brexit, and the next two years would be a matter of “damage control”.

Is right now as good as it gets for the US economy? San Francisco Fed President John Williams seems to be saying we’re getting pretty darn close. Williams said that the economy was “in a good place,” and that the Fed’s job has now changed from getting the economy back on track to keeping the economy on track.

It’s an important distinction. As the economy has recovered from the Great Recession of 2009 when the unemployment rate hit 10%, the Fed has moved from stabilizing the US economy and bringing it back to life, to now keeping an eye on making sure it doesn’t overheat as the rate of unemployment has dropped to 4.7%. And right now, we basically have a Goldilocks economy – not too hot, not too cold. Williams said he “would not rule out more than three increases total for this year.”

Meanwhile, Federal Reserve Bank of Boston President Eric Rosengren argued today that four hikes in 2017 may be needed to guard against economic overheating. Rosengren said, “The economy is in a much better spot. We’re basically where we want to be, and we don’t want to grow so much faster than potential at this point that we end up getting to an unsustainable unemployment rate that would be reflected either in inflation or in higher asset prices.”

Chicago Fed President Charles Evans filled out the trio of Fedspeakers today, saying the fundamentals of the US economy are good and calling for another one or two increases in short-term interest rates this year. Evans cast doubt on the Trump administration’s stated intention to boost the growth rate to a 3% to 4% range. The Chicago Fed president said sustainable growth at that level would require “some truly astounding turnarounds in demographic and technological trends,” and the odds of this occurring “seem to be pretty low.”

Contract signings for home sales boomed in February to the second-highest level in a decade. The National Association of Realtors reported pending home sales rose 5.5% in February after falling 2.8% in January. A sale is listed as pending when the contract has been signed but the transaction has not closed. The NAR said the rising stock market and steady hiring helped, as did fears from home buyers of rising interest rates.

Well, that didn’t take long. Yesterday, President Trump signed an executive order, repealing the Clean Power Act. Already, the lawsuits are flying. The Northern Cheyenne Tribe, located in southern Montana, said the administration lifted a moratorium on coal leases on public land without first consulting with tribal leaders about the impact the coal-leasing program has on the tribe, its members and lands.

In a separate lawsuit filed on yesterday by environmental group Earthjustice, a coalition of conservation groups challenged the administration’s moratorium decision, arguing that it imperils public health for the benefit of coal companies.

And the idea of a clean environment has even attracted some strange bedfellows. Exxon Mobil has written to the Trump administration urging it to keep the US in the 2015 Paris climate agreement. Calling the accord “an effective framework,” Exxon cited several reasons to stay in the pact, including the opportunity to support greater use of natural gas, since it creates lower carbon emissions than coal when used for power generation.

Also, the CEO of ConocoPhillips, is saying that the U.S. should stay in the Paris Climate Agreement. For ConocoPhillips and Exxon – as well the non-US oil and gas heavyweights; BP, Royal Dutch Shell, Eni, Total, and Statoil—backing the Paris Agreement is not just riding the trend of increasingly environmentally-conscious businesses.

Those companies with operations all over the world stand to benefit from the Paris Agreement because the nations’ efforts to cut carbon emissions will lead to transitioning from coal-fired plants to gas-fired plants. And natural gas is quite a substantial portion of all those majors’ businesses, investments and profits.

Meanwhile, the White House and House Republicans have quietly begun new talks on repealing Obamacare.  The New York Times writes, Trump’s chief strategist Stephen Bannon has been meeting with members of two Republican factions that sank the bill last week, the Freedom Caucus and the Tuesday Group. Trump told senators at a White House reception Tuesday night that “we are all going to make a deal on health care.”

Following last week’s vote in the Senate, the US House has voted 215-205 to repeal Obama-era regulations governing consumer privacy protection at Internet service providers. If passed into law, the repeal will again allow ISPs to sell consumer information, including browsing history, without customer consent.

A New York law that barred retailers from charging customers more when they use credit cards instead of cash hit a legal roadblock Wednesday when the Supreme Court sent the law back to a lower court for more review. The justices agreed with merchants in New York state that the law curtailed their free speech by mandating what they say to their customers about the credit card fees.

The lower court had upheld the New York law as a pricing regulation only and not as a matter of free speech. The Supreme Court has a standing belief that money is speech, and therefore protected. Maybe now we’ll find out if credit cards are protected speech.

The evolution of stock picking has taken a toll on jobs and fees at BlackRock, as the world’s biggest money manager said it will increasingly rely on data-mining technology to make investment decisions. Over forty staff will be laid off, including some portfolio managers. The revamp marks BlackRock’s biggest attempt to rejuvenate its actively managed equities business as investors shift to ETFs.

Last year, Samsung received dozens of complaints about the Galaxy Note 7 overheating, and in some cases exploding, the company recalled the phones. But replacement phones continued to catch fire, and the company had to recall the devices a second time before killing the product altogether. Samsung lost billions in revenue.

Today, Samsung unveiled the new Galaxy S8, with a big version and a bigger version; they will arrive in stores next month with a starting price of $750. Perhaps the most curious bit of news, though, isn’t about the phones so much as it is an accessory that supports them: the DeX. Short for “desktop extension,” it’s a little dock that effectively turns the Galaxy S8 or S8 Plus into a desktop computer.

Amazon closed today at $874, a new record high. Amazon’s stock price has rocketed 50% in the past 12 months, adding to the net-worth of its largest shareholder, founder Jeff Bezos. The Amazon founder is now worth $75.6 billion, per Bloomberg, surpassing Berkshire Hathaway CEO Warren Buffet ($75.5 billion) and Amancio Ortega, chairman of Inditex fashion group ($74.1 billion). Bill Gates is still the richest man in the world with a net-worth of $86 billion.

Marijuana will be legal for all Canadians over the age of 18 by July 1, 2018. Prime Minister Justin Trudeau’s Liberal Party will officially announce the plan on April 10. The legislation is expected to easily pass through Parliament, as it holds support from major political parties both to the right, and left of Trudeau’s Liberals. As well, a majority of Canadians support legalizing marijuana.

Stocks Lower on Light Data Day

Charles Schwab: On the Market

Posted: 10/04/2016 4:15 PM ET

Stocks Lower on Light Data Day

U.S. stocks finished lower in choppy trading with sparse data, though the economic calendar will heat back up tomorrow. The U.S. dollar was solidly higher following another dose of hawkish Fedspeak, while European equities posted a broad-based advance as the euro and British pound fell versus the greenback. Treasuries and gold dropped and crude oil prices ticked slightly lower. In equity news, Darden Restaurants offered upbeat earnings and guidance and Sears Holdings reported of several potential suitors for its Craftsman tool business.

The Dow Jones Industrial Average (DJIA) lost 85 points (0.5%) to 18,169, the S&P 500 Index decreased 11 points (0.5%) to 2,151, and the Nasdaq Composite declined 11 points (0.2%) to 5,290. In moderate volume, 849 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.12 to $48.69 per barrel, wholesale gasoline increased $0.03 to $1.50 per gallon and the Bloomberg gold spot price declined $42.60 to $1,269.01 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 96.12.

Darden Restaurants Inc. (DRI $62) reported fiscal 1Q earnings-per-share (EPS) ex-items of $0.88, above the $0.82 FactSet estimate, as revenues increased 1.6% year-over-year (y/y) to $1.7 billion, roughly in line with forecasts. 1Q same-store sales grew 1.3% y/y, versus the projected 1.5% increase. The parent of Olive Garden raised its full-year EPS outlook, while announcing a new $500 million share repurchase program. Shares finished higher.

Sears Holdings Corp. (SHLD $12) rallied amid a Bloomberg report that several companies, including Stanley Black & Decker Inc. (SWK $123), are exploring a bid for SHLD's Craftsman tool business, which may be valued at about $2.0 billion. None of the companies mentioned commented on the report.

Economic calendar goes quiet today

Treasuries finished lower, while the economic calendar  was void of any major reports today. The yield on the 2-year note gained 2 basis points (bps) to 0.82%, the yield on the 10-year note increased 6 bps to 1.69% and the 30-year bond rate advanced 7 bps to 2.41%.  Schwab's Chief Fixed Income Strategist, Kathy Jones points out in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, the end of the bull market doesn't mean a bear market is starting, as slow global growth, deflationary pressures abroad, a firm dollar and demographic trends are likely to keep yields low. Investors should focus less on short-term changes in the market and more on structuring a fixed income portfolio that can work for them over the long run. Read the whole article and other timely bond market commentary at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones.

Mixed economic data as of late has kept growth concerns alive and Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Every Picture Tells a Story: Recession Risk Up, but Not High, that recession models show rising, but still low risk of a coming contraction in economic activity. Economic recoveries don’t tend to die of old age; they die of excess…of which there's little in this recovery. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the domestic economic calendar will heat back up with a plethora of key reports, headlined by reads on services sector activity for September, in the form of the Institute for Supply Management's (ISM) non-Manufacturing Index and the final Markit Services PMI Index. ISM's report is projected rise to 52.9 from 51.4 in August, while Markit's release is estimated to be unrevised at the preliminary level of 51.9, but up from August's 51.0. Readings above 50 for both indexes denote expansion.

As noted in the Schwab Market Perspective: Crunch Time, economic data has been mixed over the past month. It started with soft ISM readings at the beginning of September and continued with some weaker-than-expected housing data. At this point we believe this is temporary softness brought on by a very quiet August when more folks than usual seemed to be on the sidelines; and are looking for a comeback in the fourth quarter. Continuing historically-low initial jobless claims reading (a key leading economic indicator), the low unemployment rate, rising wages and consumer confidence, and ongoing accommodative monetary policy lead us to believe that the economy will continue to muddle through into 2017. Read the whole perspective at www.schwab.com/marketinsight.

Additional reports due out tomorrow include the ADP Employment Change report, forecasted to show private sector payrolls added 165,000 jobs during September and factory orders, expected to have declined 0.2% m/m in August. Weekly MBA mortgage applications will be released as well.

Europe and Asia gain ground 

European equities traded higher, courtesy of a broad-based advance among the sectors, while earnings and economic data were light. Deutsche Bank AG(DB $13) is gained ground, bolstered by an upgrade from Bank of America Merrill Lynch on the heels of last week's wild swings amid elevated capital concerns toward the lender and reports it may be close to settling with the U.S. Department of Justice (DoJ). The German markets returned to action following yesterday's holiday. The British pound fell versus the greenback, to aid the U.K. markets, amid resurfacing concerns about Brexit timing. The euro is also traded lower compared to the U.S. dollar, while bond yields in the region mostly dipped.

With global market uncertainty/volatility elevated, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversificationand why Your portfolio may be less diversified than you think. Read these articles, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished higher, though volume remained light as mainland Chinese markets continued to break for the golden week holiday. Japanese equities increased, with the yen losing some ground on the U.S. dollar as the markets continued to grapple with monetary policy uncertainty of the Bank of Japan. For our latest analysis of Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, Going Godzilla: What has the Bank of Japan Unleashed?, at www.schwab.com/oninternational. Stocks trading in Hong Kong and South Korea gained ground, while Australian shares also ticked higher after the Reserve Bank of Australia (RBA) expectedly kept its benchmark interest rate unchanged at 1.5%, noting that the unchanged stance would be consistent with sustainable growth in the economy and achieving its inflation target over time after easing monetary policy in May and August. Finally, Indian stocks held onto modest gains after the Reserve Bank of India unexpectedly cut its benchmark repo rate by 25 bps to 6.25%.

Tomorrow, the international economic docket will deliver a plethora of services PMI reads from Japan, the U.K., the Eurozone, France and Italy, while Japan and the Eurozone will also report retail sales.