Financial Review

Go Placidly

Sinclair Noe — May 19, 2017

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DOW + 141 = 20,804
SPX + 16 = 2381
NAS + 28 = 6083
RUT + 6 = 1367
10 Y + .01 = 2.23%
OIL + 1.18 = 50.53
GOLD + 8.80 = 1256.60

Stocks finished with triple digit gains but well off session highs as news headlines once again rattled traders. The Dow gave back more than 50 points and the S&P 500 saw gains cut in half following an afternoon news dump. The Washington Post is reporting that a current White House official is a significant person of interest in the law enforcement investigation.

Separately the New York Times reported that Trump told Russian officials at the White House that firing FBI Director James Comey relieved “great pressure” from an ongoing probe into Russia and the election. The Times report cited a document summarizing the meeting.

Trump is on the first leg of a ten-day overseas trip that starts in Saudi Arabia, then moves to Israel, the Vatican, Brussels (for a NATO summit), and then Sicily for a G7 summit. The Trump administration planned to announce $110 billion in sales of advanced military equipment and training to Saudi Arabia this weekend.

Despite the firing of James Comey, and a general sense from the mainstream media that the Trump White House is in disarray, and the lowest public approval ratings since the inauguration, Wall Street continues to trade near record highs.  For the week, the Dow and S&P dropped 0.4 percent and Nasdaq was down 0.6 percent.

The dollar index lost 1.6 percent in the five days, the worst week since July 2016. Gold capped its best week in a month. The yield on 10-year Treasuries climbed less than one basis point to 2.23 percent, after rising as much as three basis points earlier in the session. It fell nine basis points this week.

Oil prices rose. West Texas crude rose 2.2 percent to settle at $50.53 a barrel in New York, for a weekly increase of 5.4 percent, the most since March and the second week of gains, on growing expectations that OPEC and other producing countries will agree next week to extend output cuts.

OPEC and other producers including Russia are scheduled to meet on May 25. They are expected to extend output cuts of 1.8 million barrels a day until the end of March 2018. U.S. crude production has climbed 10 percent since mid-2016 to 9.3 million barrels per day as shale producers have taken advantage of higher prices to boost activity.

Iran holds its first round of presidential elections this weekend. If President Hassan Rouhani remains in office, it should encourage Western investment and boost Iranian oil production. If the winner is Ebrahim Raisi, a critic of Iran’s nuclear deal with the West, then it is possible that new sanctions could be imposed, which could reduce the oil supply from Iran.

After two weeks chock full of retailers’ earnings — largely disappointing Wall Street and missing analysts’ expectations — the S&P 500’s Retail ETF (XRT) finished the week down about 3.5%. Leading the declines were names like Ascena Retail Group, Foot Locker, American Eagle and Sears.

Ascena — the parent of clothing companies such as Ann Taylor and dressbarn — saw its shares plunge more than 30 percent earlier in the week, after it adjusted its second-half outlook to reflect worse-than-expected business conditions. Meanwhile, Foot Locker’s same-store sales fell short of expectations.

Off-price retailer TJX, which operates T.J. Maxx, Marshalls and HomeGoods stores, was expected to be an upbeat outlier for the week, but even its first-quarter comparable sales couldn’t match Street estimates. Gap reported a surprise rise in quarterly same-store sales, bucking the trend of dismal results in the U.S. retail industry, as the company benefited from the robust performance at its Old Navy brand.

Campbell Soup’s quarterly sales and profit missed analysts’ estimates, hurt by higher promotions and weak demand for its condensed soups, broths and V8 vegetable juices, and the company warned that its full-year sales could decline.

Deere & Co raised its full-year sales and profit forecast for the second time, as demand improves for its farm and construction equipment, particularly in South America, sending its shares to a record high of $122. The company said it expected fiscal 2017 industry sales of tractors and combined harvesters in South America to be at the high-end of its earlier forecast of about 15-20 percent rise.

While farmers in South America have been complaining about low prices, they have enjoyed big gains in corn and soybean output.

Brazil’s Supreme Court released explosive plea-bargain testimony today accusing President Michel Temer, along with former presidents Lula da Silva and Dilma Rousseff, of receiving millions in bribes. The testimony raises serious doubts about whether Temer, who replaced the impeached Rousseff last year, can maintain his grip on the presidency.

The testimony implicates both ruling and opposition parties and indicates that Temer, a conservative, accepted $4.6 million in bribes from JBS, which ranks as the world’s largest meat processor. It also alleges that Lula, who is already facing five corruption trials, received $50 million in bribes in offshore accounts from JBS, while Rousseff took $30 million in bribes.

Temer said he would not resign from the presidency. The Supreme Court released an audio tape of Temer, approving the payment of hush money to former lower house speaker Eduardo Cunha, who last year orchestrated Rousseff’s impeachment and was later convicted for corruption.

Many politicians fear that if Cunha should turn state’s witness, his testimony could implicate scores of congressmen and members of the executive branch.

About 37,000 AT&T workers, or less than 14 percent of the company’s total workforce, began a three-day strike after failing to reach an agreement with the No. 2 U.S. wireless carrier over new contracts. This is the first time that AT&T wireless workers are on strike, which could result in closed retail stores during the weekend.

The workers on strike are members of the CWA Communications Workers of America union. The workers are demanding wage increases that cover rising healthcare costs, job security against outsourcing, affordable healthcare and a fair scheduling policy.

Slightly over half of the workers on strike are part of the wireless segment and the rest wireline workers, including a small number of DirecTV technicians.

Fiat Chrysler plans to update software that it expects will resolve the concerns of U.S. regulators about excess emissions in 104,000 older diesels. The software update would begin rolling out once the Environmental Protection Agency and California Air Resources Board approved.

In January, the EPA and California accused Fiat Chrysler of illegally using undisclosed software to allow excess diesel emissions in 104,000 U.S. 2014-2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks in a notice of violation.

The Environmental Protection Agency and California Air Resources Board announced approval of a fix for about 84,000 older Volkswagen diesel vehicles that can emit excess emissions. Volkswagen agreed last year to offer to buy back up to 475,000 2.0-liter diesel vehicles that had been sold in the United States or offer fixes if regulators approved.

Friday’s announcement covers a fix for 84,000 2012-2014 Passat diesel vehicles with automatic transmissions. A fix for vehicles with manual transmissions has not yet been approved. In January, regulators approved a fix for 67,000 2015 model diesels, leaving around 325,000 older vehicles still awaiting approval for a fix.

The federal government has, in recent years, paid debt collectors close to $1 billion annually to help distressed borrowers climb out of default and scrounge up regular monthly payments. New government figures suggest much of that money may have been wasted.

Nearly half of defaulted student-loan borrowers who worked with debt collectors to return to good standing on their loans defaulted again within three years, according to an analysis by the Consumer Financial Protection Bureau. For their work, debt collectors receive up to $1,710 in payment from the Department of Education each time a borrower makes good on soured debt through a process known as rehabilitation.

They keep those funds even if borrowers subsequently default again. What constitutes rehabilitation? Nine months of on-time payments, even if the borrower only pays $5 a month. That means that in many cases, the government pays $38 to collect one dollar. The department has earmarked more than $4.2 billion for payments to its debt collectors since the start of the 2013 fiscal year.

Seven years into an economic recovery, nearly half of Americans didn’t have enough cash available to cover a $400 emergency. That’s according to the latest findings from the Federal Reserve’s annual economic well-being of U.S. households, which found 44% in 2016 said such an expense would have to be covered by borrowing or selling something.

That’s a similar percentage to what was found in past Fed surveys. Of the group that can’t pay in cash, 45% would use a credit card to pay off the expense over time, about a quarter would borrow from friends of family, another 27% just couldn’t pay the expense and smaller fractions would turn to selling items or using a payday loan.

We now know where all the money is hiding. Retirees who are usually expected to spend that hard-earned nest egg are instead cutting their spending and living frugally, according to a University of Michigan survey analyzed by software company United Income. The median retiree spends 8 percent less than they comfortably could afford; the result, retirees now hold assets totaling more than $25 trillion.

Spending money, besides being a boost for the economy, could help retirees be more active, if they physically get out of the house to do it. Meanwhile, younger Americans, whose incomes are falling behind those of previous generations, aren’t saving enough.

So, the moral of the story is get out and spend some money this weekend, you might feel younger.

Financial Review

Apple Bites

Sinclair Noe — July 26, 2016

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

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DOW – 19 = 18,473
SPX + 0.7 = 2169
NAS + 12 = 5110
10 Y – .01 = 1.56%
OIL – .49 = 42.64
GOLD + 4.40 = 1320.70

The S&P CoreLogic Case-Shiller 20-city composite saw a 0.9% gain in May to stretch the 12-month advance to 5.2%. Phoenix resale home prices were up 0.6% in May, and 5.4% over the past 12 months. Portland had the hottest housing market, New York the weakest. From the 2006 peak, the 20-city composite is down 8.8%; it’s up 40.4% from the trough in 2012.

The Commerce Department reports new home sales increased 3.5 percent to a seasonally adjusted annual rate of 592,000 units last month, the highest level since February 2008. Sales were up 25.4 percent from a year ago. At June’s sales pace it would take 4.9 months to clear the supply of houses on the market, down from 5.1 months in May. The median price for a new home rose 6.1 percent from a year ago to $306,700.

The Conference Board’s consumer confidence index was little changed this month, finishing at 97.3 compared to revised 97.4 in July. Consumers were slightly more positive about current business and labor market conditions. Expectations regarding business and labor market conditions, as well as personal income prospects, declined slightly.

The Federal Reserve has begun a two-day FOMC meeting on interest rate policy. The Fed is all but certain to keep interest rates on hold, acknowledging improved economic prospects, but offering few hints about its next move. Central to the debate will be how to reconcile upbeat economic data, highlighted by strong job gains in June, with a global growth slowdown and other headwinds threatening the inflation trajectory. The inflation measure the Fed prefers to track is currently at 1.6 percent, and oil prices have just moved to three-month lows.

Threats to America’s financial stability rose after the U.K. voted in June to leave the European Union but remain moderate, according to a report from the Office of Financial Research, the research arm of the Financial Stability Oversight Council. The vote could usher in “months or years of uncertainty” over rules tied to the U.K.’s investment, financing and trade relations with Europe and the rest of the world. Despite the ability of U.S. markets to recover from the initial shock of a market selloff, persistent concerns remain as the U.K. decides “if, how and when” to leave the EU. Possible spillover effects could jolt the broader financial system, including U.S. banks and nonbanks such as life insurers and broker-dealers.

The Bank of England’s Martin Weale has changed his mind and now supports immediate stimulus for the U.K. economy at next week’s policy meeting. The pivot follows a series of negative business reports, culminating in last week’s poor PMI data. Only a week ago, the widely-followed policymaker called on the central bank to wait for “firmer evidence” before implementing more monetary easing.

Just two months before the yuan is to be included in the IMF’s Special Drawing Rights basket for the first time, the fund’s board has adopted a new methodology for calculating the amounts of its global reserve currencies. New weightings of the dollar, euro, yen and pound will be set on Sept. 30 and fixed for five years, pushing the yuan a step closer to being freely usable internationally.

Specialist Italian pension funds are considering a government request to pour money into a bank rescue fund, days before European stress tests are expected to show the country’s third-largest lender, Banca Monte dei Paschi, is in urgent need of capital. Italy is looking for ways to support struggling lenders without breaking EU state aid rules, but a deeper financial crisis could further undermine confidence in the eurozone’s fourth-largest banking sector.

Here’s a rundown of some of the earnings reports today:
3M posted earnings that beat by one cent a share, on revenue a touch below estimates. The firm lowered its guidance for 2016 sales growth.

Caterpillar reported earnings that beat on both the top and bottom line.

DuPont posted earnings that beat on both the top and bottom line, and raised its full-year forecast.

McDonald’s reported a lower-than-expected rise in U.S. same-store sales. Quarterly earnings, ex-items, did beat expectations.

United Technologies raised full-year guidance and posted quarterly earnings that beat on both the top and bottom line.

Verizon reported quarterly earnings that topped expectations on revenue that missed. The telecommunications giant said a seven-week workers’ strike hurt results.

As the first oil major to report Q2 results, BP announced a loss that missed estimates due to lower refining margins and a multibillion-dollar charge relating to its 2010 oil spill.

Twitter’s stock is crashing, down 10% in after-hours trading, after delivering a revenue forecast that fell well short of expectations.

Also, negative earnings results from Reynolds American, Starwood, KeyCorp, Nielsen, Gilead Sciences and Under Armour.

Positive earnings news from Corelogic (along with higher 2016 guidance), and Texas Instruments beat estimates. Also good reports from Centene, Waters Corp, Avery Denison, Baxter, and Valero.

Of course the big earnings report today came after the closing bell. Apple reported iPhone sales fell for the second straight quarter, although the 15 percent drop was less than feared. The company’s total revenue dropped 14.6 percent in the third-quarter ended June 25, also declining for the second quarter in a row. Apple said it sold 40.4 million iPhones in the third quarter, more than the average analyst forecast of 40.02 million. Apple’s quarterly net profit fell 27 percent to $7.8 billion, while revenue of $42.36 billion beat analyst’s estimates. Phone sales in China dropped 33%.

Apple’s services business, which includes the App Store, Apple Pay, iCloud and other services generated nearly $6 billion in revenue, up 18.9 percent from the previous year. The stock was trading toward the low end of its 52-week historical price range – down 8.5% year-to-date –  and at the bottom of the range for mega-cap tech stocks. In after-hours trade Apple was up about 6%, topping $101 per share.

Annheuser-Busch InBev raised its offer for SABMiller by 2.3% to 79 billion pounds to account for the Brexit-related plunge in sterling.

Switzerland said it plans to give information to U.S. tax authorities about accounts at HSBC Holdings’ Swiss private bank, as part of a U.S. investigation into tax evasion. HSBC’s Swiss unit has already paid tens of millions of dollars in fines after admitting substandard compliance on tax evasion and other issues. The Swiss government said it made the announcement to alert HSBC account holders whom it has been unable to locate, and to give them the chance to lodge a legal appeal if they object to having their information sent to the IRS.

Fiat Chrysler Automobiles said it has revised the way it counts monthly sales figures of new cars and trucks and now says its impressive sales streak of 75 months of consecutive sales gains actually ended in September, 2013. It said that under the revisions, there were three months in which it had reported sales gains but now will report them as declines.

Volkswagen’s settlement plans to get 482,000 diesel-cheating cars off U.S. roads won a preliminary go-ahead from a federal judge. The plan for buybacks and a possible fix covers car owners, the U.S. government and 44 states and will cost the company about $15.3 billion if the agreements are fully adopted. The settlement includes $10 billion for buybacks, as well as $4.7 billion in government penalties and remediation. With or without a fix, car owners who don’t like the buyback option may be able to keep driving the polluting cars in some states.

The pact eats up almost all of the $17.8 billion the company had set aside to cover the cost of the scandal worldwide. In addition to investor class actions in the U.S. and lawsuits in Germany and South Korea, the company faces criminal probes in all three countries. VW took a 2.2 billion-euro charge in the second quarter, chiefly related to legal risks in the U.S. The company will report full earnings figures on Thursday.

Amazon is partnering with the U.K. government to significantly expand drone testing, a move that could let the devices deliver packages to British homes far earlier than in the US. Amazon will work with British regulators to test drones that fly beyond the line of sight of operators in rural and suburban areas. It will also test whether a single operator can safely command multiple drones at once, as well as technology that lets the machines automatically detect and avoid other planes, buildings and people.

Tesla has doubled the labor force working on its $5 billion battery factory in the Nevada desert, aiming to meet demand for its coming Model 3. Now, 1,000 workers build seven days a week on two shifts in an effort to start churning out lithium-ion cells by late 2016. Elon Musk is set to inaugurate the Gigafactory with a media briefing today, followed by an exclusive tour and party for Tesla customers on Friday.

Have you noticed the changes to Google Maps? For its more than 1 billion users, Google announced a design update to Google Maps yesterday, July 25. Embracing a “cleaner look,” the new reduced interface for mobile and desktop is focused on discovery and socializing, instead of turn-by-turn directions. Areas of interest like restaurants, bars, and shops are now shaded in a light shade of orange, allowing users to learn about new venues around their destination.

The first round-the-world solar powered flight has been completed, after the Solar Impulse aircraft touched down in Abu Dhabi and finished a journey that began over a year ago. The ABB-engineered plane is no heavier than a car, but has the wingspan of a Boeing 747. It’s powered by 17,248 solar cells, runs on battery power at night and has an average airspeed of 46 mph.

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

Progress Not Perfection

Sinclair Noe — July 15, 2016

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

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DOW + 10 = 18,516
SPX – 2 = 2161
NAS – 4 = 5029
10 Y + .06 = 1.60%
OIL + .27 = 45.95
GOLD – 3.80 = 1331.80

Another record high close for the Dow Industrials; six straight winning sessions, and since the June 27 lows following the Brexit vote, the Dow Industrials have added just over 1453 points, or an 8.5% gain in less than 3 weeks.

Consumer prices rose in June for the fourth straight month as the cost of gasoline, rent and medical care continued to go up. The consumer price index increased a seasonally adjusted 0.2% last month; the CPI is a measure of inflation at the retail level. Overall inflation remains low. The consumer price index has risen 1% in the past 12 months. And the multi-year trend is disinflationary. Real or inflation-adjusted hourly wages, meanwhile, fell 0.2% in June to mark the second drop in three months. Hourly pay has risen a scant 1.5% in the past 12 months.

The higher cost of gas accounted for much of the increase in inflation in June. Energy prices rose 1.3%. What’s also helping households is the biggest sustained drop in grocery prices since 2010. The so-called food at home index fell 0.3% in June, and it’s down 1.3% in the past 12 months. The core rate that excludes food and energy rose 0.2% in June and increased at a 2.3% annual pace. Yet other key expenses for consumers such as housing and medical care have gotten costlier. Rents rose 0.4% in June and the price of prescription drugs jumped 1.3%. Rent in particular is denting the pocketbooks of consumers, especially people moving into new apartments. Longtime home owners with low mortgages are faring much better.

Retail sales rose a seasonally adjusted 0.6% to mark the third straight strong gain. The surge in spending was led by home-and-garden centers and online stores. Online retailers led by Amazon boasted a 1.1% increase in sales in June. Gas stations and even department stores, lately the industry laggards, also recorded strong sales. Gas prices increased in the spring and early summer, though prices have since leveled off. Sales at apparel stores fell 1%, restaurants lost business and sales at purveyors of electronics and appliances were flat. Auto dealers registered a 0.1% increase. Purchases of new cars and trucks were softer than expected last month.

 Industrial production in June grew 0.6%, the fastest monthly rate in eleven months. Despite the gains, the factory sector is still struggling. For the second quarter as a whole, industrial production fell at an annual rate of 1%, its third consecutive quarterly decline and the fifth out of the past six. Compared to a year ago, production was down 0.7%. Manufacturing has been hurt by the strong dollar and the drop in oil prices.

The University of Michigan said its consumer sentiment index fell to 89.5 in July, a three-month low, from 93.5 in June. Prior to the Brexit vote, virtually no consumer thought the issue would have the slightest impact on the U.S. economy. Following the Brexit vote, it was mentioned by record numbers of consumers, especially high income consumers.

Three Fed policymakers, James Bullard, Robert Kaplan and Dennis Lockhart, all expressed the view yesterday that there’s no hurry to raise interest rates in the wake of the Brexit vote, despite signs that the U.S. is near full employment. Kansas City Fed President Esther George differed on the outlook, stating she would keep an eye on recent market volatility, but stressed that rates were too low for the strength of the economy.

Companies have begun announcing earnings for the second quarter, and the results are not expected to be pretty over the next few weeks. Analytics firm FactSet estimates profits of companies in the S&P 500-stock index will fall 5.6 percent compared with a year ago; the fifth straight quarter of decline. The contraction has been so prolonged that investors consider it an “earnings recession.” LPL Financial, analyzed the S&P’s 12 earnings recessions since 1954. Nine of them were accompanied by economic recessions a year before or after, although the depth and duration of the downturns varied widely. Three earnings recessions have not been tied to broader distress. The first two occurred in 1967 and 1985. The third is the one we’re in right now, and it is not done playing out.

Citigroup reported quarterly earnings and revenue that easily beat analysts’ expectations, even as earnings and revenue dropped from the year-earlier quarter. The company posted second-quarter earnings per share of $1.24, compared with $1.51 a share in the year-earlier period. Revenue for the quarter came in at $17.5 billion, against the year-earlier figure of $19.1 billion.

Wells Fargo reported net income fell from $5.4 billion to $5.2 billion, even as revenue was higher. That’s a bad combination – it means net margins are down or expenses are up, or both. Part of the problem for Wells Fargo is that they have to set aside more provisions for loan losses.

The Federal Trade Commission settled with Herbalife, effectively determining that the nutritional supplement marketer is not a pyramid scheme. However, the FTC did warn Herbalife that it will need to prove that its business model is legitimate going forward. Separately, the company said Carl Icahn and his interests have retained the right to boost their ownership stake of Herbalife to 34.99 percent, up from a previous maximum of 25 percent. Icahn currently owns about 18 percent of Herbalife’s outstanding common shares.

Fiat Chrysler Automobiles is investing more than $1 billion in its assembly plants in Illinois and Ohio, retooling them to boost production of its Jeep Cherokee and Wrangler. Sales of Fiat Chrysler’s Jeep brand rose 17% in June and accounted for 42.5% of the company’s total U.S. sales.

The gavel is finally poised to drop in the drawn-out auction for Yahoo’s core internet business. Final bids for the services, which include its search, email, advertising and media operations, are due Monday, with the board set to make a decision soon afterward.

Costs from BP’s deadly 2010 Gulf of Mexico oil spill will rise by an additional $5.2 billion and ultimately cost $62 billion in pay-outs for one of the worst environmental disasters in U.S. history. The pretax charge for BP’s second quarter will also likely be the last from the Deepwater Horizon accident to have a “material impact” on its financial performance.

A federal appeals court sided with Microsoft in a case over whether the U.S. government could force the company and other tech companies to hand over customer emails stored overseas. The decision reverses a 2014 court order that required Microsoft to turn over email content stored on a server in Ireland. The court found that the federal Stored Communications Act only applies to data stored in the United States — and thus can’t be used to force a company to produce information from servers outside the country. Without the warrant, the government has to go through a much lengthier process set up through a mutual legal assistance treaty with the Irish government to obtain the data. Ireland filed a brief supporting Microsoft in the case, as did many tech companies, including Apple and Cisco.

There is no question that we live in amazing times. You can use your cell phone to look at a map of almost any place in the world, and not just look at the map, but zoom in to street level to look at the trees and buildings. Google Street view has even gone to Mount Everest and the Great Barrier Reef. Still, there are some places…, such as the Faroe Islands, an archipelago between Scotland and Iceland. They have streets and a few cars, but so far, no Google Street View. If Google Street View won’t come to the Faroe Islands, the Faroe Islands will bring 360-street views to them and the world. The islands’ tourism board is strapping 360 degree cameras onto sheep. Each minute, photos and GPS coordinates taken from the sheep are sent back to the tourism board. They’re then uploaded to Google Street View. Progress, not perfection.

Financial Review

Headwinds and Tailwinds

Sinclair Noe — January 14, 2016

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DOW + 227 = 16,379
SPX + 31 = 1921
NAS + 88 = 4615
10 Y + .03 = 2.10
OIL + .66 = 31.14
GOLD – 15.00 = 1079.50

Global stocks have lost almost $3.2-trillion in market value since the start of 2016, pushing all major US indexes into correction or bear market territory. Asian markets (except for China) and European exchanges were mostly lower. Even with a bounce, we’re trending lower, short-term.

The Bank of England this morning kept its key interest rate at a record low of 0.5% and made no changes to its $540 billion asset purchase program. Both decisions were widely expected.

The Hong Kong dollar sank by the most in more than a decade overnight and speculation mounted in the options market that the city’s 32-year-old currency peg will soon come to an end, as investors lost confidence in Chinese assets. Other currencies also took a hit. The loonie fell to its lowest level since April 2003, fueling speculation the Bank of Canada could cut interest rates as early as next week.

The average number of people who applied for jobless benefits in the past month climbed in early 2016 to the highest level since last July. Initial jobless claims for the first full week of January, meanwhile, rose by 7,000 to a seasonally adjusted 284,000; the four-week average rose to 278,750.

The prices the U.S. paid for imported goods fell 1.2% in December, and dropped 8.2% for all of 2015. Even if oil prices are set aside, import prices have been falling. The cost of all imports excluding fuel slid 3.4% in 2015, marking the only decline since the government began keeping track in 2001. At the same time, export prices sank 1.1% in December. For the full year, export prices sank 6.5%, the biggest decline since the government first began keeping records in 1983.

JPMorgan Chase said fourth-quarter profit rose 10 percent. Net income rose to $5.4 billion, or $1.32 a share, from $4.9 billion, or $1.19, a year earlier. Revenue rose 1 percent to $22.9 billion in the fourth quarter. Earnings rose as the bank cut expenses from litigation and employee compensation shrank. Now there’s a business model for you.

We didn’t see much in the way of positive surprises in the earnings report, unless you consider not paying the lawyers and the regulators more to be a surprise. Still, they beat estimates. JPMorgan was up .86 at 58.20 today. Flat is the new up in investment bank land.

JPMorgan kicks off a parade of bank earnings reports. Wells Fargo and Citigroup report on Friday. A few analysts think the big banks have already taken their licks and are so far into oversold territory that there might not be much downside left. The KBW Nasdaq bank index shows bank shares down 17% from their July 2015 highs, down 15% since December, and down almost 10% so far in 2016.

If the big banks are going to climb out of their hole, they’ll need a lot better news than JPMorgan delivered today. One of the bright spots was from advisory fees on M&A. Mergers and Acquisitions in the fourth quarter reached near record levels, capping a record year. Globally, M&A activity topped $4.9 trillion in 2015, outpacing the previous record of $4.6 trillion set back in 2007. In a rising interest rate environment, it is hard to imagine 2016 will be a better year for M&A.

JPMorgan’s advisory revenue was up 43% to $622 million. Not bad but not outrageously great; and it was about the only strong area and not a surprise. Meanwhile trading revenue fell 3%, equity trading fell 7%, and credit underwriting disappeared.

And the headwinds are more problematic than the tailwinds are helpful. There’s no question debt and credit trading was difficult in fourth quarter. High-yield debt in general hit the skids hard, and nowhere was that more prevalent than in the energy sector. The Federal Reserve’s most recent Shared National Credits exam noted that 74% of the increase in classified loans were oil and gas loans, “where near default loans increased four times.”

JPMorgan nearly doubled its loss provisions in the fourth quarter, mostly due to bad energy loans. Asked on the earnings call if the bank is setting aside too little, Dimon says he’d put up more if he could, but accounting rules dictate what can be done.

I’m not sure which rules Dimon was referencing but we do know that every 10 basis points of expense increases for loan loss provisions will knock about 4% off banks’ earnings. Bottom line: a decent report from JPMorgan but it doesn’t look like enough to lift the banking sector.

Following the collapse of the Third Avenue Focused Credit Fund last month, the SEC has launched a review of the entire junk-bond fund complex. Reuters reports the agency “sent detailed requests” to mutual fund and ETF managers following the Third Avenue liquidation plan in which investors could wait a year or more to get their money. Regulators are “seeking information about how they price less liquid securities, and whether certain parties have ever challenged those prices.”

Intel reported a small increase in quarterly revenue, reversing two quarters of declines, as growth in its data center business more than offset weak sales to PC makers. Net income fell to $3.61 billion for the fourth quarter, from $3.66 billion, a year earlier. Net revenue rose to $14.91 billion from $14.72 billion. On a per share basis, earnings were flat at 74 cents. The fourth quarter of 2015 marked the fifth consecutive quarter of worldwide PC shipment decline. Intel was up .83 at 32.74, but they are down over $1 in after-hours trade.

GoPro shares were clobbered, down 26%. The wearable camera maker said on Wednesday it expected revenue of about $435 million for the fourth quarter, well below the average analyst estimate of $512 million.

Renault shares dropped more than 20% after a union said French fraud investigators seized computers from the automaker, apparently as part of a probe into emissions testing. The French government said tests on nearly two dozen Renault models and other automakers found several that exceeded the country’s air quality standards but so far found no evidence of technology designed to cheat on emissions tests, except a couple of VW models.

Volkswagen and EPA officials remain at an impasse following yesterday’s talks between VW CEO Matthias Müller and EPA chief Gina McCarthy, casting doubt over a quick resolution of the automaker’s emissions cheating scandal. The two sides gave no indication of any progress during a meeting at EPA offices in Washington, D.C.

Trading in Fiat Chrysler was halted several times today in Milan Italy, as prices dropped by 10% or more on a report from Automotive News, saying that two Chicago car dealerships have filed a lawsuit alleging the company offered dealers large amounts of money to report US unsold vehicles as sold. A spokesman for Fiat Chrysler in the U.S. said the auto maker “has not been served with this lawsuit and cannot comment.”

West Texas Intermediate crude oil fell to $29.73 in overnight trade, its lowest level since February 2004; prices bounced from that low. Prices have already tanked 20% this year.  Not a big surprise that there was some support at $30. The question is whether support can hold in the face of a potential new source of supply. The United Nations’ nuclear watchdog is likely to confirm on Friday that Iran has curtailed its nuclear program as agreed with world powers, paving the way for sanctions to be lifted.

The past 18 months have been rough for the oil industry. The low price has caused layoffs in what had been a robust and growing shale oil extraction business. A new report shows the number of jobs in the United States in the solar industry outpaced those in the oil and gas industries for the first time ever. As of November 2015 there were almost 209,000 people who worked in the solar industry, 90 percent of whom only work on solar-related projects. There were only about 185,000 people working in oil and gas in the United States in December 2015, according to the Bureau of Labor Statistics.

The solar industry has seen prices drop, not quite as much as oil, but as the technology becomes cheaper, sales have remained solid. One other key difference for the economy, jobs in solar pay about half what jobs in the oil industry pay, on average.

Meanwhile, renewables just finished another record-breaking year, with more money invested ($329 billion) and more capacity added than ever before (121 gigawatts), according to new data released by Bloomberg New Energy Finance. Spending on clean power declined in Europe, but increased 17% in China, 7.5% in the US, and for the first time, more than half of the world’s annual investment in clean energy came from emerging markets.

And since clean energy is also getting cheaper, the world got more bang for each buck. Investment dollars rose 4 percent last year, while the new capacity added for wind and solar jumped 30 percent. Looking out still further, the International Energy Agency said last year that between now and 2020, renewable energy will be the largest area for growth, and predicts 700 gigawatts of added generating capacity.

Oscar nominations were announced this morning.  “The Revenant” led the nominations with 12 nods, including best picture, and best actor for Leonardo DiCaprio; while the action movie “Mad Max: Fury Road” landed 10 nominations.