Financial Review

91 Days

Sinclair Noe — February 22, 2017

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DOW + 32 = 20,775
SPX – 2 = 2362
NAS – 5 = 5860
RUT – 6 = 1403
10 Y – .01 = 2.42%
OIL – .76 = 53.57
GOLD + 2.50 = 1238.90

Another record high for the Dow. S&P and Nasdaq, not so much.

91 straight trading days — that is how long the S&P has gone without closing lower by 1% or more. The S&P 500 ended 1.2% down on Oct. 11 — more than four months ago — and hasn’t clocked out on such a negative note since then.

The result has been a slow, steady slog to record highs. Hardly the stuff of investor euphoria or irrational exuberance; more like climbing a wall of worry. Stocks are expensive by almost any measure, and Mom and Pop investors seem skeptical, but the reality is that they have few good options but to stand on the edge of the cliff.

In mid-December, Bloomberg polled Wall Street analysts for their full-year predictions.  The average forecast for 2017 was calling for growth of 5.2 percent. The S&P 500 is already up 5.5 percent year-to-date. The average estimate was 2,364. The index touched 2,366 yesterday.

The Federal Reserve’s Federal Open Market Committee held a meeting January 31 – February 1. The Fed stood pat at that meeting, and today they released the minutes from that meeting. Policymakers seemed confident that the labor market was strong, and even though there were signs of inflation, that didn’t seem to worry them.

Fed officials wrestled with uncertainty on issues ranging from the Trump administration’s fiscal stimulus plans to the headwinds a rising dollar may pose. A few participants “noted that continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the committee greater flexibility in responding to subsequent changes in economic conditions.”

The minutes included several references to “downside risks” to the economy. However, the meeting was held before data releases on jobs and inflation early in February that crushed estimates. The takeaway is that they seem ready to raise rates “fairly soon”.

The next policy meeting is March 14-15, and the more likely chance for a rate hike is the policy meeting in June. Still, the Fed is holding to the idea of 3 rate hikes for 2017, so March is on the table.

The National Association of Realtors reports existing home sales jumped 3.3% in January to a seasonally adjusted annual rate of 5.69 million.  January’s sales pace is 3.8 percent higher than a year ago. The median existing-home price for all housing types in January was $228,900, up 7.1 percent from January 2016 and marks the 59^th consecutive month of year-over-year gains.

Total housing inventory at the end of January rose 2.4 percent to 1.69 million existing homes available for sale, but is still 7.1 percent lower than a year ago, and has fallen year-over-year for 20 straight months. And of course, tight inventory combined with higher mortgage rates, means less affordable housing.

Not surprising that lower-price, or starter homes were a sweet spot for buyers. First time buyers rose slightly to 33% of sales in January. For Phoenix, the median listing price was $307,000. And the average time on market was 66 days. Compared to an average of 50 days nationally.

The US has approximately 200,000 unfilled construction jobs, which represents an 81% increase over the last two years, according to estimates from the National Association of Homebuilders. Home-builders like Lennar and Toll Brothers have cited a shortage in construction workers as a major reason they’ve had to slow down home construction.

Toll Brothers reported quarterly profit of 42 cents per share, 7 cents above estimates, while the luxury homebuilder’s revenue beat forecasts by a wide margin. However, overall profit was down 3.8 percent from a year ago, impacted by lower average selling prices.

Shares of Fannie Mae and Freddie Mac plunged by more than 30 percent on Tuesday following a ruling by a US appeals court dismissing hedge funds’ claims that the government seized Fannie’s and Freddie’s profits after their taxpayer bailout.

Fannie and Freddie went into conservator-ship during the 2008 financial crisis, receiving a nearly $188 billion bailout from the federal government. In return, Fannie and Freddie were required to pay a 10 percent dividend to the government. In 2012, the terms of the bailout were amended — the Third Amendment — forcing Fannie and Freddie to forward all their profits to the U.S. Treasury.

On Friday, Fannie and Freddie announced they were sending a combined $10 million in dividends to the U.S. Treasury. Fannie reported a $5 billion profit for the fourth quarter, while Freddie reported a $4.8 billion fourth-quarter profit. Because Fannie and Freddie’s profits have been going to the government, there was nothing left for the investors, who cried foul.

OPEC and Russia will need to prolong their production-cut deal in order to trim the global inventory that is keeping a lid on prices. ABN Amro Bank warned that crude prices could plunge towards $30 a barrel if the cuts are not extended beyond the first half of this year.

Saudi Aramco names 3 underwriters for its IPO. JPMorgan Chase & Co, Morgan Stanley, and HSBC have been selected as the lead underwriters for what is expected to be the world’s largest initial public offering of all time.

Facebook is in discussions with Major League Baseball to air one game a week. Social networks believe their platforms are a “second screen” that sports fans rely on while watching games, and are eager to test the popularity of combining the viewing of video and the commentary that takes place on social networks into a single feed.

Lloyds reported its highest annual profit in a decade, helped by a reduction in payment protection insurance provisions. Pre-tax profits increased by 158%, a level last seen in 2006 before the financial crisis. The UK government’s stake in Lloyds has also fallen below 5% and it wants to return the bank to full private ownership sometime in May.

First Solar  beat fourth-quarter estimates by 27 cents with adjusted quarterly profit of $1.24 per share, and the solar company’s revenue also beat estimates; even as sales fell to $480 million in the quarter from $942 million a year ago. Tempe-based First Solar also tweaked higher its expectations for 2017 sales to between $2.8 billion and $2.9 billion.

First Solar said the more than 300-megawatt Tribal Solar project, which was planned for the Fort Mojave Indian Reservation in Arizona, would not be built. The company’s contract to sell the power to California utility Southern California Edison was canceled. Executives described the cancellation as a one-time event due to the unique concerns of the Fort Mojave Indian Tribe and said the company had several opportunities to offset the impact of the cancellation, including new business in Japan.

Verizon Communications says it will offer its high-speed wireless 5G network to certain customers in 11 U.S. cities in the first half of 2017. Verizon will begin pilot testing 5G “pre-commercial services” in cities, including Atlanta, Dallas, Denver, Houston, Miami, Seattle and Washington, D.C. – Phoenix is not on that list.

New 5G networks are expected to provide speeds at least 10 times and up to maybe 100 times faster than today’s 4G networks, with the potential to connect at least 100 billion devices with download speeds that can reach 10 gigabits per second.

That got me thinking about how the US compares with other countries for internet speed on mobile devices, and the results are not good. South Korea has the fastest mobile internet speeds, followed by Norway and Hungary. The US ranked 36^th on the list, just a bit slower than Romania and Slovenia.

In a big win for rural delivery, UPS just tested a delivery drone on a farm outside of Tampa, Florida, with the Unmanned Aerial Vehicle, or UAV, returning to the roof of the truck. The big feat? The vehicle already moved 2,000 feet down the road. UPS says the “Drones won’t replace our uniformed service providers,” just provide extra assistance. The company also announced it would roll out Saturday ground delivery starting in April.

If you were planning to make a purchase from Amazon.com, today might be good. For today only, Amazon is offering $8.62 off orders of $50 or more. To take advantage of the discount, just enter the promo code “BIGTHANKS” when you check out.

A discount of $8.62 might seem super random, but Amazon has a good reason for that seemingly arbitrary figure. The company ranked No. 1 in the annual Harris Corporate Reputation Poll, earning a score of 86.27 percent, so it’s offering the discount as a thank you to customers.

Watch your mailbox, early-bird filers: Your tax refund should be arriving soon.  So far, the IRS has distributed more than 14 million refunds as of the week ending Feb. 10. The average amount has been $2,058. Both figures are expected to rise as the agency processes more returns.

However, if you will owe tax this year, well…, the current Powerball jackpot is worth $403 million. If you choose the lump sum option, the cash payout is $243.9 million, minus taxes of course.

Financial Review

Summer Stall

Sinclair Noe — August 4, 2015

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

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DOW – 47 = 17,550
SPX – 4 = 2093
NAS – 9 = 5105
10 YR YLD + .06 = 2.21%
OIL + .80 = 45.97
GOLD + 1.40 = 1088.50
SILV + .08 = 14.68

Corelogic reports home prices rose 1.7% in June, and nationwide home prices including distressed sales, increased by 6.5% over the past 12 months. Fifteen states and the District of Columbia were the strongest since the series began in 1976. Only four states – Massachusetts, Connecticut, Louisiana and Mississippi – saw year-over-year declines.

Orders for goods produced in US factories rose 1.8% in June. Orders for durable goods, products meant to last at least three years, advanced 3.4% in June. Orders for nondurable goods edged up 0.4%.Factory activity has been stymied by a strong dollar and spending cuts in the energy sector after last year’s sharp plunge in crude oil prices. Tepid global demand also has weighed on manufacturing, which accounts for about 12 percent of the domestic economy.

Greece expects to wrap up its bailout deal with international creditors by Aug. 18, with the drafting of the agreement to begin Wednesday. The ongoing talks are reaching the end of the first phase, with the second phase to include the details of the final deal. The Greek stock market reopened yesterday, after being shut down for 5 weeks; yesterday the Athens Stock Exchange index closed down 16%.

Puerto Rico is in default. On Monday, the commonwealth paid just $628,000 of the $58 million it owed creditors, triggering the largest municipal default in US history. By a quirk of law, Puerto Rico is not allowed to seek protection through the bankruptcy courts, like we saw when Detroit failed to pay its debt. At the same time, it is unable to draw on support from the International Monetary Fund since it is not a sovereign country.

A group of 34 hedge funds is calling on Puerto Rico to shut down schools, saying it spends far too much money on education. Congress may help the territory through the passage of a bankruptcy bill, although that effort has faced opposition. The island has also floated the idea that the Treasury Department could guarantee its debt when it seeks to borrow in the market again – helping to lower the cost significantly.

A Pimco ETF that once tracked the performance of a much larger fund formerly managed by Bill Gross, may have violated federal securities laws. Pimco has disclosed that the SEC is considering filing an enforcement action over potential trading infractions that took place in the Total Return Fund. The fund may have improperly valued small stakes in non-agency Mortgage Backed Securities, leading to inaccurate disclosures about performance.

Investors pulled $2.5 billion from Pimco’s flagship fund in July, the 27th consecutive month of outflows from what used to be the world’s largest mutual fund. The July withdrawals from the Pimco Total Return Fund compare with $3 billion in redemptions in June, and $2.7 billion in May. The fund’s assets have plunged to $101 billion, from a high of $293 billion in April 2013. And the reason is probably not related to the SEC investigation, although that won’t help. Investors took out record amounts of money amid concerns about lackluster returns and rising interest rates; the whole bond sector has been weak and even though Pimco’s Total Return outperformed 93% of its peers, it still only managed to return 1.6% this year.

But there has been even more pain in the commodity sector. Since oil hit $107 a barrel last summer, energy companies have lost $1.3 trillion in valuation. State pension funds and insurance companies have also been hard hit. Investment advisers, who manage the mutual funds and exchange-traded products that are staples of many retirement plans, had $1.8 trillion tied to energy stocks in June 2014.

China represents a major source of commodity demand and China’s business cycle has been slowing. Meanwhile, the strong dollar exacerbates the declines in commodities, a trend that might continue if the Fed raises interest rate targets later this year.

China has unveiled more rules that make it harder for speculators to profit from hourly changes in stock prices. Under the new guidelines, short sellers must wait at least one day to cover their positions and repay loans used to buy shares. Chinese markets are up on the news. Shanghai +3.7%; Shenzhen +4.5%; Chinext +6.1%.

The DOJ is investigating billions of dollars’ worth of mirror trades made by Deutsche Bank on behalf of its Russian clients to move funds quietly out of the country, in violation of sanctions. Deutsche’s Russian clients bought stocks in rubles in Moscow, and then made simultaneous stock purchases in London in an attempt to launder money. The new inquiry adds to the wave of legal woes challenging the institution, which has been battered by multiple criminal investigations and resignations of top executives.

Shire Plc made an unsolicited offer to buy Baxalta for about $30 billion in stock to create a biotech company focused on rare diseases.  Baxalta was spun off by Baxter International last month. Shire said it hadn’t discussed the proposal with Baxter. Baxalta, based in Deerfield, Illinois, would benefit from a lower tax rate by being taken over by a U.K. company.

Microsoft now holds $108 billion offshore, a 17 percent increase over the past year. Microsoft crossed the $100 billion mark, making it just the second U.S. corporation, along with General Electric, to do so. Apple has more cash abroad than Microsoft, but it already has assumed for accounting purposes that it will pay tax on some of the stockpile and thus has less than $70 billion offshore that would affect earnings directly if repatriated.

Community Health  is planning to spin off 38 hospitals as well as its consulting unit into a separate company called Quorum Health. Community Health is the second largest publicly traded hospital operator in the U.S.

Apple’s stock dropped to a six-month low today, representing a 12% drop from February highs. Apple has traded lower for 10 of the past 11 sessions. Yesterday, Apple closed below its 200-day moving average, which many view as a dividing line between longer-term uptrends and downtrends. Today, the shares dropped 3.2% on the heaviest volume since January.

So, for now this looks like a technical correction for Apple. And there might not be a fundamental reason to lift Apple out of its slump. With 74.5 million iPhones sold in the December quarter and the iPhone so important to earnings, the worry is it will get tough for them to post year-over-year growth

AIG reported adjusted earnings that beat estimates by 17 cents; more than doubled its quarterly dividend; and announced a $5 billion addition to its stock buyback program. AIG’s results were aided by new investments in China.

Toyota reported record earnings, helped by lower expenses and currency gains. The Japanese automaker sales growth continued to be held back by a self-imposed production slowdown aimed at preventing quality problems.

Aetna’s second-quarter earnings jumped 33 percent and the health insurer raised its 2015 forecast again. Aetna gained members in both its Medicare and Medicaid businesses, and higher underwriting margins or improved profitability helped balance a jump in operating costs during the quarter. The nation’s third-largest health insurer easily topped Wall Street expectations.

Allstate was the biggest decliner in the S&P 500. The insurance company dropped 11.9 percent after reporting earnings that fell significantly short of analysts’ expectations. The company said its earnings dropped because of more frequent and more severe auto accidents.

After the close, Dow component Disney reported earnings rose a better-than-expected 11%, boosted in part because of the success of Marvel’s “Avengers: Age of Ultron” as well as the continued popularity of merchandise related to the “Frozen” film. Disney is up nearly 30 percent this year, and hit a new high this morning, but dropped about 1% in after-hours trade.

Arts and crafts site, Etsy said it had a net loss of $6.4 million, or 7 cents per share, wider than the loss of $3.2 million, or 8 cents per share, posted in the year-earlier period. Etsy dropped 13% in after-hours trade.

First Solar reported second-quarter earnings of $95 million, or 93 cents a share, compared with earnings of 4 cents a share a year ago. Revenue hit $896 million in the quarter, compared with $544 million a year ago. First Solar rallied 12% in after-hours trade.

A California company has produced a prototype car using 3-D printing technology. The 3D printed chassis is only 102 pounds and has the same strength and safety protection as a frame made out of steel. The car runs on natural gas powering a 700 horse power engine. They hope to have it on the road next year.

Last month, an Arizona company – Local Motors – announced plans for a 3D printed electric car; they also hope to go into production next year.

The Food and Drug Administration has approved the first prescription drug made through 3-D printing: a dissolvable tablet that treats seizures. Aprecia Pharmaceuticals said the FDA approved its drug Spritam for adults and children who suffer from certain types of seizures caused by epilepsy. The tablet is manufactured through a layered process using 3-D printing and dissolves when taken with liquid.

The lineup for the first 2016 Republican presidential debate was unveiled today. Actually there will be two debates on Thursday. The first debate. The first debate will be at 2PM Arizona time; it will feature candidates that didn’t make the cut, including: Rick Perry, Rick Santorum, Bobby Jindal, Carly Fiorina, Lindsey Graham, George Pataki, and Jim Gilmore. The main event will be at 6PM and it will feature the higher rated candidates, including: Donald Trump, Jeb Bush, Scott Walker, Mike Huckabee, Ben Carson, Ted Cruz, Marco Rubio, Rand Paul, Chris Christie, and John Kasich. In that order.

Financial Review

Goodnight and Good Luck

Sinclair Noe — February 11, 2015  

 

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

DOW – 6 = 17,862
SPX – .06 = 2068
NAS + 13 = 4801
10 YR YLD un = 1.98%
OIL – .75 = 49.27

President Obama has asked Congress for formal authorization to fight the Islamic State that would prohibit the use of “enduring offensive ground forces” and limit engagement to three years. The proposed resolution says Islamic State “has committed despicable acts of violence and mass execution.” Its militants have killed thousands of civilians while seizing territory in Iraq and Syria in an attempt to establish a hub of jihadism in the heart of the Arab world. Don’t expect a quick vote by Congress, maybe something in March, maybe just more talk.

We keep hearing that ISIS is growing, and one way they recruit jihadists to their cause is through slick websites and social media. So, you might be wondering why the government doesn’t just close down those sites. I don’t know, but today, the hacktivist group Anonymous has launched a massive cyber-attack against ISIS. A list of more than hundred Twitter and Facebook accounts suspected to belong to Islamic militants has been released by Anonymous. Twitter has already suspended more than 1500 ISIS accounts since the group released the first list in June, 2014 and dozens of militant recruiting websites were knocked offline using collective DDoS Attack. Thousands of Twitter accounts associated with ISIS are still active and spreading jihadist propaganda, but Anonymous says this is just the beginning.

The federal government ran a bigger deficit in January, pushing the imbalance so far this budget year up 6.2% from the same period a year ago.  The Treasury Department said the deficit for January stood at $17 billion compared to $10 billion a year ago.

Home prices moved higher across most of the country. According to the National Association of Realtors, the median price of an existing single-family home rose in the 4^th quarter from a year earlier in 86% of the 175 metropolitan areas measured. Twenty-four areas had price gains of 10% or more, up from 16 regions in the third quarter. Prices declined in 24 areas. The median was $208,700, up 6% from the fourth quarter of 2013. NAR reports Phoenix home prices increased 3.9% over the past year to a median price just over $200,000.

Finance ministers from across the Eurozone have gathered in Brussels today to try to figure out what to do about Greece. The newly elected Greek government is looking for relief from austerity measures. Those restrictions were a condition of Greece’s being granted a total of 240 billion euros, or about $272 billion, in loans from its European neighbors and the International Monetary Fund since 2010. Greece still needs to receive its next loan installment, €7.2 billion, or otherwise bridge the financial gap, to keep from defaulting on its international debt payments in coming months.

Reckless lending and reckless borrowing went hand in hand in the years leading up to the euro crisis. Greek officials did indeed use financial tricks developed by Wall Street to mask the size of budget deficits. Still, even before Greece joined the eurozone, it was clearly living far beyond its means. International lenders knew or should have known this; they were not defrauded so much as willfully blind.  The bailout of Greece was not a rescue of the country, but rather a rescue of the creditors; it was a bank bailout. The Greek government only received 11% of the bailout money to date; the rest went to creditors, or who knows where.

Greece now has more debt than it can ever repay, and lenders share some of the blame for this.  Spending cuts have only resulted in destroying the economy. The Greeks understand; that’s why they voted for Syriza; that’s why there are tens of thousands of Greeks protesting in the streets of Athens today. Unlike many countries, the protestors are not protesting against their government, they are protesting for their government to fight against the creditors. At some point the Euro Union will have to let Greece out of debtors’ prison. At a certain point you have to stop squeezing countries that are in the depths of a depression. And ultimately, some form of forgiveness benefits creditors as much as it helps debtors. Greece is well past the point where debt forgiveness could be considered reward for bad behavior.

By the way, the finance minister for Greece, Yannis Varoufakis, considered by some to be a bit radical, but also well known for research in game theory. So, how about a little game of chicken? Good luck.

Ten U.S. states have sent a letter to Anthem complaining that the company has been too slow in alerting clients that they were victims of a massive data breach disclosed last week and claiming the health insurer should commit to reimbursing customers for losses during the lag time.

The FBI is examining how fraudulent tax returns were filed in 19 states through Intuit’s tax-preparation software TurboTax and whether a computer data breach allowed access to personal information. Intuit halted e-filings of state returns last Friday after spotting criminal attempts to get refunds through its systems, but resumed filing after steps were taken to combat the activity.

A federal judge has approved the IRS issuing summonses requiring certain companies to hand over information about US taxpayers who used Sovereign Management and Legal for offshore accounts. The companies include FedEx, DHL, UPS, Western Union, The Federal Reserve Bank of New York, and HSBC. This could get interesting.

Apple has plenty of cash on the books, but they want more; so, they’re issuing Swiss bonds. For Apple, the lure of issuing in Swiss francs is clear: Swiss government yields are negative as far out as 2027, with its 10-year government bond yielding negative 0.09%. Apple’s strong brand and high credit ratings—Aa1 from Moody’s Investors Service and AA+ from Standard & Poor’s—should make it an attractive proposition for yield-starved investors who have Swiss currency to put to work. That will make any funding ultracheap.

What will Apple do with the extra cash? Activist investor Carl Icahn has a suggestion: more dividend dollars and a few less Apple shares. This is a common theme on Wall Street; according to the Academic-Industry Research Network. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54% of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4% of GDP, to prop up their share prices by repurchasing their own stock. Last year’s buybacks were about 3.3% of market capitalization. Since 2004, stock buybacks totaled $6.9 trillion, and that must surely skew our understanding of earnings.

Apple, which began playing with a record valuation of $700B during midday trading in November, ended the day yesterday at $710 billion. The landmark comes just two weeks after Apple posted the largest quarterly net income of any public company in history. Apple will also be launching a new energy project, partnering with First Solar on an $850M solar farm in California.
The deal will supply enough electricity to power all of Apple’s California stores, offices, headquarters and a data center. Apple will get 130 megawatts, enough to power 60,000 California homes. It’s the biggest-ever solar procurement deal for a company that isn’t a utility, and it nearly triples Apple’s stake in solar.

But it’s not the biggest solar project in California, not by a long shot.

Nearly 4,000 acres of desert near Desert Center California have been converted into a massive solar farm. The Desert Sunlight Solar Farm has been running since December and it was officially dedicated on Monday. The 550-megawatt farm is the largest on public lands managed by the federal Bureau of Land Management. It will provide enough energy to power more than 160,000 average California homes annually. Desert Sunlight was developed by First Solar of Tempe.

First Solar received $1.46 billion from the U.S. Department of Energy, a partial loan guarantee funded by a group of private investors, to finance the project. Pacific Gas & Electric Company and Southern California Edison already have agreed to purchase power from Desert Sunlight for the next two decades.
Before 2009 no solar projects had been permitted on public land. Today, there are 29 permitted commercial-scale solar projects throughout the Southwest. Desert Sunlight is the sixth solar project to come online, and eight more are under construction.

Desert Sunlight is the world’s largest solar power plant, but just slightly. The Topaz solar project in San Luis Obispo County, Calif. — which, like Desert Sunlight, was built by Arizona-based First Solar — also has a capacity of 550 megawatts. But the desert has more abundant sunlight than San Luis Obispo County, so Desert Sunlight will actually generate more electricity than Topaz.

It’s an open question, though, whether future solar projects will be anywhere near as big as Desert Sunlight. Developers have been gravitating toward smaller solar farms, which are easier to build and usually have a smaller environmental impact.

One major obstacle for solar development has been the looming expiration of a 30% federal investment tax credit, which is scheduled to fall to 10% at the end of 2016. Another challenge for solar energy developers is that California and other states are already on track to meet increased requirements for renewable energy generation. But the outlook may be more positive after Gov. Jerry Brown in his inaugural speech last month called for half of the state’s power to come from renewable sources by 2030, up from the previous goal of 33% by 2020.

And finally, the Powerball lottery is up to almost $500 million, making it one of the top payouts ever. Actually, the cash payout would be about $370 million, and then you would have to cut taxes out of that. Still, you would be left with a healthy sum. Playing the lottery is a long shot, and it really doesn’t make much sense. But if you are going to play, might as well play when the payout is big. And for a couple of bucks, you can enjoy your own personal fantasy of how you might spend those millions; that’s got to be worth something. Your odds are 175-million to one. If you buy 2 tickets, each ticket will still be 175-million to one odds. It’s a bad bet. Good Luck.