Financial Review

DeFAANG

Sinclair Noe — July 27, 2017

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DOW + 85 = 21,796
SPX – 2 = 2475
NAS – 40 = 6382
RUT – 8 = 1433
10 Y + .03 = 2.31%
OIL + .08 = 49.12
GOLD – 1.50 = 1259.60
BITCOIN + 0.73% = 2717.16 USD
ETHEREUM – 0.07% = 204.20

The major stock indexes moved to all-time intraday highs, only the Dow held on for a record close. The Dow Jones transportation Average dropped to its lowest level in nearly two months, with UPS offering a weak outlook and FedEx falling in tandem. Volume was heavy today.

The Nasdaq Composite and the Nasdaq 100 or QQQ just fell off a cliff around midday. With a higher high and a lower low than yesterday, we have an outside reversal, a strong bearish move – but it isn’t necessarily conclusive.

Tech has been leading the markets, and now the FAANG stocks have all reported earnings; so, it might be nothing more than buy the rumor, sell the news. A JPMorgan derivatives strategist thinks it might be more; claims low volatility has led to more leverage; recommends buying S&P 500 puts as a kind of portfolio insurance. For anybody old enough to remember 1987, portfolio insurance has nasty connotations.

A milestone was passed this week when one-month Treasury bill rates rose above 1 percent for the first time since 2008. That may not seem like much until you consider that the rate averaged a paltry 0.07 percent between 2008 and 2016.

With nearly half the S&P 500 having reported, second-quarter earnings are expected to have climbed 10.7 percent, compared to an 8-percent rise expected at the start of the month.

Amazon is the world’s biggest online retailer but they don’t earn much profit. Net income fell to $197 million, or 40 cents per share, in the second quarter, from $857 million, or $1.78 per share, a year earlier. Net sales rose 24.8 percent to $37.96 billion. Instead of booking profit, Amazon plows the money back into the business.

Amazon has stepped up spending to expand globally, to build warehouses and on new areas. The company also plans to create more than 130,000 full-time and part-time jobs by mid-2018 to speed up delivery. And they are in the process of buying Whole Foods Market.

Amazon Web Services public cloud generated $916 million in operating income on $4.10 billion in revenue in the second quarter of this year. The results and forecast show the world’s biggest online retailer is preparing for stepped up competition from Wal-Mart, and cloud-computing challengers Microsoft and Alphabet.

Spending is always a concern with Amazon, but investors eventually give Amazon a pass because Amazon invests in growth opportunities. Amazon shares dropped about 2% in after-hours trade, but still hanging in above $1,000, with market cap right at $500 billion.

For a while today, Amazon shares were up, and Jeff Bezos was the richest man in the world for a while, at $92.3 billion –  briefly passing Bill Gates at $90.8 billion. Bezos holds about 17% of Amazon, and Amazon has grown to be the 1800-pound gorilla of online retail. Gates and his colleagues at Microsoft can tell Bezos a thing or two about how an antitrust probe or two can slow progress down and consume years and millions of dollars in resources.

Intel, the world’s largest chipmaker, reported a 9.1 percent rise in quarterly revenue, helped by strength in its data center and personal computer businesses. Net income for the quarter rose to $2.8 billion, or 58 cents per share, from $1.3 billion, or 27 cents per share, a year earlier. Revenue rose to $14.7 billion from $12.5 billion.

In 144 characters or less: Twitter 2Q net loss widens. Revenue down. Flat user growth. Guidance lower. Shares down 14%.

Starbucks reported quarterly profit that matched analysts’ estimates, tempered expectations for the current quarter and said it would close all 379 of its Teavana stores. Net income fell to $691 million, or 47 cents per share, down from $754 million, or 51 cents per share, a year ago. Same cafe sales rose 5% in the quarter.

Electronics manufacturing giant Foxconn unveiled plans to build a massive factory in Wisconsin to make flat-screen displays. Foxconn plans to invest $10 billion in Wisconsin. Wisconsin will invest $3 billion in Foxconn in tax breaks, to be passed and provided by the state government.

Those kinds of tax incentives can get a manufacturer to plant a factory in a given location—but generally at a significant cost to the state budget, and without doing much to help the economy overall.

The company said it planned to hire 3,000 workers over four years, whereas the state said the new facility would create 13,000 jobs with an average salary of nearly $54,000, along with 10,000 temporary construction gigs and an eventual 22,000 “indirect and induced jobs,” from firms supplying goods and services to Foxconn and its workers. (To give a sense of scale, Wisconsin currently has around 472,000 manufacturing workers.)

Wisconsin reported beat out six states in a hush-hush bidding war to attract the plant. Whether it is 3,000 jobs or 13,000, the state is spending a lot to win Foxconn’s investment. The Washington Post estimates that the breaks could cost the state as much as $230,700 per job created.

To its credit, Wisconsin has tied its breaks to the number of jobs that Foxconn creates and has vowed to claw back money if “the jobs and investment are not kept in Wisconsin.” And as of now, nothing has been built. Foxconn made a splashy and lavishly praised promise to build a new, high-tech factory in central Pennsylvania a few years ago. It never followed through.

Shipments of key U.S.-made capital goods increased in June for a fifth straight month, suggesting that business spending on equipment helped to boost economic growth in the second quarter. The increase in equipment spending has mostly been driven by the energy sector, where oil and gas drilling has increased significantly.

The trade deficit narrowed in June. The bullish reports came on the eve of the government’s advance second-quarter gross domestic product estimate due out tomorrow. The economy grew at a 1.4 percent pace in the first quarter. Estimates for second quarter GDP are running from around 2.5% to as high as 3.5%

Senate Republicans have tried to repeal and replace Obamacare. That failed. Then they tried repeal only. That failed. Now they are trying to repeal bits and pieces, including the mandate that Americans must obtain health insurance or face a fine, as well as a partial repeal of the mandate that employers with more than 50 employees provide healthcare coverage.

A vote is expected later tonight. That would not repeal the entire Affordable Care Act but it would effectively kill it in slow motion. There was also discussion about abolishing a tax on medical device manufacturers, but it was unclear whether that provision would be included. If all or part of the so-called skinny repeal is approved, it would set up a committee of House and Senate lawmakers to meld the two competing versions into a single comprehensive bill that would be wider in scope than the skinny bill.

The skinny repeal would be a nightmare for insurance companies. Making the purchase of coverage compulsory is meant to distribute risk evenly among healthy and sick people and keep overall costs down. But many people, especially, younger and healthy people opt for the less expensive fine instead. Insurers have taken notice.

Many have raised premiums or pulled out of certain markets as healthier people decide to forgo coverage. They warn that overturning the mandate will only create more instability and result in even higher premiums. According to the Congressional Budget Office, a skinny repeal would still leave somewhere close to 16 million more people uninsured over a decade and increase premiums immediately.

Financial Review

Year of the Rooster

Sinclair Noe — January 23, 2017

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Financial Review by Sinclair Noe for 01-23-2017
DOW – 27 = 19,799
SPX – 6 = 2265
NAS – 2 = 5552
RUT – 4 = 1347
10 Y – .06 = 2.40%
OIL – .35 = 52.87
GOLD + 7.40 = 1217.40

President Trump is expected to sign an executive order as early as today – intended to renegotiate NAFTA, the free trade agreement between the United States, Canada and Mexico. Trump also signed an executive order pulling out of the Trans-Pacific Partnership (TPP).

In one of first Trump administration orders, the Department of Housing & Urban Development suspended reduction of FHA annual mortgage insurance premium rates. That was a quarter of a percent cut in the mortgage insurance premium for FHA loan holders, announced last week by the U.S. Department of Housing and Urban Development and set to go into effect next Friday, January 27. The reduction was estimated to save the average FHA borrower $500 this year.

The new White House rolled out several policy promises on its new website. The position page on jobs and the economy reads: “To get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 percent annual economic growth.”

So, now we have a baseline, even if it is improbable.

A group including former White House ethics attorneys filed a lawsuit today accusing President Donald Trump of allowing his businesses to accept payments from foreign governments, in violation of the U.S. Constitution. The lawsuit, brought by the Citizens for Responsibility and Ethics in Washington, alleges that the Constitution’s emoluments clause forbids payments to Trump’s businesses. It will seek a court order forbidding Trump from accepting such payments.

President Trump held meetings this morning with business and labor leaders, seeking to work quickly on his campaign promise to boost the American manufacturing sector and deliver more jobs. Trump repeated a campaign promise to cut regulations by at least 75%. He also said there would be advantages to companies to make their products in the US, suggesting there will be a substantial border tax on foreign goods entering the US. This afternoon he meets with labor leaders and U.S. workers.

Foxconn Technology Group is considering building a display-panel manufacturing facility in the United States in a joint venture with Apple that could create up to 50,000 jobs. Terry Gou, Taiwan-based Foxconn’s chairman and CEO, said the facility could cost $7 billion and create between 30,000 and 50,000 new jobs, and could include the production of TV screens in addition to smartphone displays. The U.S. has no TV-display factories, even though it is the world’s second-largest TV market.

Supermarket operator Kroger says it will fill 10,000 permanent positions in its supermarket divisions. Kroger, which had about 431,000 full- and part-time employees as the New Year, also said its total active workforce grew by more than 12,000 in 2016.

On the eve of a summit last month between technology executives and then President-elect Donald Trump, IBM Chief Executive Officer Ginni Rometty publicly pledged to hire about 25,000 U.S. workers and spend $1 billion on training over the next four years.

In late November, IBM
completed at least its third round of firings in 2016, according to former and current employees. They don’t know how many people have lost their jobs but say it’s probably in the thousands, with many of the positions shipped to Asia and Eastern Europe.

Rometty’s hiring pledge prompted current and former IBM workers to vent on message boards and Facebook groups. IBM’s re-organization inevitably meant some workers would lose their jobs. Automation wiped out some positions, and at the same time, IBM has sent thousands of jobs offshore.

This will be another busy week for earnings reports; later in the week we’ll hear from Alphabet and Microsoft. Intel is also set to report, along with telecom and media giants Verizon, AT&T, and Comcast. 3M, Caterpillar, Boeing, and Ford will give us a snapshot of the manufacturing and industrial sectors.

We’ll also see earnings from pharmaceutical companies like Johnson & Johnson and Biogen and oil giant Chevron. The major data release in the week is the advanced reading of fourth-quarter GDP. There is also some housing data, durable goods orders, and a look at consumer sentiment.

Yahoo reported earnings after the closing bell that beat estimates but the earnings are secondary. Verizon has agreed to pay $4.8 billion for Yahoo, and the factor that could change that price is not financial results but hacks – and who knew what and when. Yahoo said today the closing would be delayed until the second quarter, or as soon as practicable.

The SEC is investigating whether two massive data breaches at Yahoo should have been reported sooner to investors. Yahoo faces questions about exactly when it knew about a 2014 cyber-attack it announced in September that exposed the email credentials of half a billion accounts. In December, Yahoo said it had uncovered yet another massive cyber-attack, saying data from more than 1 billion user accounts was compromised in August 2013. Securities industry rules require companies to disclose cyber breaches to investors.

McDonald’s posted better-than-expected global same-store sales in the latest quarter, but its results in the U.S. declined as enthusiasm for its all-day breakfast options leveled off. For the quarter that ended in December, the burger chain’s global comparable sales increased 2.7%, well estimates. In the U.S., comparable sales fell 1.3%; the company blamed a challenging comparison to the prior-year launch of its all-day breakfast service.

Halliburton reported mixed fourth quarter fiscal 2016 earnings results. Despite a miss on the top line, which continue to suffer from weak demand, Halliburton’s overall results point to improvements in North America — its largest revenue region.

OPEC’s production fell by about 221,000 barrels a day to just over 33 million a day in December, per secondary sources data in the group’s monthly report published Jan. 18. The declines still leave output about 1.8 million barrels a day higher than the average of 31.3 million the group is targeting in the first half of the year, underscoring a need to press on with cuts. Saudi Arabia’s Minister of Energy said the first two weeks of January saw “very strong” compliance and most producers are already exceeding their pledged cuts.

The mega-merger between health insurers Aetna and Humana has been blocked by a federal judge. The deal, in which Aetna proposed to buy Humana for $37 billion, has been ruled anti-competitive. Aetna now owes Humana a $1 billion break-up fee, according to Bloomberg. Last summer, Aetna threatened to pull out of the Affordable Care Act exchanges, after the Department of Justice brought a lawsuit to block the merger.

Reuters last week reported that another healthcare tie-up, the Anthem-Cigna mega-merger, would be blocked by a federal judge.  Former Attorney General Loretta Lynch argued in July when the suit was brought that both the Anthem-Cigna and Aetna-Humana mergers would hurt consumer choice and increase prices.

The City of Everett Washington has file suit against Purdue Pharma, alleging the drug manufacturer turned a blind eye to criminal trafficking of its OxyContin painkillers to “reap large and obscene profits” and demanding it foot the bill for widespread opioid addiction in the community.

In a first-of-its-kind lawsuit, city lawyers accused Purdue of gross negligence, creating a public nuisance and other misconduct and said the company should pay costs of handling the opioid crisis — a figure that the mayor said could run tens of millions of dollars — as well as punitive damages.

A computer problem forced United Airlines to ground all domestic flights for about an hour on Sunday evening, causing a cascade of delays and annoying customers throughout the United States. The “ground halt” was lifted after about one hour.

Cyber-attacks against banks have increased in numbers and sophistication in recent years, with criminals finding new ways to target banks. Last February $81 million was taken from the Bangladesh central bank when hackers broke into its system and gained access to the SWIFT international transactions network. The European Union is considering testing banks’ defenses against cyber-attacks, with an EU wide stress test.

Its lead may have narrowed over the past year, but South Korea still reigns supreme on Bloomberg’s Innovation Index, which ranks the world’s economies using metrics such as R&D spending and the concentration of high-tech public companies.

Hong Kong is the most expensive city in the world to live in. That’s according to the 13th Annual Demographia International Housing Affordability Survey, which says that Hong Kong’s housing market is the least affordable in the world.

All around the world, Chinese people are cleaning their houses, shopping for new clothes, and following several traditions leading up to and during the New Year to help usher in good luck and fortune. Roughly a sixth of the world will observe Chinese New Year. Starting January 28, celebrations to welcome in the year of the rooster will continue through February 2. This week also marks the world’s largest annual mass migration as millions of Chinese people travel back to their family homes for reunions ahead of the New Year celebrations.

Today also marks the start of tax filing season. Your taxes aren’t due until April 18^th this year, but you can start filing as of today.

And for those of you still trying to cling to your New Year Resolutions, be warned – today marks the start of Girl Scout Cookie season and it also marks the 100th anniversary of Girl Scout cookie sales. I could tell you to just say no, but that wouldn’t work.

Financial Review

Two Days!

Sinclair Noe — May 25, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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