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

Break Down

Sinclair Noe — November 1, 2016

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

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DOW – 105 = 18,037
SPX – 14 = 2111
NAS – 35 = 5153
10 Y – .02 = 1.84%
OIL – .53 = 46.33
GOLD + 10.80 = 1288.80

Stocks started the session in positive territory but slippage was immediate; slow at first then picking up momentum. The Dow Industrial Average dropped below 18,000 for the fourth time since September 12, at one point posting a 200-point loss.

The S&P 500 took out the lows of September at the 2120 level. We had talked about 2020 being a level of support, which has now been broken. The next levels of support are 2080 (representing the 200-day moving average) and 2040 (representing lows from April and May). The point here is that today’s trading did some serious technical damage; the other point is to remind you to keep an eye on the charts; they are very effective at cutting through the chatter and the clutter.

The Fed began its 2-day FOMC meeting.  Treasury yields climbed early toward the highest since May on speculation the Federal Reserve will raise interest rates this year as the global economy improves. The Atlanta Federal Reserve’s GDP Now forecast model shows the economy is on track to grow at a 2.3 percent annualized pace in the fourth quarter; that is a downward revision from just yesterday, when the GDP Now forecast was for 2.7 percent fourth quarter growth.

Investors will be scouring the accompanying statement for clues on how determined the Fed is to raise rates in December. As things stand, the markets are taking policymakers such as Bill Dudley of the New York Fed at their word when they say a move is likely before the year is out if growth stays on track. Fed funds futures data compiled by Bloomberg shows the market is pricing in a 16% chance of a November interest-rate hike and a 71% chance of a rate hike before the end of the year.

The Bank of Japan kept policy on hold. Japan’s central bank voted 7-2 to keep its key interest rate at negative -0.1%, and target for the 10-year Japanese bond yield at 0%, warning that risks to growth and inflation were “skewed to the downside.”

Australia’s central bank held rates steady at 1.50%, as expected, and said “the Bank’s forecasts for output growth and inflation are little changed from those of three months ago.”

American manufacturers grew slightly faster in October and even put more people to work for the first in four months. The Institute for Supply Management said its manufacturing index rose to 51.9%, the highest in three months, from 51.5% in September. Readings over 50% indicate more companies are expanding instead of shrinking.

A measure of factory employment jumped 3.2 percentage points to a reading of 52.9. But a gauge of new orders slipped to a reading of 52.1 from 55.1 in September, suggesting any future gains in manufacturing activity would be modest.

The Affordable Care Act Open Enrollment starts today. Arizonans will find in most counties only one insurer selling exchange plans for 2017. Premiums for some plans will be more than double this year, some of the biggest increases in the nation. Only last-minute maneuvering prevented one Arizona county from becoming the first in the nation to have no exchange insurers at all.

Outlays for U.S. construction projects fell 0.4% in September. Spending on private outlays fell 0.2%. Residential spending rose 0.5% but spending on nonresidential projects sank 1%. For overall public construction projects, spending fell 0.9%. Outlays for the first nine months of the year are 4.4% higher compared with the same period in 2015.

CoreLogic reports home prices nationwide, including distressed sales, increased year over year by 6.3 percent in September 2016 compared with September 2015 and increased month over month by 1.1 percent in September 2016 compared with August 2016. Arizona is still 22% below peak prices. Arizona home prices were up 0.6% for the month and 5.6% year-over-year.

Sales of new cars and trucks were expected to fall in October. Auto sales have been strong but there are limits and it looks like car makers hit those limits last month. General Motors’ sales fell 2 percent from last October, while Toyota’s sales fell 9 percent. Honda’s sales were down 4 percent and Nissan’s fell 2 percent. Fiat Chrysler’s sales were down 10 percent. Volkswagen’s sales fell 18 percent. Ford will report later in the week due to a fire at their headquarters.

Sales fell even though automakers increased average discounts per vehicle by 12 percent from last October to $3,726 per vehicle. But the average sales price still was expected to set an October record at $31,383. Prices are rising because more high-priced trucks and SUVs are being sold.

Gasoline is surging, despite a recent drop in crude oil prices. An explosion of a Colonial pipeline in Alabama killed one person and injured 5 other; it is also causing gasoline futures to skyrocket higher. Futures for December delivery jumped 10.8% to $1.57 a gallon. Colonial Pipeline said it hopes to restart its major gasoline pipeline between Gulf Coast refiners and customers in the East and Southeast by noon Saturday; that news pushed prices down, but futures are still up about 4% at $1.48.

Meanwhile, crude oil has not been able to mount any kind of rally despite a weaker dollar. Following last week’s inventory draws across the entire energy complex, API was expected to report a seasonally normal 1.5 million barrel build but instead printed a massive 9.3 million build.

Royal Dutch Shell and BP both reporting higher than expected earnings by making further deep cuts in spending. Shell announced higher quarterly earnings than Exxon Mobil, the world’s largest listed oil company by output and market capitalization. At $2.8 billion in the third quarter, Shell’s net income was above Exxon’s third quarter net income of $2.65 billion. Both Shell and BP maintained their dividends unchanged as expected.

Mortgage provider Freddie Mac reported a profit of $2.3 billion in the third quarter, as interest rates turned in its favor, credit quality improved, and mortgage volumes surged. Freddie has operated under federal conservatorship since the 2008 financial crisis, when it received $71 billion in bailout funds. In December, the enterprise will remit $2.3 billion to the U.S. Treasury, bringing its total paid post-crisis to $101 billion.

Pfizer lowered its earnings outlook for the year and said it was ending the development of a drug in the cholesterol-treatment sector. Pfizer reported a profit of $1.3 billion, or 21 cents a share, down from $2.1 billion, or 34 cents a share a year prior; bottom line missed estimates – revenue matched estimates.

Prosecutors are focusing on Valeant Pharmaceuticals’ former CEO and CFO as they build a fraud case against the company that could yield charges within weeks. Authorities are considering potential accounting fraud charges related to the company’s hidden ties to Philidor Rx Services LLC, a specialty pharmacy company that Valeant secretly controlled.

Federal prosecutors in Manhattan and agents at the Federal Bureau of Investigation in New York have been investigating the company for at least a year. Last October, accusations of accounting malfeasance combined with government scrutiny over the company’s drug price hikes brought the company to its knees. Valeant’s stock price is down around 90% since last year’s peak.

One of the most difficult things Valeant has had to deal with through this entire mess is its over $30 billion debt load, which could be an even bigger problem with a criminal charge. Prosecutors in Boston and Philadelphia are also said to be conducting separate inquiries of Valeant.

Boston’s investigation focuses on Valeant’s payments to charities that then helped patients make co-payments for the soaring cost of Valeant drugs, some of the most expensive on the market. The Philadelphia case is examining Valeant’s billing of government health care programs for the company’s drugs.

And while that all sounds very bad for Valeant, if you pull up a quote today, you will see the stock is up 33%. The reason – Valeant is in talks to sell its Salix unit to Japan’s Takeda for $10 billion, per the Wall Street Journal. The crown jewel of Salix’s product line is Xifaxan, a drug that cures irritable bowel system.

When the company bought Salix, it told investors that Xifaxan would be a $1 billion drug in 2016. So far though, that hasn’t been in case. Valeant acquired Salix for $11 billion in 2015 and took on around $4 billion of its debt, so the company would be taking a loss, but it would show Valeant still has some valuable assets, even in a fire sale.

Sony’s second-quarter profit missed estimates, as a one-time charge and stronger yen weighed on profit from financial services and PlayStation games.

Angie’s List said it has hired financial advisers to review its strategic options as it continues to work on a turnaround and seek new opportunities. The company said it had a net loss of $16.8 million, or 28 cents a share, in the quarter, after breaking even in the year-earlier period – a big miss on top and bottom line estimates.

Gannett (the publisher of USA Today) has dropped its bid to buy Chicago Tribune and Los Angeles Times publisher Tronc. Gannett first made a bid for Tronc in April, then Tronc rejected a sweetened offer in May.

ChemChina has extended its $43 billion cash offer for Syngenta to Jan. 5 while it works to gain regulatory approval for the transaction. On Friday, EU anti-trust regulators opened an in-depth investigation into China’s biggest-ever foreign acquisition, setting a March 15 deadline to complete its review.

In one week and a few hours, the results will pour in. Hang in there.

Financial Review

School’s Out

Sinclair Noe — May 3, 2016

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DOW – 140 = 17,750
SPX – 18 = 2063
NAS – 54 = 4763
10 Y – .07 = 1.80%
OIL – 1.13 = 43.65
GOLD – 5.20 = 1286.70

Eurozone growth will be slower than previously expected with subdued inflation in 2016, the European Commission announced in its spring economic forecast, warning of high risks to the bloc’s economy. The GDP of the 19-nation area is now predicted to expand just 1.6% this year, less than the 1.7% growth of 2015, while consumer prices are seen up 0.2%, significantly below the 0.5% increase projected in February.

The Reserve Bank of Australia has cut its official cash rate by 25 basis points to a historic low of 1.75%, the first reduction since May 2015. The RBA noted that inflation was “unexpectedly low,” and it also gave a cautious outlook for the Australian economy. Following the rate cut, the yen surged against the Australian dollar, pushing the greenback below ¥106-yen for the first time in about 18 months.

Federal Reserve Bank of Atlanta President Dennis Lockhart says financial markets may be underestimating the odds of a rate increase in June. Lockhart calls it a real option. At the most recent FOMC meeting Federal Reserve officials signaled that they expect to raise interest rates twice this year, while investors see only one move. If economic theory is any guide, even the central bank’s more hawkish outlook would still leave the target for the benchmark policy rate way too low. 

Meanwhile, San Francisco Fed President John Williams laid out a “pretty optimistic” outlook, with unemployment coming down, growth rebounding and inflation picking up, allowing the Fed to raise interest rates gradually. Williams said he doesn’t agree with negative scenarios for the economy and doesn’t take a “strong signal” from the 0.5% growth rate in the first quarter. He said GDP data were distorted by seasonal factors and growth was actually closer to 2% annual rate.

Seven of the world’s biggest banks have agreed to pay $324 million to settle a private U.S. lawsuit accusing them of rigging the ISDAfix, an interest rate benchmark used in the $553 trillion derivatives market; ISDA stands for the International Swaps and Derivatives Association.

The settlement resolves antitrust and other claims against Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, JPMorgan Chase and Royal Bank of Scotland. Several pension funds and municipalities accused the banks of engaging in a conspiracy to rig the “ISDAfix” benchmark from 2009 to 2012. Other bank defendants have yet to settle.

Nearly every school in Detroit was closed for the second straight day, once again causing more than 45,000 students to miss class because of a funding crisis that has put the city at odds with teachers. The Detroit Teachers Federation called for a mass sickout after the school district’s management announced over the weekend that it would not be able to pay teachers in the summer.

Union leaders met with district leadership on Monday but did not reach an agreement. Though most school districts in the US are run by local governments, the state took over the Detroit school district because of financial difficulties in 2009. A series of emergency managers have headed the district in the seven years since.

Puerto Rico’s debt crisis has moved into a more perilous phase after it missed a $422 million bond payment deadline for its Government Development Bank. Treasury Secretary Jack Lew warned in a letter to Congress that a US “taxpayer-funded bailout may become the only course available” if the proposed restructuring legislation isn’t approved. The missed payment, the largest so far by the island, is widely viewed on Wall Street as foreshadowing additional defaults this summer, when more than $2 billion in bills are due.

Mortgage buyer Freddie Mac said it has a loss of $354 million in the quarter, compared with a prior-year profit of $524 million and a fourth-quarter profit of $2.16 billion.  Ahead of the release, some had speculated that Freddie Mac might need what’s called a “draw” from the U.S. Treasury this quarter. While that didn’t occur, the company is clearly vulnerable to needing one in the future. Some shareholders of Freddie have pursued court action to invalidate the 2012 Treasury decision to sweep all of the profits of Freddie and its Fannie Mae to the government.

Freddie and Fannie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new home loans. The two companies don’t directly make loans to borrowers. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.

According to the latest report from CoreLogic, Home prices nationwide, including distressed sales, moved higher year-over-year by 6.7% in March 2016 compared with March 2015 and increased month-over-month by 2.1% in March 2016 compared with February 2016. The highest appreciation was in the West, where prices continue to increase at double-digit rates.

Pfizer reported first-quarter results that blew past analyst estimates, boosted by sales of its new cancer and arthritis treatments and the acquisition last year of hospital products company Hospira. The largest US drug maker also raised its revenue and earnings forecast for the year, helped in part by the weakening dollar.

UBS Group reported a 64 percent decline in first quarter profit, with earnings at its wealth-management and securities unit hit hardest. UBS is planning job cuts. Commerzbank AG, Germany’s second-biggest lender, reported first-quarter profit was cut in half. HSBC Holdings reported profits that beat analyst forecasts, as cost-cutting measures started to bear fruit.

Sprint reported a wider quarterly loss and added fewer subscribers than expected, but vowed to cut more than $2 billion in costs in the current fiscal year to stop the red ink.

Halliburton said it would consider acquisitions to bolster its weaker businesses as the oilfield services company looks to move on after a deal to buy smaller rival Baker Hughes fell through. Halliburton also reported a higher-than-expected adjusted profit for the first quarter.

Detroit automakers reported another month of strong demand from US consumers for trucks and sport utility vehicles, but their shares dropped as analysts focused on signs the world’s second largest auto market has little room to grow.

Ahead of the final tally for US light vehicle sales in April, General Motors estimated the seasonally adjusted annualized selling rate will be 17.6 million vehicles. U.S. auto sales in 2015 hit a record 17.4 million vehicles. GM said sales of the Chevrolet Silverado pickup truck rose nearly 9 percent in April compared to a year earlier. However, sales of GM’s Cadillac CTS and ATS luxury sedans plummeted 23 percent and 18 percent respectively. Other luxury brands also had weak results in April, especially for cars.

Toyota’s Lexus luxury division suffered a 26 percent decline in sales of cars such as the large LS sedan, although sales of Lexus brand SUVs rose 20 percent. Still, April sales for Ford, Honda, and Nissan all beat analysts’ expectations. Ford’s sales rose 4 percent from a year earlier, Fiat Chrysler was up 5.6 percent and Toyota, No. 3 in the U.S. market, rose 3.8 percent. Honda’s sales rose 14.4 percent.

Google has agreed to buy about 100 plug-in hybrid minivans from Fiat Chrysler to expand its self-driving vehicle testing program, in the most advanced partnership to date between Silicon Valley and a car maker. The vehicles will not be offered for sale to the public. Unlike prior testing in which Google bought Toyota vehicles from dealers and retrofitted them, the search engine giant will work with Fiat Chrysler directly to equip around 100 of the Chrysler Pacifica minivans it launched in February with Google’s self-driving technology.

Philips is spinning off its lighting division, the world’s largest maker of lights, selling a stake of at least 25% in the new company during the IPO, which will take place on Euronext Amsterdam. Philips began as a lighting company in 1891. Analysts have valued the unit as being worth roughly $5.8 billion.

Bankruptcy talk… Fairway Group Holdings, which has lost money in every quarter since it went public in 2013, has filed for Chapter 11 bankruptcy in a New York court. The grocery chain operator listed assets and liabilities in the range of $100 million to $500 million, and is seeking approval for $55 million of debtor-in-possession financing. Meanwhile, Aeropostale, delisted by the NYSE just over a week ago, is said to be preparing a bankruptcy filing this week in which it would close more than 100 of its 800 stores.

Johnson & Johnson must pay $55 million to a 62-year-old South Dakota woman who blamed her ovarian cancer on the company’s talcum powder in the second such trial loss this year. In February, J&J lost a $72 million verdict in the same St. Louis courthouse to the family of a woman who died of the disease. J&J is accused in more than 1,000 lawsuits in state and federal courts of ignoring studies linking its Shower-to-Shower product and Johnson’s Baby Powder to ovarian cancer. Women contend the company knew the risk and failed to warn customers.

Solar Impulse 2 touched down in the Phoenix suburb of Goodyear, last night around 9 PM, after a 16-hour flight from northern California. The wings of the plane are equipped with 17,000 solar cells that power propellers and charge batteries. After Phoenix, the plane will make two more stops in the United States before crossing the Atlantic. It began its globe-circling journey last year, and flew from Hawaii to the Silicon Valley last week.

FINANCIAL REVIEW

Too Much Pie

Sinclair Noe — December 1, 2014

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW – 51 = 17,776
SPX – 14 = 2053
NAS -64 = 4727
10 YR YLD + .02 = 2.22%
OIL + 3.22 = 69.37
GOLD + 44.30 = 1213.80
SILV + .88 = 16.56

Last week I said that you can never eat too much pie. I would like to amend that statement.

That was a long weekend. While we were gone, the Dow hit another record hit on Friday, the 31st of the year. Dow stocks are still up about 7% for 2014; with all these record high closes, you might think it would be more, and you might think you could just throw a dart at any of the Dow 30 stocks and hit a winner. Unfortunately, not all Dow stocks were able to revel in the year’s rallies. In fact, nearly one-third of the market’s companies had negative returns this year. Big names that are down, including: Boeing – down about 7% despite fairly strong sales of airplanes, IBM – down 13% as they try to figure out what their business is, General Electric – is off about 6%, United Technologies – down about 3%, and Chevron – down about 6% for the year as oil prices have been sliding.

The oil companies are about the only ones not happy with lower oil prices. On Thursday, as we were enjoying turkey and way too much pie, OPEC was meeting in Vienna and they decided to leave oil production unchanged. That sent oil prices down big on Friday. Then early today, prices dipped all the way down to 63.72 a barrel before recovering to finish up 3.22 at 69.37. Earlier this year, most oil companies expected prices would remain above $90 a barrel; wham bam, next thing you know oil was under $80, and now there are more than a few oil related companies on the ropes and trying to figure out how low prices can go, and how they can survive.

Energy is a cyclical business, and adjusting production to lower prices and lower demand is not uncommon; companies did that in 2008 and 2009, when oil prices collapsed during the recession. Oil companies will have to adjust to lower prices. Right now we don’t know how low the bottom is, and it doesn’t make sense to try to catch a falling knife. Wait and let the market tell us.

The Federal Reserve is welcoming the sharp drop in global energy prices, with two influential policymakers saying today that it should provide a boost to American pocketbooks and shrugging off any pressure on already low inflation, with the thinking that any dis-inflationary problems will be temporary.

Someone’s income is someone else’s expense. Losers are those who were dependent on rising or steady oil prices. Winners are those who benefit from lower oil prices and lower prices for all the things whose cost is driven in part by the cost of oil. High-yield bonds dependent on higher energy prices are now at greater risk. You might consider separating energy-dependent flows supporting bonds from those that are not tied to the energy sector.

In the geopolitical arena, low oil prices have an enormous impact. Budgets of many foreign countries are coming under duress. Civil unrest is likely to increase in those countries due to their inability to fund subsidies that have acted to bribe the population. Look for more geopolitical turmoil worldwide and regime change in some countries. In others, dictators suppress the population with machine guns, so the unrest is below the surface until it explodes. Certainly lower prices tend to target oil producers such as Russia, and today Putin shot back by scrapping a major natural gas pipeline project scheduled to run through Bulgaria, in favor of a pipeline through Turkey. Putin said he was punishing Bulgaria for siding with the European Union. Meanwhile, the Ukrainian military accused Russian special forces of taking part in attacks on the strategically important Donetsk airport in eastern Ukraine, where fighting has intensified in recent days despite a September ceasefire deal.
The drop in oil prices is good news for most other businesses; great news for manufacturing firms and transportation companies; it might lift GDP by about 0.3 to 0.5 percentage points. And low prices are a real boon for most families. The cost of regular gas sank to a nationwide average of $2.82 a gallon from as high as $3.70 five months ago. In some areas gas prices have dropped to as low as $2.50 a gallon. By most estimates, lower oil prices put about $75 billion to more than $100 billion back in consumers’ pockets; it works out to more than a $1000 dollars for a typical household.

What are we doing with all that extra money? Well, we are not driving to the mall. Sales, both in stores and online, from Thanksgiving through the weekend were estimated to have dropped 11 percent, to $50.9 billion, from $57.4 billion last year, according to preliminary survey results released yesterday by the National Retail Federation. Sales fell despite many stores’ opening earlier than ever on Thanksgiving Day, or maybe sales fell because so many stores were opening earlier; it might have been backlash for trying to intrude on our holiday, and in support of retail workers who most likely wanted to spend a little time away from the store; or maybe it just smacked of desperation. American shoppers have keen instincts, and if we suspect retailers will buckle, we have the patience to wait them out; maybe shoppers smelled blood.

Whatever the case, sales were down big. Overall, 133 million people shopped or planned to shop at stores or online over the four-day weekend, 5.2 percent fewer than last year. And shoppers spent an average of $380.95 over the four days, 6.4 percent less than the $407.02 they spent last year.

And though many retailers offered the same aggressive discounts online as they did in their stores, the web failed to attract more shoppers or spending over the four-day holiday weekend than it did last year. The average person who shopped over the weekend spent $159.55 at online retailers, down 10.2% from last year. At least that’s the best guess. The survey of shoppers is subject to revision, and has not always been the most reliable indicator. Still it doesn’t look good.

And now, Cyber Monday, well, we’ll just wait and see. One of the twists this year is that more people will make Cyber Monday online sales with their smartphones. On Cyber Monday in 2013, 38% of shoppers said they used smartphones to shop, up from 23% in 2012.

If you really want to find a deal, try a mortgage. New guidelines go into effect today aimed at making mortgage lending easier. The new standards stem from an agreement in October put in place to clarify when banks would be penalized for making mistakes on mortgages they sell to Fannie Mae and Freddie Mac. Banks became more risk averse after the mortgage meltdown, and very conscious of exactly what they are allowed to do and how they are supposed to treat loans. They apparently had very unclear guidance from Freddie and Fannie about the rules of the road, in terms of which types of mortgages were going to be acceptable for Fannie and Freddie to buy. Lenders have said this lack of clarity is why credit is tight and many consumers aren’t qualifying for loans. Demand for loans and the credit worthiness of borrowers have also forced banks to pull back on lending.

Banks are expected now to relax some of their credit requirements and give prospective borrowers more consideration, particularly those whose credit score took a hit because of one-off events, like loss of a job or a single large medical bill. Fannie Mae and Freddie Mac will soon give guidance to banks requiring only a 3% to 5% down payment from borrowers.

By now, we’ve all heard stories about how hackers have infiltrated major retailers and banks, and they are ready to steal your credit card numbers, and account numbers, and anything digital. Now comes word that hackers are trying to game the stock market. Security researchers say they have uncovered a cyber-espionage ring focused on stealing corporate secrets for the purpose of gaming the stock market, in an operation that has compromised sensitive data about dozens of publicly held companies. Cybersecurity firm FireEye says that since the middle of last year the hackers have attacked email accounts at more than 100 firms, most of them pharmaceutical and healthcare companies. Victims also include firms in other sectors, as well as corporate advisors including investment bankers, attorneys and investor relations firms.

The hackers only targeted people with access to highly insider data that could be used to profit on trades before that data was made public. They sought data that included drafts of Securities and Exchange Commission filings, documents on merger activity, discussions of legal cases, board planning documents and medical research results. The victims ranged from small to large cap corporations. Most are in the United States and trade on the New York Stock Exchange or Nasdaq. The cyber-security firm declined to identify the victims. It said it did not know whether any trades were actually made based on the stolen data.

Looking forward, lawmakers returned to Capitol Hill today; they have less than 2 weeks to figure out how to keep the government funded. With government funding set to expire Dec. 11, top Democrats and Republicans had hoped to pass a so-called omnibus measure that would tie together tailored spending bills to fund the government through September 2015, the end of the fiscal year. So, they will try to cram 2 years of business into the next 2 weeks. Just a reminder that they had some temporary extensions on tax cuts that are scheduled to expire at the end of the month, assuming that the government is still open for business.

Friday brings the monthly jobs report. The economy has settled nicely into a hiring groove since the early spring, adding more than 238,000 jobs a month and putting the US on a path to produce the strongest employment gains in 15 years. Friday’s report is expected to show another 230,000 jobs added to the economy in November.

FINANCIAL REVIEW

Fluctuations

Sinclair Noe — October 1, 2014

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Financial Review

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

DOW – 238 = 16,804
SPX – 26 = 1946
NAS – 71 = 4422
10 YR YLD – .10 = 2.40%
OIL – .43 = 90.73
GOLD + 4.30 = 1214.00
SILV + .20 = 17.28

Yesterday, we talked about third quarter results. Most of the stock indices were down in September but still slightly positive for the third quarter. Today wiped out the third quarter gains. Why? Well, that’s always fun; the headlines offer a plethora of reasons, including “global worries” or maybe it’s a “market top” or “geopolitical hotspots” or “commodity crash” or maybe it’s just the start of a “rocky October”. I don’t claim to know why the markets dropped today, or any given day. I can read a chart, and I can identify patterns, but there are no guarantees. We follow macroeconomics and we analyze company P&Ls, but there are no guarantees. We do not get stuck in cheerleader mode like the talking heads on TV business shows, nor do we follow the perma-bears.

Markets fluctuate; to paraphrase a line from J.P. Morgan, or maybe John Rockefeller. “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” That’s a quote from Warrant Buffet. We don’t yet know whether this is folly or a trend. We’ll just have to listen to the markets.

The Institute for Supply Management’s index of national factory activity dropped to 56.6 last month, its lowest level since June. A reading above 50 indicates expansion. The gauge of new orders fell to 60% from 66.7%, but that’s still very strong. Production edged up a tick to 64.6%, marking a four-year high. Fifteen of the 18 industries tracked by ISM reported growth in September. A similar survey put out by the private-research firm Markit was just slightly off a four year high in September.

And compared to the rest of the world, American manufacturing is red hot. The JPMorgan global manufacturing index edged down to a four-month low of 52.2% in September while the rate of expansion was the weakest since April. Growth was near-stagnant in the Eurozone and Asia, and the global index is being propped by the United States.

On Friday, we’ll get the monthly jobs report from the government. I always consider this one of the most important economic reports. The warm-up for the report comes from ADP, a private payroll processing firm. Each month they gather data and make their own estimate about the labor market. ADP is not always a good predictor of the Labor Department’s report; for example, last month ADP predicted the economy added 202,000 jobs, and the official number came in at 142,000. In defense, the government numbers for August are typically subject to upward revisions, more than other months; so after revisions, ADP’s estimate might turn out to be pretty close.

That’s a fairly long setup to let you know that today, ADP estimates the economy added 213,000 private sector jobs in September. Most estimates call for the government’s report to show that total nonfarm employment rose by 220,000 jobs in September. Weekly readings on jobless claims are near lows hit before the recession, signaling that employers are laying off few workers. And if the economy continues to add about 200,000 net new jobs each month; it would be consistent with about 3% GDP growth. Not shabby.

Job growth has been steady since 2009, but it has also been uneven. The Labor Department reports today nearly a quarter of the metropolitan areas in the country had fewer jobs in August than 5 years earlier; 92 regions have experienced net job loss since August 2009. The Tucson region recorded the largest total decline with 23,500 fewer jobs there in August compared with the same month in 2009. The Pine Bluff, Arkansas region saw the steepest decline, down 9.4% from 5 years earlier. The hardest hit areas are more lightly populated; indicating rural America has not really recovered. Los Angeles added the largest total amount of jobs during the five-year span, almost 390,000; Houston, Miami and Dallas followed.

In a separate report, the Commerce Department says construction spending dropped 0.8% in August to a seasonally adjusted rate of $961 billion. Looking at private outlays, spending fell 1.4% for nonresidential projects and dropped 0.1% for residential projects. For overall public construction projects, spending fell 0.9%. In addition, July’s rise was revised lower to a 1.2% rise from an initially reported 1.8% gain.

Fannie Mae and Freddie Mac are the giants of mortgage financing; they are government sponsored entities that issue and guarantee mortgage-backed bonds. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backs nearly 97 percent of US mortgages.

And today, they crashed. Fannie and Freddie shares each dropped 37%. And preferred shares were down more than 60%. A federal judge on Tuesday threw out a lawsuit brought by Fannie Mae and Freddie Mac investors to stop the government from seizing most of the profits at the mortgage finance twins.

Let’s set the stage. In 2008 Fannie and Freddie were placed into conservatorship to avoid bankruptcy. Congress originally authorized Treasury to collect 10 percent dividend payments from Fannie and Freddie every quarter as a condition of the government’s $188 billion bailout of them. Treasury amended the terms of the agreement in 2012 to make Fannie and Freddie give the government most of their profits, a move known as the “sweep amendment.” And earlier this year, Fannie and Freddie paid off their bailout, and taxpayers recouped the $187 billion that was used to prop up the two GSEs. A couple of big institutional investors in Fannie and Freddie, including Perry Capital and Fairholme Funds, sued, claiming that the dividend sweep was tantamount to a purchase of new securities, which Treasury did not have the authority to make. It also claimed the FHFA failed to conserve the assets of Fannie and Freddie by allowing Treasury to take most of their profits.

The hedge fund argued that Treasury’s arrangement caused irreparable harm to all private investors, saying they have been shortchanged as Fannie and Freddie returned to profitability. In its original complaint, the hedge fund said the government “maneuvered to ensure that Treasury would be the sole beneficiary of the companies’ improved financial position.” Basically, the hedge funds were upset that the taxpayers that bailed out Fannie and Freddie got paid back before they could suck out profits for their hedge fund.

In Tuesday’s ruling, the judge expressed sympathy for the plaintiffs, but it wasn’t enough to reverse course. He found that Treasury and FHFA were well within their rights, as dictated by Congress; and if the hedge funds didn’t like it, they could take it up with Congress. What’s still unclear is how and when and if Fannie and Freddie will emerge from conservatorship.

Bill Gross’s surprise departure on Friday from Pacific Investment Management Co., or Pimco, shook up the $42 trillion bond market. The most-traded assets quickly recovered but the less-traded ones are still feeling the effects. And it may have exposed an Achilles’ heel: the lack of liquidity in the bond market. When you get a dislocation like this, it tends to exacerbate price movements maybe more than what you’d have seen 10 years ago.

One person pushing around borrowing costs for nations and companies worldwide, however briefly, shows the increasing fragility of credit markets. Average daily trading in the US bond market fell to $809 billion in 2013 from $1.04 trillion in 2008, according to data compiled by the Securities Industry & Financial Markets Association. Debt still largely changes hands off exchanges, through telephone calls and e-mails. And in September Pimco’s Total Return Fund was hit with $23.5 billion in withdrawals, or right at 10% of assets.

Bill Gross does not rule the bond markets; any effect from him changing jobs will be temporary. The Fed will soon unwind QE, and that has been and will be a much bigger story. Gross’ departure serves as a reminder that fluctuation should not be confused with liquidity. Bond markets fluctuate all the time but things get scary when prices stop fluctuating.

We’re pretty sure the bond market will feel a bit uneasy about the end of QE, but what about the energy markets? And what is the connection between the end of quantitative easing and raising interest rates, and energy? The oil and gas industry is extremely capital intensive, with billions of dollars required in some cases to suck hydrocarbons from the ground. That means that companies need to sell a lot of debt to financial markets to finance their projects. But if interest rates rise, it will significantly raise borrowing costs for oil and gas operators.

Increasing interest rates should strengthen the US dollar relative to other currencies; and we’ve already seen the dollar at 4-year highs in recent trading. Higher interest rates makes holding dollars more attractive, which increases demand for the currency. Oil is priced in dollars, so a stronger dollar pushes down oil prices, along with other commodities priced in dollars. Lower oil prices mean lower revenues for oil companies.

Higher interest rates will make debt more expensive, making it more expensive to borrow money to drill an oil well. Moreover, the problem becomes worse still because so much of the oil growth in recent years has come from shale, which has rapid decline rates after initial production. Companies have to keep borrowing to drill new wells, but will run into trouble if the cost of debt rises too fast. So, high interest rates mean higher expenses and a stronger dollar means a lower price; and that means some of the marginal players won’t manage, and that means a pullback in production growth.

So far this year, oil prices have been moving lower; production is strong, inventories are high. The Fed says it will be a “considerable time” before they raise rates. Best guess is that sometime next year the Fed will end the era of easy money; they will tighten the spigot of stimulus, and that will tighten the spigot on oil and gas output, especially for companies that have high levels of spending. There are other factors at play, including global production and the impact of renewable energy, but the formula is in place. Higher borrowing costs will likely necessitate higher revenue and if oil prices don’t rise the industry will need to pare back production; not today, but over the next year or two, and America’s oil boom will fizzle.

The End of US Capitalism

History will point back at September 2008, as the beginning of the final economic decent into the first global depression of the 21^st century. If, the natural world’s symbol of the Great Depression was the dust bowl and drought throughout the 1930’s, then, hurricane and flood will become its substitute.

 America’s total world hegemony is indisputably on the wane.  Evidence to support this theory includes the nationalization of Freddie Mac and Fannie Mae, the bankruptcy of Lehman Brothers, and the surrender of Merrill Lynch to Bank of America.  Additional exhibits offered for the record includes the near drowning of the U.S. cities of New Orleans and Houston.  

 Metaphorically, the bull, Merrill Lynch’s signature mascot and Wall Street’s icon of capitalism’s vitality and unparallel economic period of prosperity in America, is corralled under duress, and, which may signify a coming collapse of middle class opulence, which might never be duplicated.

Weekly Review and Outlook: Deleveraging's Not Just for I-Banks

Like a wild jungle creature forced into a confrontation, but unsuccessful, this past week's stock market limped into the weekend, stunned, pensive, and little changed with Dow Jones Industrial Average [DJIA] closing at 11370.69, the Standard & Poor's 500 ending at 1256.76, and NASDAQ finishing its week at 2310.53. The Dow lost 125.88 for the week. Likewise, the S&P 500 dropped 2.92 and NASDAQ subtracted 27.75, respectively.

The CNBC midday rowdies strained themselves lifting a Hubble sized telescope looking for positive data points in the housing numbers. Existing home sales came out Thursday; they were down 2.4 percent in June, at a seasonally adjusted annual rate of 4.86 million units. New home sales for June, appearing Friday, was lower by .06 percent, on a seasonally adjusted annual rate of 530,000, from a revised upward May figure of 533,000.

I can imagine the rowdies on an express elevator to hell remarking that our destination has dry heat, that it's a gated community, and that it's a Christian neighborhood with few trespassers.

In the second quarter, 739,714 foreclosure filings were recorded. Also, 220,000 homes were lost to bank repossession, according to RealtyTrac. That is up 14 percent from the first quarter and up 121 percent from the same quarter in 2007.

A report published on Friday, by an International Monetary Fund economist, concluded U.S. housing prices were still overvalued, in the first quarter this year, perhaps, 14 percent, within a range of 8 percent to 20 percent. According to Reuters, IMF economist Vladimir Klyuev's report "What goes up must come down? House price dynamics in the United States", examined the inventory-to-sales ratio, foreclosure rates, market inertia, and other data points, formulating this opinion. That would mean at least an additional $1 trillion in lost asset value. The government debt market is still comatose.

The 2 year and 10 year US Treasury Notes, as well as the 30 year US Treasury Bond ended the week with higher yields, paying 2.71%, 4.10%, and 4.68%, versus 2.64%, 4.85%, and 4.65, respectively. August is a major refunding month with auctions scheduled for the Two, Five, Ten, and Thirty Year Treasury obligations, in addition to the weekly T-Bill The brightest spot in the market was the Nymex Light Sweet Crude Oil September contract; it closed Friday at $123.26 per barrel, extending its reprieve to cash strapped motorists from its recent high of $147.20.

Online retail analysts are reporting double digit growth in sales among several retailers because of consumers passively boycotting higher gasoline prices. Who would have thought that one day we would be happy seeing oil prices heading towards $100 a barrel?

Late Friday afternoon, the Office of the Comptroller of the Currency closed First National Bank and the FDIC was named receiver of another two banks, one California-based and the other Nevada based, First National Bank of Nevada with $3.4 billion in assets, and First Heritage with $254 million in assets. Both were owned by undercapitalized First National Bank Holding Co., of Scottsdale, Arizona. First National lost $140 million in the first quarter. They reported $4.6 billion in assets and $4.3 billion in liabilities. Nine point four percent of it $3.7 billion in loans were non-current, ending March 31. Mutual of Omaha Bank acquired the deposits of the two banks from the FDIC for a 4.41 percent premium. The new Mutual of Omaha Bank branches will open Monday morning.

There are currently 8,494 institutions holding $13.4 trillion assets insured by the FDIC. The FDIC said the failures would cost its deposit insurance fund roughly $862 million. This brings the total number of bank failures in 2008 to seven. You can learn more about the status of a particular bank here

Game Changer : The really, really, big news this week came from Chrysler LLC. It announced Friday afternoon that its financing arm would discontinue offering leasing deals to its U.S. customers beginning August 1; the same date when their $30 billion credit facility is up for renewal. The rising cost of capital is making leasing terms less attractive to consumers. This is another aftershock resulting from stifling energy prices and an economy that's deleveraging.

Declining SUV and lease values forced Ford to take a $2.1 billion charge at its finance division last week. Although, third party banks and credit unions will step in to fill the void, expect some slippage in the approval rates for leasing transactions. The same market pressures compelling Ford (F) to exit this market will certainly continue to present as a business factor for any entity looking to make a profit leasing vehicles. The cost of capital is important, however, the residual value of the underlying asset is monumental. The percentage of Chrysler sales attributed to leasing is greater than 20 percent.

It will be very interesting to see if this extemporaneous admission becomes evolutionary inside America's automobile industry. Americans divine right to drive automobiles has been an unconditional assumption since the end of WWII. In 2008, it's a fair question to ask given this extraordinary economic environment of failing banks, growing home foreclosures, stagnant incomes, evaporating jobs, personal and business credit contraction, a runaway federal budget, an aging infrastructure, an expensive endless foreign war, a fractured financial system, rising worldwide demand for limited resources, and a demonstrable shifting of global wealth. Plus, the third generation of Americans, exposed growing up around an enlightenment concerning the ecology and global environmental issues, is being handed the task of running our economy. They will shape and modify our society's habits in the future.

The U.S. Senate actually gaveled a rare Saturday session passing landmark legislation to triage a metastasizing bankrupted residential real estate market. Highlights of the bill include; a new regulator for Fannie Mae (FNM) and Freddie Mac (FRE) and up to $300 billion to insure refinanced mortgages for the next 18 months; $4 billion to states to buy and rehabilitate foreclosed properties, a 10 percent tax credit up to $7,500 dollars for first time home buyers purchasing a home between April of this year and June of next year; increase the federal debt limit to $10.6 trillion, and more.

We now have a de facto nationalized residential real estate market. The reversal by the White House to withdraw a veto threat and sign a passed bill into law would create tears of joy on the face of Scottish economist John Law and Louis the XIV of France. Welcome to the new depression. France has succumbed to capitalism. In between fist bumping with the Democratic presumptive nominee Barack Obama and checking out his Italian-born former model turned pop star wife's, Carla Bruni-Sarkozy's new music album, "Comme si de rien n'etait"(As if nothing had happened), President Nicolas Sarkozy of France bullied his National Assembly into radically reforming their 1958 Constitution. Passage of the reform package includes limiting Presidential terms, strengthening the power of the legislature, weakening the position of Prime Minister, and repealing the 35 hour per week cap for workers.

It is an indication that the global downturn will affect everyone. The French are now more aware than ever of prioritizing work and leisure to enhance income and productivity. Calling national strikes on idealistic principles was an industrial age luxury. Cash flow is paramount in the beginning of the 21st century. Welcome to the club.

The year 2008 will record the resignation of Fidel Castro of Cuba, as its President, and the abandonment of immense leisure time by the average French worker; two aging symbols of 20th Century socialism. I wonder if Hank Paulson and Ben Bernanke are erecting the first 21st century's symbol of socialism. Tonight, I shall pour a very, very, nice XO Cognac and contemplate the upcoming Consumer Confidence figure on the 29th; the Employment and Crude Inventories figures on the 30th; the GDP-Advanced, Initial Claims, and Chicago PMI, on the 31st; and August 1st, Auto and Truck Sales, Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, Construction Spending, and the ISM Index. Maybe two drinks, au revoir!