Financial Review

G19

Sinclair Noe — July 6, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW – 158 = 21,320
SPX – 22 = 2409
NAS – 61 = 6089
RUT – 19 = 1400
10 Y + .04 = 2.37
OIL + .16 = 45.29
GOLD – 1.70 = 1226.00
BITCOIN +0.08% = 2621.33 USD
ETHEREUM – 1.30% = 265.59

The G20 Summit is underway in Hamburg Germany.

China’s President Xi Jinping and German Chancellor Angela Merkel pledged to work together more closely on a range of issues. Japan and the European Union agreed a free trade pact to create the world’s biggest open economic area and signal resistance to what they see as President Trump’s protectionist turn.

German chancellor Merkel, who is hosting the summit, wants to unite world leaders on environmental goals, but will be careful not to mention the words “climate change” around the US president. Japanese Prime Minister Shinzo Abe urged the G20 states to continue working together on climate protection, after Trump pulled the United States out of the 2015 Paris agreement on climate change policy.

France announced it will end the sale of gasoline and diesel vehicles by 2040 and become carbon neutral 10 years later. Earlier today, Trump delivered a speech in Warsaw before heading to the summit. Tomorrow, Trump meets with Russian President Putin.

The G20 is the G19 this year. Brazil is absent. Brazilian President Michele Temer faces criminal corruption charges. Meanwhile, protesters are capturing the spotlight. There are 20,000 riot police in Hamburg; six times more protesters. What are they protesting? Well, it’s a mixed bag of issues but it seems to include globalization, a lack of action on climate change, war, inequality, refugees, and authoritarianism in general.

Germany, the host of the G19, saw its bond yields climb to the highest levels in 18 months. The yield on German 10-year bunds rose nine basis points to 0.56 percent; part of a drop in global government bonds that spread to the US and pushed the yield on 10-year Treasury notes to the highest level since May.

Bonds across Europe fell after the results of a French debt auction showed a drop in excess demand for 30-year securities. Trading volumes in bund futures contracts jumped after the auction results were announced, sparking the surge in yields. The Stoxx Europe 600 Index fell 0.7 percent as bond yields rose, bringing its decline since mid-May to about 4 percent. Eurozone stocks were hot a couple of months ago, now, not so much.

Hedge funds that built up bullish long-end Treasury wagers to the highest outright level since 2008 are rushing for the exit. DoubleLine Capital Chief Executive Officer Jeffrey Gundlach says the recent selloff is a sign of more pain to come for Treasury bulls.

With a Federal Reserve seemingly committed to raising interest rates a third time this year and speculation the European Central Bank could announce a tapering of bond purchases by the end of the year, the fundamentals aren’t encouraging. As yields are now approaching key technical marks that could trigger a fresh flush out of long-end bulls, the risk is building that Treasury yields go even higher.

Tomorrow we will receive the Labor Department’s monthly non-farm payroll report. Today we had a sampling of predictive data.

The ADP National Employment Report showed private sector payrolls increased by 158,000 jobs last month, stepping down from the 230,000 positions created in May and below expectations for a gain of 185,000.

While the ADP report has a spotty record predicting non-farm payrolls, June’s modest job gains together with the modest rise in first-time applications for jobless benefits and cooling services sector employment pose a downside risk to the government’s June jobs report.

Last month, for example, ADP recorded 253,000 private-sector job gains while the Labor Department tallied just 147,000 private jobs and 138,000 total additions, after subtracting out government job losses.

Outplacement consultancy firm Challenger, Gray & Christmas reports the number of planned layoffs fell in June to its lowest level of the year as employers opted to hold onto existing jobs in a tight labor market where skilled laborers are harder to find.

Meanwhile, initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 248,000 for the week ended July 1. It was the third straight weekly increase in claims. Still, it was the 122nd straight week that claims remained below 300,000, a threshold associated with a healthy labor market.

A report from the Institute for Supply Management showed its non-manufacturing sector index rose half a point to a reading of 57.4 in June. A reading above 50 indicates expansion in the vast services sector. Industries reported an increase in new orders, but said employment growth had slowed.

A report from the Commerce Department showed the trade deficit fell 2.3 percent to $46.5 billion in May. When adjusted for inflation, the trade deficit narrowed to $62.8 billion from $63.8 billion in April. Real goods exports surged to an all-time high in May, propelled by record high petroleum exports.

Still, the real trade deficit averaged $63.3 billion in April and May, above the first quarter’s average of $62.2 billion. That suggests trade will be a drag on gross domestic product in the second quarter after contributing 0.23 percentage point to the economy’s 1.4 percent annualized growth pace in the first three months of the year.

As the US economy enters its ninth year of expansion this month, many Americans feel the recovery has been incomplete — and the numbers back them up. Five states — Arizona, Connecticut, Mississippi, Nevada and Wyoming — still haven’t regained their levels of gross domestic product from before the financial crisis, more than five years after the country hit that milestone.

Arizona’s GDP is still 0.3% below the pre-recession peak. Home prices in Arizona are still almost 11% lower than 2007 levels. Eight states are below pre-recession levels of employment. And 15 have home prices that have yet to rebound fully.

Eighteen states and the District of Columbia sued the US Education Department and Secretary Betsy DeVos over the recent suspension of rules that would have swiftly canceled student-loan debt of people defrauded by Corinthian Colleges Inc and other for-profit schools.

The suits claim the department broke federal law in announcing the delay with limited public notice and opportunity to comment. They said the department and DeVos were using the pending litigation as “a mere pretext” to repeal the rules and replace them with one that “will remove or dilute student rights and protections.”

DeVos said she wanted to pause the acceleration of the debt cancellation process because it “puts taxpayers on the hook for significant costs.” She also said a delay was needed while current litigation in California over the rules, works its way through the legal system. Consumer groups Public Citizen and Project on Predatory Student Lending sued to remove the delay as well.

The Home Shopping Network is having a sale. The buyer is QVC, the shopping channel owned by Liberty Interactive is buying Home Shopping Network for $2.6 billion. A combined QVC-HSN ranks as the No. 6 U.S. online retailer ($7.5 billion eCommerce sale in 2016), dwarfed by Amazon ($123.8 billion). QVC and HSN will continue to operate as individual brands.

We’re waiting for an announce from Berkshire Hathaway. Berkshire Hathaway’s energy business is close to a deal to acquire Oncor, the electric-utility giant based in Texas. Oncor, one of the largest utility companies in the US, says it serves 10 million customers across Texas. It earned $935 million in operating revenues and $73 million in net income in the quarter ended March 31.

We just had a vote in Illinois. A financial showdown, more than two years in the making, went to a vote this afternoon in the Illinois House as Democrats enacted a $36 billion spending plan fueled by a 32 percent income tax increase over the Republican governor’s objection.

Votes to override Gov. Bruce Rauner’s vetoes of the budget package give Illinois its first annual budget since 2015 and spell the end of the nation’s longest fiscal stalemate since at least the Great Depression. The standoff entered a third fiscal year on July 1. Credit-rating houses had threatened to downgrade the state’s creditworthiness to “junk,” signaling to investors that buying state debt is a highly speculative venture.

Yesterday, Moody’s Investors Service, put Illinois under review for a downgrade even with the new budget. Moody’s said that while lawmakers have made progress, the House budget does not address the state’s massively underfunded pensions or do enough to pay down bills.

The resolution to the fiscal standoff, which emerged from the Democrat-led legislature over the last several days, triggered a rally in Illinois bond prices by signaling that elected leaders are beginning to tackle the government’s long-building financial strains. Without a full-year budget for the past two years, Illinois continued to run up deficits, leaving it with dwindling reserves, a record pile of unpaid bills and increasing obligations to its underfunded employee pension system.

Thirty-three of the 50 U.S. states reported revenues that came in below projections in fiscal year 2017, the highest number of states since the recession decimated budgets in 2010.

Microsoft announced a major reorganization that will include up to 3,000 layoffs, largely in sales. The job cuts amount to less than 10 percent of the company’s total sales force, and about 75 percent of them will be outside the US. Reports from last week suggested this was going to happen and that Microsoft was going to specifically focus on how it sells its cloud-services product, Azure, which has been booming in recent quarters.

Financial Review

Happy Day

Sinclair Noe — March 20, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW – 8 = 20,905
SPX – 4 = 2373
NAS + 0.53 = 5901
RUT – 7 = 1384
10 Y – .03 = 2.47%
OIL – .55 = 48,23
GOLD + 5.10 = 1234.90

The directors of the FBI and NSA appeared before a rare open congressional intelligence committee hearing today.

FBI Director James Comey confirmed the FBI is investigating Russia’s interference in the US election and investigating possible links between the Trump campaign and the Russian government. Comey said the FBI has “no information” to support President Trump’s allegation that Barack Obama wiretapped him.

NSA chief, Admiral Mike Rogers, weighed in as well, saying that he had no knowledge of anyone asking the British or any other ally to wiretap Trump. That seemed to refute another claim made by the White House.

Confirmation hearings for Trump’s Supreme Court nominee kicked off today. Trump nominated Neil Gorsuch, 49, to replace conservative Justice Antonin Scalia, who died in February 2016.

Meanwhile, Wall Street also braced for a contentious House vote on the GOP health care bill slated for Thursday. The bill’s passage is considered a first step toward enacting tax reform, but it has faced criticism from both sides of the aisle.

The Trump administration appealed Friday a temporary restraining order against its revised travel ban policy. The reworked executive order (which halts the issuance of visas to six majority-Muslim countries for 90 days and suspends the refugee resettlement program for 120 days) was set to go into effect on March 16, but federal judges and Hawaii and Maryland blocked it from going forward.

The Justice Department filed an appeal in the Maryland case, which will take that fight to the Fourth Circuit, based in Richmond, Va. Meanwhile, a federal judge in Hawaii declined a request from the Justice Department to narrow the injunction. That ruling clears the way for the Trump administration to appeal the judge’s initial decision to the 9th Circuit Court of Appeals.

Bill Gates met with Donald Trump today.  An agenda wasn’t released, but a statement from the Gates Foundation said it has “a long history of working with officials” on issues like domestic education and global health and development. Gates and Trump also met in December to discuss innovation.

On March 16, the Gates Foundation said that it was “deeply troubled” by the president’s 2018 budget request, released that morning. The proposal included deep cuts to both the EPA and non-military overseas aid. The next day, Gates responded with an article on the Gates Notes blog, “How Foreign Aid Helps Americans.”

The meeting of the Group of 20 in Germany over the weekend featured an apparent win for the US after the communique produced by the talks omitted warnings about protectionism. One thing that was repeated was the pledge to overhaul bank-capital rules, with the statement urging the Basel Committee on Banking Supervision to finalize the Basel III reforms.

Away from the G-20, German Chancellor Angela Merkel joined Japanese Prime Minister Shinzo Abe in calling for a concerted effort to defend free trade.

Nine months after Britain voted to leave the European Union, Prime Minister Theresa May is planning to open divorce proceedings on March 29.  May will trigger Article 50 of the Lisbon Treaty, the EU’s guiding document, which details how a country leaves the bloc. It’s never been activated and is only about 260 words long. It gives the departing country up to two years to negotiate “its future relationship with the Union.” If May has her way, the actual split will occur around April 2019.

Greece missed another deadline for unlocking bailout funds today, edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted nation to the edge of economic collapse. Prime Minister Alexis Tsipras had promised the latest bailout’s long delayed review would be completed by March 20, but many see that reaching an agreement even in April is now considered a long shot.

Deutsche Bank will issue 687 million new shares at a 35 percent discount to Friday’s closing price — to raise €8-billion-euros of fresh capital. In its annual report published today the bank said it expected revenue to remain broadly unchanged this year, while revealing that the bonus pool was slashed to €500-million-euros in 2016.

Britain’s Vodafone Group and Idea Cellular agreed to merge their Indian operations in a $23 billion deal. The combined entity would have almost 400 million customers, accounting for 35% of the market share.

Albertsons, the grocery-chain operator backed by Cerberus Capital Management, has held preliminary talks to merge with Sprouts Farmers Market. Bloomberg reports the discussions, which took place in recent weeks, are at an early stage and may not lead to a deal. The talks have involved a plan to take organic grocer Sprouts private and add it to Albertsons’ portfolio, which includes the Safeway store brand.

Unilever is preparing a $7.4 billion sale of some of its food brands, British newspapers reported on Saturday. The British-Dutch company is planning to sell Flora margarine and Stork butter brands. Unilever rebuffed a surprise $143 billion takeover offer from Kraft Heinz last month, saying the bid undervalued the company.

Pressure is growing on Twitter CEO Jack Dorsey to step down, per the Sunday Times, after a report from the University of Southern California and the University of Indiana alleged that up to 48 million of its accounts – equal to 15% of its users – were robots not people (that’s nearly twice the company’s own estimate).

The number of executive departures from Uber is growing. President Jeff Jones is quitting the company, citing “incompatibility with leadership,” while Brian McClendon, a VP responsible for the company’s mapping program, is leaving to return to his home town in Kansas. Uber has been recently plagued by allegations of sexual harassment and the combative behavior of CEO Travis Kalanick.

Bullish bets on West Texas Intermediate crude prices fell by a record amount in the week ending March 14, with wagers on further price falls doubling. Energy lender Arab Petroleum Investment Corp. sees oil prices remaining below $60 a barrel for the rest of the year.

Bank of America Merrill Lynch has published a giant list of asset class returns for the year so far. Here’s a quick rundown. Looking at global asset classes, the Pacific Rim, excluding Japan is up 9.6%, matched by Emerging Market equities, Industrial metals up 7.6%, US equites (7.2%), global equities (up 6.7%) And Euro stocks (up 4.9%).

By country; Russia’s stock market is the laggard this year after being one of the best performers in the world in 2016. India is the leader, year-to-date, up 14.5%, followed by South Korea (up 13.3%) and Brazil (up 12.8%). China and Hong Kong round out the Top Five. Russia is down 9%.

By sector, Biotech is the leader (up 11.9%), followed by information technology (up 11.6%), healthcare (up 9.3%), banks (up 7%), with consumer discretionary and financials both up 6%.

The strongest currencies against the US dollar are the Mexican peso, which took a hit following the US election in November, but has gained 7.8% against the dollar since the start of the year; followed by the South African rand, and the Australian dollar.

Natural gas prices have tumbled amid unseasonably warm weather, which implies weaker demand for heating. The US had its second-warmest February ever on record, per to the National Centers for Environmental Information.

Crude oil is also a big loser, likely to the dismay of the Organization of Petroleum Exporting Countries. The top gainers among commodities include iron ore (up 15.3%), lead (up 12%), aluminum (up 11.1%) and cotton (up 10.5%). Nat gas is down 20% and WTI crude is down 9%.

Or, if you want to keep it simple, Apple hit a record high today, and it is up about 23% from the start of the year. Of course, you still must decide if you want to run with the bulls or buy the dips.

Italy is ranked the healthiest country on Earth in the Bloomberg Global Health Index of 163 countries. A baby born in Italy can expect to live to be an octogenarian.

Even though economic growth in Italy has stagnated for decades, and almost 40 percent of its youngsters are out of jobs and it’s saddled with one of the world’s highest debt loads relative to the size of its economy; Italians are in way better shape than Americans, Canadians and Brits, who all suffer from higher blood pressure and cholesterol and poorer mental health.

Italy also has “an excess of doctors.” Then there is the diet, rich in vegetables and drizzled with extra virgin olive oil. Each country in the index was graded based on variables such as life expectancy, causes of death and health risks ranging from high blood pressure and tobacco use to malnutrition and the availability of clean water.

Iceland, Switzerland, Singapore and Australia rounded out the top five most-healthy countries in the index. The U.S. placed No. 34 with a health grade of 73.05 out of 100. It’s ranking for prevalence of overweight people is 67.3 — tipping the scale as one of the world’s heaviest nations.

Norway is now the world’s happiest country, per the 2017 World Happiness Report. The Central African Republic was the least happy of 155 countries. The report was prepared by the Sustainable Development Solutions Network, an international panel of social scientists convened by the United Nations.

Researchers used a scale of zero to 10, covering six areas: gross domestic product per capita, life expectancy, support from relatives or friends, charitable giving, freedom to make life choices, and perceived levels of government and corporate corruption. Norway and several other Nordic countries dominated the top of the list.

America’s rank on the happiness scale is falling.

Even as the country pulled off an economic turnaround, with increases in income and unemployment falling to historic lows, Americans are becoming less happy. When it comes to happiness, the US ranked 19th among the 34 countries in the Organization for Economic Cooperation & Development in 2016, down from third among 24 countries on a similar measure in 2007.

And today is the first day of Spring. Enjoy.

Financial Review

The Vultures Eat

Sinclair Noe — February 29, 2016

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

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DOW – 123 = 16,516
SPX – 15 = 1932
NAS – 32 = 4557
10 Y – .02 = 1.74%
OIL + 1.12 = 33.90
GOLD + 16.50 = 1239.30

If you missed the past month, you might think things were calm on Wall Street for the month of February. For the month, the Dow rose 0.3 percent, the S&P 500 lost 0.4 percent and the Nasdaq lost 1.2 percent. This marks the first time since 2011 that major indexes posted three consecutive monthly declines.

Chinese shares closed at one-month lows. China cut the amount of cash banks must hold as reserves for the fifth time since last February. The yuan hit a three-week low. China expects to lay off 1.8 million coal and steel workers. 

A weekend meeting of G20 finance chiefs ended without a plan to spur global growth. The G20 issued a statement which basically said the global economy is not as bad as the doomsayers think. G20 finance ministers agreed to use “all policy tools – monetary, fiscal and structural – individually and collectively” to reach the group’s economic goals; but there was no plan for coordinated stimulus.

Participants also repeated previous pledges not to engage in competitive currency devaluations and promised to “consult closely” on exchange markets. Those pledges might not last long, and the Euro Union might be the first to crank up the printing press.

The inflation picture in the Eurozone further deteriorated in February, giving ECB policymakers more bad news to digest just a week before their next meeting. Consumer prices in the 19-nation bloc declined to -0.2% from a positive reading of 0.3% in January, displaying its worst figure in the last year.

Core inflation, which strips out volatile elements such as food and energy, was at 0.7%, down from 1% in the prior month. The deflationary reading in Europe has pushed German yields into negative territory out to nine years.

When the European Central Bank last discussed interest rates in January, Mario Draghi made clear the ECB would pump out more money in March if necessary. He cited a deteriorating outlook for the economy due to uncertainty about global growth, volatile markets and geopolitical risks.

Since then, Japan has introduced negative interest rates to boost an economy that is now shrinking again, and China has told its banks they’re free to lend more cash in the hope of supporting growth. And Britain is gearing up for a vote on whether to leave the EU. At the very least look for the ECB to increase bond purchases.

American and European officials are set to release details about the new trans-Atlantic data-sharing deal that would allow companies to move people’s digital information between the two regions. While the agreement was completed in early February, policy makers will now outline how the new structure will operate in practice. Some disagreement remains, however, regarding the level of protection people should be given over their digital privacy.

The Pentagon is seeking $35 billion through 2021 for cyber-security, in part to beef up offensive military capabilities such as those deployed in newly disclosed operations against Islamic State. The proposed budget would bankroll the Pentagon’s U.S. Cyber Command and its new Cyber Mission Force to assist regional commanders with tools to conduct defensive and offensive operations in their own areas as needed. Who knows, maybe they can hire someone to hack an iPhone.

The National Association of Realtors monthly gauge of pending home sales fell to 106.0 from an upwardly-revised 108.7 in December. It was the 17th straight month in which the index has been higher compared to a year ago, but that gain was only 1.4% in January – and it was a drop from December. The index tracks real estate transactions in which a sales contract has been signed, but the deal has not yet closed.

The median annual household income was $57,173, a gain of $424, or 0.7%, from November.  Incomes are now up 0.4% from where they stood in January 2000—the month that Sentier Research began tracking this data. Before you start thinking everybody got a raise, the data is adjusted for inflation, so volatility in fuel prices can weigh heavily on results.

Another month of volatility for the Chicago PMI which lurched from solid expansion in January to noticeable contraction in February. Today’s report came in at 47.6; any reading below 50 indicates contraction, and confirms other early indications of February softness, not only for manufacturing but for services as well since this report tracks both sectors.

The good news in the report is that new orders have held over breakeven 50 which hints at better readings in next month’s report. Now the bad news. Production is down sharply, backlogs are in a 13th month of straight contraction, employment is down and in a fifth month of contraction, and prices paid are contracting at the fastest pace since 2009.

The big event on this week’s economic calendar is the Friday jobs report. January managed to show a net gain of 151,000 jobs, and February is estimated to come in around 190,000, with a little luck.

Berkshire Hathaway profit hit a record. The Warren Buffett-led conglomerate announced earnings of $3,333 a share, easily beating the $2,529 that was expected by the Bloomberg consensus. Profits surged 32% to a record $5.48 billion. In his letter to shareholders, Buffett noted that Burlington Norther Santa Fe railroad “dramatically improved” after a bad 2014. Additionally, Buffett said the company bought more of its big four investments (American Express, Coca-Cola, IBM, and Wells Fargo) over the past year.

Warren Buffett thinks the gloom is overdone, however, saying politicians are “dead wrong” on the U.S. economy. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.” In his closely watched annual letter to investors, Buffett also defended his ties to 3G capital and Clayton Homes, and revisited Berkshire’s biggest takeover ever – Precision Castparts. Buffett reduced Berkshire’s bond portfolio for a sixth straight year, saying bonds should come with a warning label. Missing topics: No mention of a successor, the slump in commodity prices or recent market volatility.

Fifteen years ago Argentina defaulted on its sovereign debt. A couple of years later the vulture funds swooped in and bought some that debt for pennies on the dollar, or peso. During the 15-year legal battle creditors have attempted to embargo everything from Navy frigates to satellite launches to claw back the money a New York court said they were owed from defaulted bonds.

The alpha vulture was Paul Singer of Elliott Management, who demanded full face value on the debt. He won’t get it, but as of today, it looks like he will get 75% of the face value. Argentina will pay out $4.6 billion, and then be allowed to re-enter the international debt market again; they will issue $15 billion in new bonds, part of which will be used to pay off the old debt. Better luck this time.

The European Commission has cleared Dell’s planned $67 billion acquisition of data storage company EMC Corp. Dell unveiled the deal in October last year, the largest ever in the technology industry sector, and designed to enable it to better challenge rivals Cisco Systems, IBM, and Hewlett-Packard in cloud computing, mobility and cyber security.

Citigroup has received a subpoena in connection with the FIFA bribery scandal, making it the first major U.S. bank to disclose a link to probes involving soccer’s governing body. The summons came from the U.S. Attorney for the Eastern District of New York, asking about the lender’s connection to “certain individuals and entities identified as having had involvement with the alleged corrupt conduct.”

Anti-money laundering laws require banks to alert authorities about shady transactions like the ones at the heart of the FIFA scandal. Authorities allege senior FIFA officials used various U.S. banks, including: Citi, JPMorgan Chase and Bank of America to transfer and receive $150 million in bribes and kickbacks.

Taser International reported better-than-expected earnings as its fast-growing body-worn camera hardware and data business notched sharp gains. Over all, Taser’s profit edged up slightly from a year ago to $5.1 million. Its earnings per share remained flat at 9 cents. Sales rose 20% to $56 million.

Amazon is stepping into the British fresh food market after striking a supply deal with grocer Morrisons. Britain’s fourth largest supermarket said the deal would allow Amazon Prime Now and Amazon Pantry customers access to Morrisons’ fresh and frozen products in the coming months. Amazon previously launched a U.K. packaged groceries service in November, but it stopped short of replicating its broader U.S. Amazon Fresh service, which offers about 20,000 items from local shops.

Starbucks is finally ready to take its Americanized version of Italian coffees back to Italy, with its first outlet set to open in early 2017. It’s a symbolic move for CEO Howard Schultz. On a business trip in the 1980s, he visited Milan and Verona and decided to bring espresso drinks to the U.S., eventually forming the world’s biggest coffee chain. The statement from Schultz said: “We’re going to try, with great humility and respect, to share what we’ve been doing and what we’ve learned.”

Whiting Petroleum, the largest oil producer in North Dakota, has announced that it will suspend all fracking in the state and cut its budget for this year by 80 percent. Whiting said it will stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance. Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows.

Financial Review

I Would Like to Thank the Academy

Sinclair Noe — February 26, 2016

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

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DOW – 57 = 16,639
SPX – 3 = 1948
NAS + 8 = 4590
10 Y + .07 = 1.76
OIL – .29 = 32.79
GOLD – 10.90 = 1222.80

For the week, the Dow Industrials added 1.5%, the S&P 500 gained 2%, the Nasdaq was up 1.9%. The S&P 500 has rallied about 6.5 percent since reaching a 22-month low on Feb. 11, it remains lower by more than 4.5 percent for the year.

The dollar strengthened for a third day versus the yen, while yields on 10-year Treasury notes topped 1.75 percent. Oil capped the biggest weekly gain since August, with a 10% move. China’s central bank said it sees room for monetary easing. Chinese markets were up over 1% after a big 6% drop Thursday.

The MSCI All-Country World Index rose 0.1 percent, while the Stoxx Europe 600 Index rose 1.5 percent. Gold posted a consecutive weekly drop for the first time this year.

Finance ministers and central bank governors from the world’s leading economies have gathered in Shanghai to discuss a response to the global economic landscape. Among the many issues facing them is the plunge in commodity prices, market volatility, exchange rates and the slowdown of China’s economy. G20 participants will try to agree on a coordinated stimulus program that could stop a global slowdown from turning into something worse.

But meetings of the world’s 20 leading economies have a long history of disappointing and analysts see little reason why this one should end differently. German Finance Minister Wolfgang Schaeuble was quick to pour some cold water on hopes for extra stimulus saying that the global economy needs reform, not stimulus.

Zero interest rates are not doing enough to stimulate flagging economies, while negative rates may well do more harm than good because potential depositors might prefer stuffing the money under the mattress rather than paying to park it at a bank. But don’t assume that will stop central banks trying to stimulate demand and raise inflation. The most likely option? Helicopter money. But what form will that take?

The most likely option is probably a direct monetization of government debt. The state could create infrastructure bonds to finance public works programs and those could be bought directly by its central bank and then cancelled. Instead of adding to the national debt, the bonds would simply be written off.

U.S. economic growth slowed in the fourth quarter, but not as sharply as initially thought. Gross domestic product increased at a 1.0 percent annual rate instead of the previously reported 0.7 percent pace. The economy grew at a rate of 2.0 percent in the third quarter. There will be another revision in about a month but as it stands now, GDP expanded 2.4 percent in 2015.

The value of inventories increased. The largest contributors to the upward revision to inventory investment were retail trade and mining, utilities and construction. Investments in new housing jumped. Exports fell. Consumers and businesses both cut back on spending toward the end of the year, and that is not a good sign for an increase in growth.

We also learned consumer purchases climbed 0.5% in January – the biggest increase in 8 months. Disposable income, or the money left over after taxes, rose 0.4 percent for a second month, after adjusting for inflation. The saving rate held at 5.2 percent. Turns out there’s still some life left in the consumer. And we are seeing some signs of inflation.

The PCE, the Fed’s preferred gauge of inflation, increased 0.4 percent in January, compared with an increase of 0.2 percent in December. The January PCE price index increased 1.3 percent from January a year ago. The January PCE price index, excluding food and energy, increased 1.7 percent from January a year ago.

That’s still short of the Fed’s 2% target for inflation, but the jump in prices makes it more likely that members of the policy-making Federal Open Market Committee, who next meet in March, will continue to raise interest rates.

Federal Reserve Governor Lael Brainard said today that the market has been doing the Fed’s job for it, as tightening financial conditions in the U.S. over the past year and a half have reached the equivalent of three quarter-percentage-point interest-rate hikes.

Federal Reserve Governor Jerome Powell, speaking in New York today said: “A data-driven committee, making decisions meeting by meeting, is likely to surprise markets from time to time.”

In a separate report, the Commerce Department says the trade gap widened in January to the largest level since June. The seasonally adjusted trade deficit widened to $62.2 billion from $61.5 billion in December.

The University of Michigan consumer sentiment index for February was at 91.7, up from the preliminary reading of 90.7, and down from 92.0 in January.

Warren Buffett will release his annual letter to Berkshire Hathaway shareholders this weekend following another lackluster year that saw the conglomerate’s stock price lag the broader market. “His under-performance is getting conspicuous. He must address it,” said Doug Kass, head of Seabreeze Investment Partners.

There are 12 stocks in Berkshire Hathaway’s largest 15 holdings, including American Express, Wells Fargo and International Business Machines, that are all together down and by a sum of nearly $13 billion over the past 12 months. Another lingering question: Who will take over in coming years, given Buffett is 85, and second-in-command Charlie Munger is 92.

Short sellers are piling into energy stocks. As oil prices struggle to recover and expected debt default rates climb, the level of energy shorts on the S&P 1500 as a percentage of float, or those available for selling, is at 12.5 percent, approaching the 13.45 percent level financials saw heading into the crisis in July 2008. Short interest for energy is at the third-highest level of any sector dating back to 2007.

Among the hardest-hit individual companies are Transocean (36.3 percent short interest of shares outstanding), Chesapeake Energy (35.3 percent) and Consol Energy (28.8 percent), which saw a 20 percent gain in short interest during the most recent two-week filing period, according to FactSet. The companies represent the second, third and fourth most-shorted on the S&P 500; the non-energy company, GameStop is first with 37.7 percent. Energy as a sector is down 4 percent year to date and nearly 26 percent over the past 12 months.

Halliburton is cutting about 8% of its global workforce, or 5,000 jobs, pressured by the prolonged slump in crude prices. Halliburton has already reduced its global headcount by 25 percent, or almost 22,000 employees, since 2014. Halliburton is awaiting regulatory approval for its acquisition of Baker Hughes, and the company said last month it still has not reached an agreement with U.S. and European regulators about the “adequacy” of proposed divestitures.

The UK’s Royal Bank of Scotland reported its eighth annual loss. The $3.8-billion loss was due partly to litigation over mortgage-backed securities. That said, the fourth quarter of the majority-state-owned British bank—bailed out during the 2008 financial crisis—wasn’t nearly as bad as the previous year. The results follow a major restructuring that started last year, which involved shrinking RBS’s investment bank and exiting 25 of the 38 countries in which it operates, to focus on U.K. retail and commercial banking.

Republic Airways has filed for Chapter 11 bankruptcy protection, blaming several quarters of falling revenue after having to ground aircraft amid a pilot shortage. The carrier, which feeds flights to American Airlines, Delta and United Continental, listed assets of $3.6 billion and $3 billion of liabilities. Republic said the bankruptcy process would allow it to continue normal business while restructuring its finances and contracts.

Hilton Worldwide Holdings confirmed plans to spin off most of its hotels into a real-estate investment trust. The REIT will include about 70 properties, mostly upscale assets in the U.S. and internationally. Hilton owns or leases 147 hotels around the world. The properties, which include hotels under the Hilton and DoubleTree banners, could be worth more than $10 billion.

Dow Chemical said it agreed to pay $835 million to settle an antitrust case that was on appeal to the U.S. Supreme Court in the wake of Justice Antonin Scalia’s death earlier this month. Dow said the accord will resolve its challenges to a $1.06 billion jury award to purchasers of compounds for urethanes, a chemical used to make foam upholstery for furniture and plastic walls in refrigerators.

Dow Chemical had disputed a jury’s finding it had conspired with four other chemical makers to fix urethane prices and asked the Supreme Court to take the class-action case on appeal. Scalia, one of the court’s most conservative members, had voted to scale back the reach of such group suits.

A week after the ruptured natural gas well in Aliso Canyon, California was finally declared sealed, we have a full account of the environmental damage — and it doesn’t look good. A new paper published in the journal Science declared it to be one of the largest environmental disasters in US history. In total, 97,100 metric tons of methane were released into the atmosphere over the course of 112 days, equal to the greenhouse gas emissions of over half a million cars.

The Oscars are this weekend, and everyone is a winner. Just for being nominated attendees will receive a gift bag with a retail value of $232,800 worth of free swag – if they want it. Don’t thank the Academy; the swag bags aren’t about rewarding nominees. They’re an advertising opportunity for interested companies, handed out by a marketing firm called Distinctive Advantage. The items are all donated by the companies, which pay for the privilege; and this year’s bag is the biggest ever, at more than a quarter-million dollars in retail value.

Financial Review

If You Build It

Sinclair Noe — February 25, 2016

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

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DOW + 212 = 16,697
SPX + 21 = 1951
NAS + 39 = 4582
10 Y – .05 = 1.70%
OIL + .93 = 33.08
GOLD + 4.30 = 1233.70

The Shanghai Composite in China dropped 6.4% today, extending its fall this year to 22%, as surging money-market rates signaled tighter liquidity and the offshore yuan weakened for a fifth day, while the country’s vice finance minister warned of pressure on exports. The plunge comes as world leaders gather for a G20 meeting in Shanghai, where current market turmoil and a global economic slowdown are expected to be key topics of discussion.

European shares bounced after two days of falls, and sterling steadied after having been pounded all week by ‘Brexit’ fears.  The S&P 500 Index closed at a seven-week high, right at a major level of resistance, and just barely breaking above the 50 day moving average.

Meanwhile, the IMF is calling for urgent and bold action to combat the slowing world economy ahead of the gathering of G20 finance ministers and central bank chiefs. The IMF report says: “The G20 must plan now for coordinated demand support using available fiscal space to boost public investment.” The calls for an organized stimulus program followed warnings that China’s slowdown, financial market turbulence and the collapse in commodity prices were major headwinds that could derail a global recovery.

Citigroup says the chances of a global recession are already high and only going up. The team of economists from Citi say that when they adjust for what they call “true Chinese growth,” the Citi team finds that global growth might have been as low as 2 percent year-over-year in the final quarter of 2015.

That is the lowest since the Eurozone recession of 2012-2013, and if growth remains at such depressed levels, it would qualify as a global recession according to their measures. They forecast global growth will this year once again unperformed (against long-term trends and previous year forecasts).

Citi’s latest forecasts are for global growth of 2.5% in 2016 (based on market exchange rates and official statistics) and around 2.2% (adjusted for probable Chinese erroneous measurements). But the risk of a global growth recession (growth below 2%) is high and rising.

While a global recession may be increasingly probable according to Citi, it’s not necessarily unavoidable. They say the world needs a global version of what they call “Abenomics plus”, which in Citi’s terms would be easy monetary policy coupled with fiscal stimulus and structural reform that would include “material deleveraging.” But, given their recession call, the team doesn’t believe these policy measures will actually occur as fiscal stimulus faces high political hurdles.

A new report this week by the Center on Budget and Policy Priorities warns that state and local spending on infrastructure – including schools and wastewater treatment plants as well as highways and bridges – is at a 30-year low. Total capital spending as a share of state GDP fell in all but five states and the District of Columbia between 2002 and 2013, with the largest drops in Nevada, Florida and Michigan.

According to the 2013 report card by the American Society of Civil Engineers, the U.S. has serious infrastructure needs of more than $3.4 trillion through 2020, including $1.7 trillion for roads, bridges and transit; $736 billion for electricity and power grids; $391 billion for schools; $134 billion for airports; and $131 billion for waterways and related projects.

A big part of the problem is that federal investment in infrastructure has dropped by half during the past three decades, from 1 percent to 0.5 percent of GDP, leaving more of the responsibility and finances to state and local governments. At the same time, states have varied greatly on how much of their annual budgets they have been willing to invest in infrastructure – from as little as 3 percent to 4 percent of total state spending in California, Michigan and Vermont to as much as 9 percent in Alabama, Montana and Nebraska.

The new report says that reversing the decline in state investment in transportation, public buildings and other forms of vital infrastructure “is the key to creating good jobs and promoting full economic recovery,” especially at a time of improved economic conditions and historically low interest rates. But instead of making the infrastructure investments essential to building a stronger economic recovery, the report says, many states have opted instead for cutting taxes and offering corporations tax subsidies in a “misguided approach to boosting economic growth.”

So, in an environment of slowing global growth the threat of a deflationary spiral, how can central banks create demand through monetary policy? And the answer is that they probably can’t. You need fiscal stimulus, and the best way to do that is infrastructure investment. This is not ideology but rather a pragmatic and fairly simple approach.

By investing in infrastructure you’re hiring a lot of people now who then build a number of public goods (roads, bridges, electrical infrastructure and the like) that increase efficiency and productivity over decades of time. It should rightly fall under the category of government investment and not government spending.

Moody’s Investors Service has become the third major rating agency to downgrade Brazil’s debt to junk, slashing its rating by two notches to Ba2 as the former emerging market star sinks deeper into its worst recession in decades. “Every day it’s something, and you don’t know what the next thing will be,” said Samar Maziad, Moody’s lead analyst for Brazil. “There’s very little visibility on what the future will be.”

Orders for US capital goods rebounded in January by the most since June 2014. Bookings for non-military equipment excluding commercial aircraft jumped 3.9 percent, more than forecast, after a 3.7 percent decrease in December that was smaller than previously reported. Orders for all durable goods – items meant to last at least three years – rose 4.9 percent, the most since March.

The number of Americans filing applications for unemployment benefits rose last week from a three-month low. Jobless claims increased by 10,000 to 272,000 in the week ended Feb. 20. The number of people continuing to receive jobless benefits fell by 19,000 to 2.25 million in the week ended Feb. 13. Since early March, claims have been below the 300,000 level which is consistent with an improving job market.

Mortgage rates slipped to a 13 month low…, so if you were waiting. The 30-year fixed-rate mortgage averaged 3.62% in the February 25 week, down from 3.65% a week ago. The 15-year fixed-rate mortgage averaged 2.93%, down 2 basis points.

Federal Reserve Bank of St. Louis President James Bullard reiterated Wednesday that the pressure has come off the central bank to raise rates. Given that Fed policy is driven by incoming data, a drop in inflation expectations and financial market declines, Bullard says it would be “unwise to continue a normalization strategy.” Bullard, long a hawkish member of the Fed who has pushed for higher rates, reversed course in a separate speech last week.

In the ongoing saga of Apple versus the G-Men, Apple has filed its formal opposition to the federal court order requiring it to help law enforcement officials break into an iPhone, setting the stage for more legal wrangling. In its brief, Apple said that the court should vacate the order.

Apple wrote that it supports law enforcement in pursuing justice against terrorists and other criminals, “But the unprecedented order requested by the government finds no support in the law and would violate the Constitution.” Apple added that the order had broad implications that would “inflict significant harm to civil liberties, society and national security.

Attention Pershing Square investors, you need to put the corks back in the champagne bottles. Bill Ackman, the billionaire investor has managed to erase his entire 40% return of 2014, a performance that put him at the pinnacle of the hedge fund world. Ackman’s portfolio dropped 17.3% so far this year, adding to 2015’s 20.5% nosedive. Pershing Square Capital Management, which now oversees $12B, did not detail exactly what caused its most recent losses and a spokesman declined to comment.

With the earnings season wrapping up, about three-quarters of S&P 500 firms have exceeded profit projections, while less than half topped sales forecasts. Analysts estimate earnings at S&P 500 companies fell 4.2 percent in the fourth quarter. For 2015, under GAAP, S&P earnings per share fell by 12.7%, highlighting the sharpest decline since the financial crisis. The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem.

Today’s earnings reports include a tale of two retailers. The worst of times and the best of times; Sears and TJ Maxx. Sears said today that its same-store sales fell 7.1% in the fourth quarter and revenue dropped 9.8% to $7.3 billion. The company reported a quarterly loss of $580 million, or $5.44 per share, compared with a loss of $159 million, or $1.50 a share, the previous year. Sears said earlier this month that it would accelerate planned closures of 50 stores to cut costs. Sears Chairman Eddie Lampert says the retailer had a rough quarter because of warmer than expected winter weather. Yeah, that’s not it.

TJ Maxx parent company TJX Cos. has managed to escape the curse. The company’s fourth-quarter performance topped Wall Street’s expectations with a sales increase of 6%. The typical TJ Maxx is located in a strip mall, ideally placed so that customers can do their grocery shopping and then meander next door to peruse the clothing and housewares on TJ Maxx’s racks.

Compare that to a trip to a department store such as Macy’s, which usually involves committing to a mall experience. And when shoppers do wander into TJ Maxx, there’s a good chance they will see styles and brands that weren’t there during a previous visit. TJ Maxx had 2015 net sales of $31 billion; Macy’s brought in $27 billion, despite carrying about 50% more inventory. There is an urgency to buy at TJ Maxx or it might not be on the rack tomorrow.

Financial Review

No Sense in Wasting Our Time

Sinclair Noe — February 23, 2016

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

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DOW – 188 = 16,431
SPX – 24 = 1921
NAS – 67 = 4503
10 Y – .02 = 1.75
OIL – 2.09 = 31.30
GOLD + 17.10 = 1226.40

The G20 is meeting this weekend in Shanghai. The US will call on G20 countries later to use fiscal policy in order to boost global demand.  American officials will also urge all members to refrain from manipulating exchange rates for competitive purposes, in line with existing G20 commitments.

The world’s oil giants were meeting today. At a conference in Houston, Saudi oil minister Ali Al-Naimi, considered the world’s most powerful energy policymaker, said production cuts will not happen. Last week, Saudi Arabia, Russia, Qatar and Venezuela proposed a freeze that would cap production at January levels.

But Naimi said: “Freeze is the beginning of a process, and that means if we can get all the major producers to agree not to add additional balance, then this high inventory we have now will probably decline in due time. It’s going to take time. It is not like cutting production. That is not going to happen because not many countries are going to deliver even if they say they will cut production, they will not deliver. So there is no sense in wasting our time seeking production cuts.”

Global production is projected to be 95 million barrels a day in the first quarter of 2016, and consumption around 94 million, according to the EIA.

JP Morgan will set aside an additional half a billion dollars to cover potential bad loans to oil and gas companies in the first quarter. According to a study by Deloitte, thousands of jobs have been cut in the U.S. energy sector and roughly a third of oil producers, or 175 companies, are at high risk of slipping into bankruptcy this year, increasing the risk that bank loans will not be repaid.

JP Morgan expects to set aside an additional $500 million for oil and gas loans in the first quarter, on top of the $815 million it had at the end of 2015; they will also increase reserves for metals and mining loan exposure by $100 million to $350 million.

What worries Wall Street types? A hedge fund called Two Sigma surveyed Wall Street analysts, and here’s what has them losing sleep: a market liquidity event, or a rapid draw-down with losses of more than 20% in one or more assets as market participants try to liquidate positions simultaneously; a hard landing for China, with GDP growth dipping below 3%; sustained global deflation, which would be the big 3 economies experiencing consecutive CPI readings below zero; emerging market sovereign debt crisis with one or more emerging markets defaulting on public debt leading to the risk of contagion; and US corporate credit liquidity crisis, which you probably remember from 2008.

BHP Biliton posted a $5.6 billion first half loss, due in part to a massive write-down of US energy assets. The world’s largest mining company by market value cut its midyear dividend by 74% to 16 cents a share.

Other leading miners and energy giants, including Rio Tinto, Glencore and ConocoPhillips, have cut shareholder payouts in recent months. BHP’s first half loss included an $858 million charge against the Samarco iron-ore mine in Brazil, where a wastewater dam collapsed in November, killing 19 people and polluting 400 miles of rivers.

Home Depot reported a profit of $1.4 billion, up from $1.3 billion a year earlier. Revenue grew to $20.9 billion from $19.1 billion. And Home Depot raised guidance for 2016.

Toll Brothers reported first-quarter net income of $73 million. That was down from its year-ago result of $81 million. The results matched analyst estimates. Revenue increased about 10% and came in better than estimates.

European earnings roundup: Standard Chartered shares plunged after full-year underlying operating income fell 15% to $15.4 billion. Swiss Re posted a 31% rise in 2015 net income, announced the retirement of CEO Michel Lies, and declared a dividend hike and €1-billion-euro buyback. Danone reported a rise in sales for the fourth quarter, boosted by a resurgent performance in its fresh dairy unit in the U.S.

Puerto Rico’s much-delayed audited financial statements for 2014 are expected to be finished and issued by April, Governor Alejandro Garcia Padilla said in a letter to House Speaker Paul Ryan, attributing the tardy submission to “complexities posed by our current financial crisis.”

The S&P Case-Shiller 20-city composite was steady in December, with 10 of 20 cities showing increases in prices for existing homes. After seasonal adjustment, prices rose 0.8%. Over the last 12 months, home prices increased 5.7%, with Portland, San Francisco and Denver each posting double-digit gains. Home prices in Phoenix were up 0.5% in December and up 6.3% for the past 12 months.

In a separate report, the National Association of Realtors reported home resales rose 0.4% to an annual 5.47 million rate in January; that topped expectations of 5.3 million. It was higher than year-ago levels by 11%. Tight supplies pushed prices higher. The median price was up 8.2% from a year earlier in January, the fourth straight month of accelerating yearly price gains.

According to the New York Fed’s quarterly report on household debt, mortgage debt outstanding nearly doubled in the period from 2000 and 2006, but has risen only about 1% since 2012. In 2008 Americans had $12.6 trillion in debt outstanding, of which housing debt made up $10 trillion, or 79% of the total. In the fourth quarter of 2015, there was $12.1 trillion in total debt, and housing’s share had dwindled to 72%, or $8.7 trillion.

One reason is that cash-out refinancing has dropped from around $300 billion a year down to around $30 billion a year, and the small amount of cash-out refi going on is almost completely offset by people repaying second mortgages and HELOCs. Also, the pace of home buying has slowed even as Americans are paying down their home loans.

Another reason is that homeowners are paying down mortgage debt much faster than in previous years, and the reason is that more people are holding their mortgages for longer; people aren’t moving as much as in the past and that means that mortgages are getting older; so payments are further along in their amortization process and principal, rather than interest, is being paid down.

Consumers' confidence fell in February to the lowest level in seven months, as American became a bit more pessimistic about job prospects and business conditions. Stock market losses also added to the anxiety. The Conference Board’s consumer confidence index dropped to 92.2 from a revised 97.8 in January. Consumers’ short-term outlook grew more pessimistic, with consumers expressing greater apprehension about business conditions, their personal financial situation, and to a lesser degree, labor market prospects.

Western Digital will buy SanDisk for $15.8 billion, sticking with plans to combine the makers of memory chips after a potential Chinese investor backed out of another deal amid a national security probe. Western Digital will pay $78.50 a share in cash and stock for SanDisk, 16 percent more than Monday’s closing price.

United Technologies has rejected another merger offer from Honeywell International on concerns it will not be approved by antitrust regulators. Honeywell is said to have offered $108 per share for United Technologies last week, a more than 20% premium to the share price at the time.

United Technologies said the two firms only held “preliminary” conversations. A tie up would have created one of the aerospace industry’s largest companies worth more than $160 billion. However, United Technologies broke off talks because a deal “would face insurmountable regulatory obstacles and strong customer opposition”.

Boeing has won an order from United Continental for 25 current-generation 737 aircraft in a transaction that could be worth over $2 billion at list prices. The follow-on deal comes just weeks after United agreed to buy 40 737-700 jets.

Alphabet is shuttering Google Compare, its U.S. comparison-shopping site for auto insurance, credit cards and mortgages after one year. The quick reversal is a setback to the company’s efforts to provide consumers with niche shopping and financial-services tools, and follows the demise of a similar website called Google Advisor that was shuttered in 2011.

Bill Gates weighs in on Apple’s battle with US government. The world’s richest person shared his thoughts on Apple versus the FBI, and says there should be a debate about whether or not the phone of one of the San Bernardino shooters should be unlocked.

Meanwhile, in the latest edition of their annual letter published today, Bill and Melinda Gates argue that the world needs “an energy miracle,” and are willing to bet that such a breakthrough will arrive within 15 years. In the letter, Gates outlines the environmental and economic quandary that the world faces: a growing population, growing demand for services, and increased energy use.

Each of these factors contributes to rising carbon dioxide emissions, a major driver behind climate change, and there’s no sign that their upward trends will reverse. But Gates argues that we could still avert environmental disaster by focusing on the carbon dioxide produced by energy – specifically, by reducing it to zero.

And even though the energy represents a multi-trillion-dollar market, Gates says the normal venture capitalist model that has worked for biotech and worked for software is not quite right here.” He cited the Breakthrough Energy Coalition – a fund he launched late last year with Facebook CEO Mark Zuckerberg – as a promising new model.

Financial Review

Pick a Lane

Sinclair Noe — November 17, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 6 = 17,489
SPX – 2 = 2050
NAS + 1 = 4986
10 YR YLD – .01 = 2.26%
OIL – .95 = 40.79
GOLD – 12.30 = 1070.80
SILV – .06 = 14.29

Global equity markets moved higher today, following the rally yesterday on Wall Street and brushed off concerns related to Friday’s terror attacks in Paris. In their final communique from a summit in Turkey, the leaders of the world’s largest economies stuck to a goal of lifting their collective output by an extra 2% by 2018, even though growth remains uneven and weaker than expected globally. G20 leaders also endorsed plans to address Syria’s refugee crisis, taxation, climate change, cyber security and inequality.

France launched another set of airstrikes on the ISIS stronghold of Raqqa in Syria early Tuesday as the country steps up its response to last week’s deadly attacks. The bombings follow a second night of home searches in France and Belgium to catch those responsible and linked to the killings. President Francois Hollande is now looking to expand his powers under France’s state-of-emergency statute and has called on the U.S. and Russia to form a “big unified coalition” to destroy ISIS.

Meanwhile, Russian officials said they had found evidence that the passenger jet that crashed in Egypt last month was downed by a bomb, the first time those investigating the crash have cited proof of a terrorist attack. Russia’s military doubled its attacks in Syria on Tuesday. President Putin ordered Russian naval forces in the Mediterranean to work as allies with French warships in attacking ISIS targets in Syria; not necessarily a France-Russia alliance, but certainly greater military coordination.

The consumer price index increased by a seasonally adjusted 0.2% in October. The CPI measures prices at the retail level and is used to determine cost of living adjustments. The cost of housing and medical care, two of the biggest expenses for most families, climbed again and are running above a 3% annual rate. Rents rose 0.3% in October and medical care jumped 0.7%, the biggest increase in five months. Food prices, meanwhile, rose just 0.1%, marking the smallest gain in five months. Energy prices advanced 0.3%, even though the price of gasoline was down last month. The discrepancy comes from seasonal adjustments. Overall inflation is up 0.2% in the past year. Core prices, excluding food and energy, are up 1.9% in the past 12 months.

Separately, a new report from Aon Hewitt shows health insurance costs for employees of midsize and large companies averaged $4,700 in 2015; that’s up 130% from $2,001 in 2005. The report shows 38% of employers have increased their participants’ deductibles and/or copays in the last year, and another 46% may do so in the future. Employers are making cutbacks in health coverage in other ways, too. Some 18% of companies are reducing subsidies for covered dependents, and 17% are adding a surcharge for adult dependents who have access to other health coverage. Plus, 43% of companies are considering using unitized pricing, in which employees pay per person instead of individual versus family.

So there are some signs of inflation in some areas but no indication that inflation is overheating, at least according to the headline inflation numbers. Still, for most of us, it seems like there is inflation; housing and rents have increased, health care, education, and food prices seem to be on the rise. Even wages are starting to show gains. The economy has added jobs at a rapid pace over the past few years, putting some upward pressure on wages and reducing the unemployment rate to 5%. The government said real, or inflation-adjusted, hourly wages advanced 0.2% in October. Real wages have climbed 2.4% in the past 12 months.

You’re not just imagining it. Prices are going up, except for commodities. And the price of energy has an oversized influence on the annual inflation rate. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditures index, or PCE, which is running at a 1.3% annualized pace; still below the Fed’s target of 2% inflation but likely to rise quickly with expected increases to health care premiums over the next few months.

Now add fiscal policy to the mix. After years of gridlock the government has finally approved a 2 year budget, and it actually includes some spending; it will likely add 0.3% to gross domestic product, rather than subtracting 2% from growth; it might even result in a few government jobs, rather than cutting government jobs. And those government workers will go out and spend their paychecks on Main Street, adding to demand and circulating money through the economy. Next year will be the first since 2010 that fiscal policy adds to growth. For years, Fed Chair Bernanke (and more recently Chair Yellen) complained about headwinds from fiscal policy, or the lack thereof. Now we are about to see a shift from monetary policy alone to fiscal policy – a passing of the baton, which is always the most perilous part of a relay; too early or too late, and the race comes to a grinding halt.

The next concern is whether fiscal policy is capable of running with the baton (to extend the analogy), and staying in the correct lane. If government spending goes to projects that improve productivity – things like infrastructure and education – then it will likely improve growth. French President Francois Hollande said he will step up spending on security in the wake of the terrorist attacks in Paris, but this type of spending is not likely to result in economic growth. So, it’s not just a matter of changing from monetary policy to fiscal policy, it is important that something is actually accomplished with the stimulus. This has been the big drawback of monetary policy; the Fed dropped money on Wall Street but it never made it to Main Street.

A new Reuters analysis shows that corporate spending on buybacks and dividends has surged relative to investment in long-term growth through R&D and other forms of capital spending, in a troubling sign that corporate America may be undermining itself. Almost 60% of the 3,297 publicly traded non-financial U.S. companies examined bought back their shares since 2010. In fiscal 2014 alone, the total amount returned to shareholders (including share repurchases and dividends) reached $885 billion, way more than the companies’ combined net income of $847 billion. And the spending on buybacks, or financial engineering squeezes out investments in R&D, which has dropped.

Industrial production fell 0.2% in October but manufacturing output advanced 0.4% in October. Overall production was held down by a drop in mining and utility output. In addition, the Fed revised August production higher to a 0.1% gain from previous estimate of a 0.1% drop. As a result, industrial production was up at a 2.6% annual rate in the third quarter.

The National Association of Home Builders/Wells Fargo housing market index pulled back 3 points to 62, slightly below expectations but up from 58 a year ago. A reading over 50 signals improvement. Builders have reported strong results in the most recent earnings season. D.R. Horton, the largest US homebuilder, reported a 44% jump in profit in the most recent quarter, with orders up 19%. Lennar, the number-two builder by volume, also reported profit and revenue that were better than expected. Orders rose more than 10%.

Greece has reached a preliminary deal with its international lenders on home foreclosures reform, removing a major obstacle holding up fresh bailout loans for the debt-laden country. The changes will see Athens qualify for a €2-billion-euro sub-tranche of new financial aid to pay off state arrears and €10-billion-euro in funds to help recapitalize the country’s four main banks.

Walmart beats. Walmart earned $1.03 per share from continuing operations in the third quarter, but $0.99 excluding adjustments to its leases. Still, that was marginally higher than the $0.98 expected by analysts. Comparable-store sales, or sales at stores open at least a year, at Walmart’s US stores were up 1.5%. E-commerce sales were up by 10%.

Home Depot beats. The do-it-yourself home-improvement chain earned $1.36 per share in third quarter, beating expectations for $1.32. This was driven by a healthy 5.1% gain in comparable-store sales, which was better than the 4.6% expected by analysts.

Urban Outfitters missed. Urban Outfitters reported record third quarter sales that missed estimates, and earnings per share matched estimates, but comparable-store sales climbed by just 1% during the period, missing expectations for 3.4% growth. The news came after shares dropped 7.4% following the company’s announcement that it acquired a group of restaurants including the fast-casual chain Pizzeria Vetri. Apparently I’m not the only one who fails to see the synergy between retail clothing and pizza.

Shares of Dick’s Sporting Goods are getting clobbered. Dick’s reported third quarter adjusted earnings of $0.45 per share, missing expectations by a penny. Same-store sales, or sales at stores open at least a year, were up 0.4% in the quarter across the company, less than the 1.9% increase that was expected. And then the salt on the wound: the company lowered fourth quarter guidance.

A New York state judge denied a temporary restraining order sought by daily fantasy sports companies DraftKings and FanDuel in an effort to keep operating in the state after NY Attorney General Eric Schneiderman deemed the games to be illegal gambling. The government will now move for an injunction against the companies which will be heard in court on Nov. 25. DraftKings continues to operate as usual in New York despite the pressure from Schneiderman’s office, but FanDuel stopped taking new deposits from state players on Friday.

A US House of Representatives investigative panel plans to hold a 2016 hearing on skyrocketing drug costs. Earlier this month, the U.S. Senate Special Committee on Aging launched a probe into drug pricing at Valeant and Turing, signaling growing bipartisan agreement over the need to review prescription medicine costs across the nation.