Financial Review

Carry On

Sinclair Noe — September 6, 2017

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DOW + 54 = 21,807
SPX + 7 = 2465
NAS + 17 = 6393
RUT + 2 = 1402
10 Y + .04 = 2.11
OIL + .55 = 49.17
GOLD – 5.90 = 1334.50

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	4,535.4	$74.84B	$2.01B	33.87%	1	-1.17%	-1.56%
	Ethereum	ETH	326.69	$30.59B	$925.72M	15.61%	0.0713257	-3.16%	-14.52%
	Bitcoin Cash	BCH	626.82	$10.25B	$735.94M	12.41%	0.136414	-3.34%	6.35%
	Ripple	XRP	0.22301	$8.48B	$146.48M	2.47%	0.00004871	-3.23%	-2.85%
	Litecoin	LTC	78.720	$4.09B	$735.92M	12.41%	0.0170777	-3.38%	20.23%
	NEM	XEM	0.29171	$2.63B	$3.85M	0.06%	0.0000645	-3.47%	-6.32%
	Dash	DASH	339.22	$2.55B	$33.61M	0.57%	0.0745771	-3.04%	-8.44%
	IOTA	MIOTA	0.70690	$1.95B	$33.70M	0.57%	0.00015468	-4.40%	-20.62%
	Monero	XMR	118.70	$1.77B	$58.20M	0.98%	0.0259621	-3.50%	-13.37%
	Ethereum Classic	ETC	18.4400	$1.72B	$193.02M	3.25%	0.00397381	-4.45%	14.47%

The major stock indices did what they have been doing all year – shrugged off worries and continued the trend. In the background, the economy continues to slog along with good, not great growth. Companies continue to report good earnings.

Expectations for tax reform and infrastructure spending are diminishing but on the bright side we are not engaged in a nuclear war with North Korea, so it all kind of balances out. Bank of America Merrill Lynch, for one, thinks investors should be more confident on equities. The firm said in a research note that it recommends being bullish given that the first synchronized upswing in the global economy since 2007 is a strong tailwind for earnings.

By its reckoning, the firm figures that global corporate profits are running 13.5 percent higher than last year. That’s in line with the gain in the benchmark MSCI All-World Country Index, suggesting stock prices have not gotten ahead of themselves. To be sure, there are plenty of other issues on the horizon to worry about, but for now the trend is in place until something blows up.

In a rebuke to Republican leaders, Trump backed Democrats’ plan to support a deal that would fund Hurricane Harvey aid but only raise the debt ceiling for three months. Those two items would also be tied to a measure to keep the government open through the end of December, setting up a hugely complicated year end crush of must-pass items. Republicans would have preferred a longer extension to avoid another fight in December.

Democrats could use the opportunity as leverage to attach a provision aimed at codifying into law the Deferred Action for Childhood Arrivals program. Nothing signed yet, but it looks like the debt ceiling crisis has been kicked down the road for now. I’m not sure we can call it bipartisanship but it’s not a debt default.

Debt ceiling jitters were particularly high Tuesday when the Treasury Department auctioned $20 billion of one-month bills at a rate of 1.30 percent, which was higher than the 1.23 percent yield on two-year Treasury notes. Those who were brave enough to buy at those rates saw the value of the bills soar today as the rate dropped to 1.02 percent.

On the stump for tax reform in North Dakota this afternoon, Trump repeated one of his favorite campaign claims: that Americans pay more in taxes than any other country. Except that’s not true.

In fact, the US ranks in the middle of the pack when compared with the roughly three dozen developed countries tracked by the Paris-based Organization for Economic Cooperation and Development. And our tax rate, is ranked fourth from the bottom, among the very lowest.

Stanley Fischer, the vice chairman of the Federal Reserve, announced today that he would resign in mid-October. Fischer joined the Fed’s board in 2014 after a distinguished career as an academic economist and an international policy maker.

Fischer brought a hawkish voice to Fed deliberations on monetary policy, arguing that the Fed should be raising interest rates more quickly, sparring with Janet Yellen, the Fed chair. But he provided reliable support for measures strengthening financial regulation.

Trump has not been in a rush to refill the Fed’s board. There were two vacancies when he took office, and a third seat opened in the spring. So far, the White House has put forward only one candidate, Randal Quarles, a Utah investor who was nominated in July.

Fischer’s departure is unlikely to shift monetary policy in the near term. The Fed is widely expected to announce after its next meeting in mid-September that it will begin to reduce its holdings of Treasuries and mortgage-backed securities.

The Federal Reserve’s latest Beige Book report, which collects and presents anecdotes on economic trends from policy makers’ business contacts around the country. All 12 Fed districts reported moderate to modest economic growth. Companies aren’t passing along higher input costs to consumers in the form of more expensive products and services. Instead, they’re accepting lower profit margins.

Most districts reported limited wage pressures and modest to moderate wage growth. The Fed said that consumer spending increased in most districts and that many contacts were becoming worried about a prolonged slowdown in the auto industry.

The Beige Book, based on information collected on or before August 28, said there was not enough time to gauge the full extent of the flooding from Hurricane Harvey.  The Atlanta and Dallas Fed banks reported the storm created broad disruptions to economic activity along the Gulf Coast.

Economic reports today show the trade deficit rose slightly in July, keeping the U.S. on track to post a larger gap in 2017 than in 2016. The deficit edged up to $43.7 billion in July from $43.5 billion in June.

A reading on services activity, meanwhile, came in better than expected, providing an added lift to the outlook for the health of the U.S. economy. ISM services were at 55.3 in August, compared with 53.9 in the prior period. A reading of at least 50 indicates expansion.

Hurricane Irma has hit a few islands in the Caribbean – including St. Martins and St. Thomas – and is now closing in on Puerto Rico. The imminent threat of a natural disaster comes as the territory deals with a massive economic disaster.

In May the commonwealth filed the biggest municipal bankruptcy in US history. Puerto Rico has $74 billion in debt, and another $50 billion in pension obligations on the books.

The Federal Emergency Management Agency already has about 400 people in Puerto Rico and the U.S. Virgin Islands to help with hurricane preparation and response. Puerto Rico will surely need and get federal assistance. A severe disaster could exacerbate some of the commonwealth’s adverse economic trends, including migration to the U.S. mainland.

The official forecast path shows that Irma’s center could track along or either side of the Florida peninsula. Where Irma turns north will be critical for determining what part of Florida experiences the most dangerous impacts from Irma. Regardless, conditions in South Florida may go downhill as soon as midday Saturday.

Irma is a Category 5 and it is a very large hurricane, wider than the state of Florida; so, despite the uncertainty in its track, there is a threat of rainfall flooding and strong winds capable of triggering power outages, downing trees and perhaps some structural damage will likely occur to some degree well inland from wherever Irma makes landfall into a swath of the Southeast early next week.

And just a side note; the NFL season kicks off Thursday night but I would like to nominate J.J. Watt as the league MVP. The Houston Texan defensive player put together a fund-raising effort for Hurricane Harvey relief, and he has already raised $27 million.

And while we’re at it, a tip of the hat to Oklahoma. The Sooner state has offered aid to burnt orange country. Volunteers from agencies in Oklahoma, such as the American Red Cross, Children’s Disaster Services, Convoy of Hope, Mercy Chefs, the Salvation Army, Southern Baptist Disaster Relief and Operation BBQ will be going to Texas.

Just in case you’re wondering – Operation BBQ is a real thing. It started in 2011, when Joplin Missouri was hit by a tornado.  Volunteers from competition BBQ teams from eight states answered the need to help feed displaced families, police, fire, National Guard and emergency personnel. They served over 120,000 meals over 13 days. Operation BBQ – you may know it by its other name: Ribs Sans Frontieres.

The Gap plans to close about 200 “underperforming” Gap and Banana Republic locations. There are currently about 2,000 Gap and Banana Republic stores worldwide, so the closures would likely impact about 10% of them. Gap declined to specify how many of each brands’ stores will close or where the soon-to-be shuttered stores are located.

One bright spot for Gap has been Old Navy – its less expensive clothing brand. When Gap reported earnings last month, Old Navy outperformed the other brands once again. While comparable sales at Gap fell by 1% and Banana Republic’s sales were down 5%, Old Navy saw a 5% increase.

The company added that it plans to continue making “significant” investments in its online operations, including in artificial intelligence technology. Shares of The Gap were up 7.4% today. Closing 200 stores and the stock jumps higher – no, it doesn’t make sense.

Restoration Hardware announced a forecast for third-quarter and full year adjusted earnings that flew past its previous expectations, sending its shares 30% higher in extended trading. The stock is heavily shorted and the big move looks like a short squeeze.

Intel has won a point in its antitrust battle with the European Commission — and the American technology industry may be feeling a little victorious as well. The Court of Justice of the European Union ordered a lower court on Wednesday to re-examine the 1.6 billion euro, or nearly $1.3 billion, fine imposed on Intel in 2009 for abuse of its dominant position in the computer chip market.

This does not mean Intel is in the clear, just getting a second chance to present their side of the case. The decision is considered a setback for the European Union antitrust authorities who have been investigating American tech giants like Google and Qualcomm.

T-Mobile upped the mobile phone carrier war on Wednesday, announcing an exclusive partnership to offer free Netflix Inc. subscriptions to T-Mobile One family plan customers.

The best selling electric car is the Nissan Leaf, and today, Nissan announced it has updated the car for the first time since it was introduced in 2010. The biggest change – a 200-mile range.

Financial Review

Place Your Bets

Sinclair Noe — June 16, 2015

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

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DOW + 113 = 17,904
SPX + 11 = 2096
NAS + 25 = 5055
10 YR YLD – .04 = 2.32%
OIL + .50 = 60.02
GOLD – 4.70 = 1182.50
SILV – .06 = 16.11

The Federal Reserve Federal Open Market Committee is meeting to determine monetary policy. Tomorrow they will issue a statement and Fed Chair Janet Yellen will hold a press conference. Nobody expects the Fed to change policy tomorrow but they will probably signal that they are looking to raise interest rates at the FOMC’s September meeting, with a few qualifiers: if the labor market continues to improve, if mild inflation does not turn into deflation, if global markets don’t melt down, if the dollar remains well behaved. And then, over the next few weeks, the policymakers will talk about how the rate hike will be small and measured.

Of course we have to wait to hear from the Fed but the markets have placed their bets. Global investors have been moving out of equities and into cash. Cash levels rise to 4.9 percent of portfolios, up from 4.5 percent in May; the proportion of investors’ overweight equities falls to net 38 percent from 47 percent. The proportion of investors expecting to underweight global emerging markets surges to a net 21 percent from net 6 percent in May. The U.S. dollar is the most crowded trade as Fed tightening looms; 72 percent predict the euro will weaken vs. the dollar in coming year.

Central banks now own an incredible $22 trillion in assets and they have created $6 trillion of negative yielding bonds this year. Some 45% of government bonds in the world currently yield less than 1%. And 83% of global stock markets are currently supported by zero interest rate policies. If that doesn’t push investors to risk assets, nothing will. And so don’t expect the Fed to just take away the punchbowl without repercussions.

Financial markets remained under pressure today as Greece teetered on the brink of default with a debt deal nowhere in sight. Greek Finance Minister Yanis Varoufakis told Bild newspaper Athens doesn’t have plans to present new proposals at the Eurogroup meeting on Thursday, saying it is up to creditors to make the next move. Greek Prime Minister Alexis Tsipras accused the International Monetary Fund of “criminal” responsibility for his country’s predicament. Tsipras’s rhetoric further diminishes the chances that the Greek government will be able to bridge the divide with its creditors in the IMF, the ECB and the European Commission any time soon.

New reports, mainly out of Germany, that European governments are ready to push for capital controls in Greece if there’s no deal this week. That would mean a severe lockdown on flows of cash similar to the ones brought in for Cyprus in 2013; strict limits on the amount that could be withdrawn from banks, taken abroad physically, or passed between international accounts. The move would slam the brakes on outflows of money streaming out of Greek banks. There’s no institutional procedure for the rest of Europe locking down an individual member state. Greece would have to pass its own law agreeing to the capital controls, and only if there is a run on Greek banks, which has basically been underway for quite some time; the ECB has been supplying emergency liquidity assistance, or emergency cash; so the way to force capital controls is to remove the emergency assistance; the Greek banks run out of cash and the economy comes to a screeching halt, or at least starts printing their own drachma.

Housing starts fell in May. Groundbreaking dropped 11.1 percent to a seasonally adjusted annual pace of 1.04 million units. That partially reversed April’s large gain. April starts were revised up to a 1.17 million-unit rate, the highest since November 2007. Groundbreaking for single-family homes, which account for the largest share of the market, fell 5.4 percent to a 680,000 unit pace. Starts for the volatile multifamily segment tumbled 20.2 percent to a 356,000 unit rate. Meanwhile, permits for future home construction increased 11.8 percent to a 1.28 million-unit rate, the highest since August 2007. Permits have been above a 1 million-unit pace since July. Single-family building permits increased 2.6 percent to their highest level since December. Multi-family building permits soared 24.9 percent. Before we start thinking all is well, the residential home industry is about half of the pre-2005 peak.

U.S. states plan to slow spending growth in fiscal 2016, taking a cautious approach to forecasting and budgeting in light of only modest increases in revenue. According to a survey by the National Association of State Budget Officers, general fund spending will rise by 3.1 percent for the fiscal year beginning July 1, below the estimated 4.6 percent for the current year. Growth continues to be a “modest slog up the hill,” compared with what the association would expect to see in an economic recovery. Revenue has grown but not as fast as some costs, particularly for pensions, healthcare, and education. A backlog of much-needed infrastructure projects will also pressure budgets longer term. Across the country, taxpayers could see an aggregate net increase of $3 billion in taxes and fees, with governors in 16 states mostly proposing hikes in general sales and cigarette taxes. Twelve states proposed cutting personal income taxes.

The Congressional Budget Office says U.S. government debt held by the public is expected to rise to 107 percent of the economy in 2040 from 74 percent this year, citing an aging population and rising health-care costs. The non-partisan agency kept its forecast for this fiscal year’s deficit at 2.7 percent of GDP. The CBO says stronger economic growth and constraints on federal spending will keep the shortfalls close to their current percentage of GDP through 2019.

This morning, the US Food and Drug Administration announced a new policy on trans fat, essentially banning it from processed foods. Under the new rule, partially hydrogenated oils (PHOs), the biggest source of trans fat, are no longer “Generally Recognized as Safe” (GRAS), and cannot be added to foods after June 18, 2018, without specific approval from the FDA. In use since the 1950s, PHOs are often added to processed foods to extend their shelf life. They are frequently found in products like frosting, microwave popcorn, and coffee creamers. However, what is good for extending shelf life is not necessarily good for extending human life. The FDA said it expects the action to result in reductions coronary heart disease and fatal heart attacks.

Since 2006, the FDA has required food manufacturers to disclose the amount of trans fat on the Nutrition Facts label of a product—but only if the product had 1/2 gram or more of trans fat per serving. A product with up to 1/2 gram of trans fat per serving could still declare “0g of trans fat” on its label, leaving consumers in the dark about PHOs unless they read the ingredients list. Other sources of trans fat, such as those that occur naturally in some meat and dairy products, as well other processed trans fat that contain fatty acids that are chemically and structurally different than those in PHOs, do not fall under the purview of the new rule.

Merger talk in the health-insurance industry is heating up. UnitedHealth has reportedly approached Aetna about a takeover deal that would likely be valued at more than $40 billion, after Anthem approached Cigna with a $45 billion buyout offer that was rebuffed. Meanwhile, Aetna and others are considering buying Humana, which is looking at strategic alternatives including a sale.

Gap is closing stores and laying off workers. The retailer announced plans to close 140 stores and lay off 250 corporate workers during this fiscal year. Over the “next several years,” the number of stores closed is expected to climb to 175. The closures and job cuts are the company’s attempt to recover from five straight quarters of sales declines.

Coty has acquired three beauty products and fragrance lines from Procter & Gamble  for almost $12 billion. The businesses are believed to include PG’s Max Factor, CoverGirl and Wella hair care brands. Details of the transaction are still being worked out but if it goes through, it would be the biggest deal in cosmetics in at least a decade and would turn Coty into a world leader in perfume and hair care.

Blackstone Group and Carlyle Group are making a joint bid for NCR, the cash register and ATM manufacturer, in a leveraged buyout that would be the year’s biggest at more than $10 billion, including debt. The auction for NCR is several weeks away from completion, and other buyout firms are expected to compete.

While still in the early planning stages, Goldman Sachs will soon offer loans online to both consumers and to small businesses as it looks to tap into a marketplace worth nearly $850 billion. Taking on consumer lending means taking on a growing field of competitors. Along with traditional credit providers like Wells Fargo and smaller banks, websites like Lending Club and On Deck have moved into the peer-to-peer lending business.

Discover Financial Services, the credit-card issuer that expanded into mortgages and student lending, is closing its home-loan origination business and will offer severance packages to about 460 employees.

Fitbit has raised its IPO price range to $17-$19 per share (from $14-$16). At the high end of the new offering range, FitBit would be valued at about $3.9 billion, and should raise about $656 million for the company. Ticker symbol FIT, going public tomorrow.