Financial Review

Split

Sinclair Noe — February 7, 2017

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DOW + 37 = 20,090
SPX + 0.52 = 2293
NAS + 10 = 5674 (record high close)
RUT – 5 = 1361
10 Y – .02 = 2.39%
OIL – .75 = 52.88
GOLD – 1.80 = 1234.40

The dollar, recovering from its worst start to a year in three decades, gained against a basket of other currencies. The euro is on the defensive, with markets nervous about elections in the Netherlands, Germany and possibly Italy, plus more wrangling over Greece’s bailout and an upcoming reduction in the European Central Bank’s monthly bond-buying.

The head of the German Bundesbank responded to accusations from the Trump administration that Germany was manipulating the euro lower. Jens Wiedmann said the dollar strength was “triggered by the political announcement s of the new government.” The pound was among the biggest losers today, falling to a two-week low as Brexit and economic growth concerns return to put pressure on sterling.

Yields on two-year Greek bonds are up 9 basis points and are at their highest level since the middle of last year, as a rare split at the International Monetary Fund puts the country’s bailout at risk. The IMF says that Greece won’t meet targets set by Europe for the country to run a budget surplus. The fund also reiterated its view that Greece’s debt levels are unsustainable.

The fund’s annual review of the Greek economy showed they disagree over the austerity measures imposed on Athens and the need for further economic reforms. The split decision fueled fears the fund might pull out of the rescue plan for the country.

China’s foreign exchange reserves have dropped below the $3-trillion level for the first time since 2011, marking the seventh straight monthly decline as capital continues to flow out of the world’s second-largest economy. Data from the People’s Bank of China showed reserves falling by over $12 billion in January, despite government efforts to tighten capital movement controls and stabilize the yuan’s exchange rate.

The US trade deficit rose slightly in 2016 to $502.3 billion, marking the highest level in four years. The trade gap widened last year because exports fell faster than imports, the result of a weak global economy and a stronger dollar that made American products more expensive to foreign buyers. The gap with China is by far the largest among the major U.S. trading partners.

Although the deficit dropped 5.5% in 2016, it still totaled $347 billion. That’s more than three-fifths of the overall U.S. trade deficit. The deficit with Mexico rose 4.2% to $63.2 billion in 2016 to mark a five-year high. Exports rose 2.7% $190.7 billion, led by higher shipments of passenger planes and parts.

Imports increased a smaller 1.5% to $235 billion as demand for pharmaceutical drugs, cell phones and televisions declined.

The Federal Reserve reports total consumer credit increased $14.2 billion in December to a seasonally adjusted $3.76 trillion, posting an annual growth rate of 4.5%, The increase was below estimates for a $20 billion gain. Revolving credit, which is mostly made up of credit card loans, slowed to a gain of $2.3 billion or an annual rate of 2.9%.

Non-revolving credit, which covers loans for education and cars, increased $11.8 billion in December, or at a 5.1% annual rate. For all of 2016, total consumer credit rose at a 6.4% rate, down from a 7% rate in the prior year.

Data provider CoreLogic said its home price index was up 0.8% during December, and 7.2% compared to a year ago. That’s the fifth straight month in which the yearly price increase was higher, including during months that saw mortgage rates jump nearly a full percentage point.

Low supply is boosting home prices higher and higher, and CoreLogic expects that prices will rise 4.7% during 2017. That would take its national index – now 3.9% below the high last set in 2006 – to a fresh high sometime this year. Arizona prices were up 0.6% for the month and 6.8% for the past year. Home prices in Arizona are still 21.4% below the peak.

The Labor Department’s JOLT survey, or Job Openings and Labor Turnover, shows there were 5.5 million job openings on the last day of December. That was essentially flat compared to November. But 5.3 million people were hired during the month, up from 5.2 million in November. Fewer people quit jobs voluntarily in December: 3 million compared to 3.1 million in November. “Quits” are tracked as a signal of how confident workers are in their ability to secure another job elsewhere.

Philadelphia Fed President Patrick Harker said he could support raising interest rates at the central bank’s March meeting if job market momentum holds up, growth continues and wages rise. John Williams, President of the San Francisco Fed, said last week that he sees the March policy meeting as a possible rate-hike candidate.

And on the flip side, Minneapolis Fed President Neel Kashkari published a blog post today stating the economy has not reached the point in terms of inflation and employment that would necessitate aggressive monetary policy. Kashkari wrote: “From a risk management perspective, we have stronger tools to deal with high inflation than low inflation.” Investors give roughly a one in four chance of a quarter-point increase in March, per federal fund futures.

Betsy DeVos was confirmed by the U.S. Senate to be education secretary, but only after Vice President Mike Pence was called in to break a tie that threatened to defeat her. It’s the first time in US history that a vice president has needed to intervene in a cabinet nominee’s confirmation.

The Department of the Army announced today that it has completed a presidential-directed review of the remaining easement request for the Dakota Access pipeline, and has notified Congress that it intends to grant an easement. Thousands of predominately Native Americans protesters boycotted the $3.8 billion pipeline’s construction in the state of North Dakota last year. The Standing Rock Tribe have said that they will fight the decision in court.

Last week President Trump signed an executive order to roll back the Dodd-Frank Act – the 2010 legislation meant to help protect taxpayers from another financial crisis. And Congress has acted, by getting rid of the Dodd-Frank rule that forces huge oil and gas companies to disclose how much they pay foreign governments while they’re doing business abroad.

Three federal judges on the Ninth Circuit Court of Appeals are set to hear oral arguments this evening on whether Trump’s travel ban will remain suspended for now; the court is not expected to decide on the constitutionality of the ban. The central question for the appellate court is whether US District Judge Robart abused his discretion by putting a temporary hold on the travel ban.

Oil prices slipped as lower production by OPEC and other exporters was undermined by growing evidence of a revival in U.S. shale production and sluggish demand. Prices have been supported over the last two months by efforts by the Organization of the Petroleum Exporting Countries and other exporters to cut output by almost 1.8 million barrels per day in the first half of 2017.

But while OPEC and Russia have together cut at least 1.1 million barrels per day so far, rising U.S. production is compensating for the shortfall. After the close, the American Petroleum Institute estimated that U.S. crude stockpiles had surged 14.2 million barrels last week.

BP’s fourth quarter earnings came in below analyst expectations, with the company saying that its cash flow won’t cover spending and dividends until Brent crude rises above $60 a barrel.

Statoil, Norway’s biggest oil company, said that it is targeting another $1 billion in cost savings after reporting an unexpected loss in the fourth quarter.

General Motors said fourth-quarter net income fell partly because of $500 million in foreign exchange losses, while the automaker forecast 2017 profit per share would be flat to slightly up from 2016. Excluding one-time items, GM earned $2.4 billion, or $1.28 a share, in the latest quarter, down 14 percent from a year earlier. The adjusted result beat analysts’ expectations of $1.17 per share.

Hourly workers for General Motors will get record bonus checks of up to $12,000 after the company reported booming sales in North America. The profit-sharing checks owed to GM’s 52,000 United Auto Workers-represented workers are based on a simple formula. They get about $1,000 for every $1 billion in annual pre-tax North American profit, according to a formula adopted as part of contract negotiations in 2011. Record U.S. industry vehicle sales powered GM to a $12 billion North American profit in 2016, up from $11 billion a year earlier.

After the closing bell, Disney reported quarterly earnings that beat expectations, but revenue fell short of estimates. The company posted first-quarter earnings per share of $1.55 on $14.78 billion in revenue.

Michael Kors Holdings reported a bigger-than-expected drop in comparable sales for the holiday quarter and forecast current-quarter profit well below estimates. Sales at stores open for more than a year fell 6.9 percent in the quarter ended Dec. 31, falling for the seventh time in eight quarters. Kors is trying to regain its brand value by reducing supplies to department stores, which have been heavily discounting its products to drive traffic.

Gap raised its profit outlook for the fourth quarter after reporting better-than-expected sales for the holiday shopping period; sales improved at its Gap and Old Navy stores.

21st Century Fox reported adjusted quarterly profit of 53 cents per share, 4 cents a share above estimates. Revenue was just slightly below estimates. Profit was up 27 percent over a year earlier, as ad sales and affiliate fees increased.

Apple pulled ahead of Samsung in smartphone shipments. Apple shipped 78.3 million units in the fourth quarter, surpassing Samsung for the first time in five years. Samsung shipped 77.5 million units, a number that was affected by its exploding-battery problem, which cost it $3 billion in lost sales.

Financial Review

Waiting on the Fed

Sinclair Noe — September 19, 2016

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

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DOW – 3 = 18,120
SPX – 0.04 = 2139
NAS – 9 = 5235
10 Y un – 1.70%
OIL + .16 = 43.19
GOLD + 2.80 = 1313.80

The Federal Reserve’s Federal Open Market Committee meets tomorrow and will issue a statement on Wednesday. A string of disappointing results on the U.S. economy in the past several weeks has all but ensured that interest rates will remain ultra-low for consumers and businesses for another few months.

That doesn’t mean the economy is in horrible shape, just more of the slow, consistent, sluggish, steady growth that we’ve seen for quite some time. Is it enough to move the Fed? Wall Street investors only see somewhere between a 9% to 15% chance that the Fed will hike rates. Still, the Fed could hike rates; they have certainly said a hike is on the table. Of course we won’t know for sure until the Fed makes its announcement.

The major stock indices started the day in positive territory. The Dow had an early gain of 100 points. Last week, the bulls and the bears faced off. As much as the bulls tried last week, they could never get the market back above a key hurdle. The threat of a September rate hike just continued to circulate, and never gave the buyers a chance to get traction. Then again, the bears didn’t make any progress either. As well as the S&P 500 held up last week, we’re still closer to a technical breakdown than a breakout.

Most likely, traders will not place big bets before Wednesday’s interest rate decision. After the Fed statement comes out, look for traders to trade, probably with enough commitment to break either support or resistance; a sizeable movement to finish out the week.

The Bank of Japan is also holding a meeting this week and they will issue their monetary policy a few hours before the Fed. The BOJ remains the most aggressive major central bank when it comes to quantitative easing—its program of bond and other asset purchases as well as negative interest rates that are designed to reflate Japan’s stubbornly sluggish economy.

Negative rates have failed to weaken the Japanese yen.  Year to date, the yen is up nearly 18% versus the dollar and 15% versus the euro. There is speculation the Bank of Japan may try to flatten the yield curve by buying long-term debt and selling short term debt. (Which sounds a lot like “Operation Twist”.)

Excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years, according to the Bank of International Settlements’ quarterly review. The central bank of central bankers also called the recent equity rally “more stick than carrot,” but stopped short of warning of a bubble, with policy makers questioning whether market prices fully reflect potential risks.

Global bond issuance is running at its fastest pace in nearly a decade as companies, countries and U.S. agencies such as Fannie Mae and Freddie Mac binge on debt. According to Dealogic, a total of $4.88 trillion of debt has been sold since the year began as issuers take advantage of rock-bottom borrowing costs. The figure is a hair below that of 2007, when $4.91 trillion of bonds were issued during the same period.

It seems more likely that London will lose its “passporting rights” with a hard Brexit. Some leading Conservative party members are currently pushing for a so-called hard Brexit option, which would end free movement between the U.K. and the EU and cut trading ties with the remaining 27 member states. But Jens Weidmann, the president of Germany’s central bank says if the U.K. exits the single market, the passport rights for London-based financial firms “would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area.” Passporting allows British banks, including insurers and funds to sell their services seamlessly in any EU member state, without having to obtain a local license.

Losing the right means any financial institution using London as their EU headquarter would have to move to another country and “passport” their services into the rest of the union from there. They could also stay based in the U.K, and instead apply for regulatory approval in each country it wishes to continue to do business. In any case, the industry has warned it will cost billions of pounds in office relocations, staff transfers, added paperwork and new capital requirements. There are also concerns jobs will be lost to other European financial hot spots, such as Frankfurt, Paris, Dublin and Luxembourg.

Venezuelan President Nicolas Maduro said that OPEC and non-OPEC countries are close to an agreement to stabilize markets ahead of an informal meeting in Algiers next week. The uncertainty ahead of that meeting has seen oil investors head for the sidelines, cutting wagers on both falling and rising crude prices.

The National Association of Home Builders index on builder confidence regarding newly built, single-family homes climbed to 65 points in September from a downwardly revised 59 in August. As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers.

Contract negotiations between Canada’s Unifor union and General Motors are continuing around the clock, with the two sides divided over new investment, ahead of a looming strike deadline that could see 3,900 workers walk off the job by midnight tonight. A strike would halt powertrain and vehicle production in at least two Canadian plants and potentially start a ripple effect for GM production in the U.S. that relies on those parts.

Although approval had been expected by the end of August, Iran has been told the U.S. will issue export licenses for the purchase of more than 200 Boeing and Airbus aircraft by the end of September. The US Treasury can veto sales of modern aircraft to Iran, including non-U.S. aircraft, due to the high proportion of US parts.

Sarepta Therapeutics shares jumped up as much as 82% in early morning trade after the Food and Drug Administration granted its Duchenne muscular dystrophy drug accelerated approval. The drug – the first treatment for the degenerative disease – has had a long and controversial history with the FDA. The agency voted against approval, then delayed review.

Duchenne muscular dystrophy, which mostly affects boys, typically kills patients before the age of 30. Patients and their families were particularly outspoken advocates for the approval of the drug, pushing back against the agency’s concerns at meetings open to the public. Sarepta shares are up about 160% over the last three months.

Salesforce is embedding artificial intelligence into its software, making it the latest firm to enhance workplace tools with human-like abilities. Called Einstein, the new offering is a set of online A.I. services designed to automate tasks, predict behavior and spotlight relevant information. Salesforce will demonstrate the software at its annual user conference next month in San Francisco.

The announcement also allowed Salesforce to pre-empt an announcement from Oracle, which also is holding its annual customer event in San Francisco. High on Oracle’s list of new features: real-time analysis of enormous amounts of data. Oracle calls its product Oracle A.I. Elsewhere, General Electric is pushing its A.I. business, called Predix.

IBM has ads featuring its Watson computer talking to various celebrities. More than 30 private companies working to advance artificial intelligence have been acquired in the past five years, and Salesforce has been among the most active buyers along with Alphabet, Intel and Apple.

And it’s all kind of cool and exciting and maybe a little creepy. So, what’s really happening?

And the answer is that it is probably too soon to say for certain. For Salesforce the idea is to provide its customers sales tools. Who are the best prospects to call this week? Which leads are most likely to become prospective clients? Why am I getting outsold by my competitors in certain markets? How long will it take a deal to close?

We don’t know what value A.I. can provide because people are still trying to figure out how to use it. At its core, A.I. is just a series of advanced statistics-based exercises that review the past to indicate the likely future, or look at current customer choices to figure out where to put more or less energy. People are going to have to experiment, most likely first on pain points like security and product marketing.

Technology matures when we don’t pay much attention to it, or only notice when it fails; think of electricity in your house, or your phone (which has enough computing power to fly a rocket to the moon). Of course, by the time A.I. becomes ubiquitous and fades into the fabric of everyday life, we’ll have some new technology to worry about.

Nearly one-third of Hanjin Shipping container ships that have been waiting to dock at ports around the world have offloaded their cargo, raising hopes that the disruption in the global supply chain will ease ahead of the year-end holiday season. Meanwhile, a South Korean judge has ruled that all Hanjin vessels that have unloaded must cancel their charter agreements and return the ship to their owners.

After rolling out a similar hub in the US, UPS is expanding its 3D printing services to Asia with a new facility in Singapore run by its partner Fast Radius. The company sees 3D printing as a potential threat to its warehousing business – where it stores parts for manufacturers – so it has looked to incorporate the technology into its business model.

As it grapples with a massive global smartphone recall that is estimated to cost more than $1 billion, Samsung Electronics is moving swiftly to sell stakes in other tech companies to raise cash. The firm said Sunday it disposed of shares in ASML, Seagate, Rambus and Sharp. Total proceeds from the sales were nearly $900 million.

Financial Review

Inside the Stagecoach

Sinclair Noe — September 13, 2016

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

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DOW – 258 = 18,066
SPX – 32 = 2127
NAS – 56 = 5155
10 Y + .06 = 1.73%
OIL – 1.39 = 44.90
GOLD – 9.00 = 1319.40

Stocks opened in negative territory and then slipped further. Any rallies were half-hearted at best. Two months of tranquility was pierced Friday when the S&P 500 tumbled in its worst rout since the Brexit vote.

Things aren’t any better in the $13.6 trillion Treasury market. Ten-year notes were stuck in their tightest monthly range in a decade up until September.

Stocks exited the tightest trading range in history last week when European Central Bank President Mario Draghi downplayed the need for more measures to boost growth and Boston Fed President Eric Rosengren warned against waiting too long to raise interest rates. Fed rate-hike expectations are falling.

Dovish commentary from Federal Reserve Governor Lael Brainard has pushed back expectations for a September interest-rate hike. In a note out late Monday, economists at Goldman Sachs cut their forecast for a rate increase at the Sept. 20-21 meeting to a probability of 25% from 40% previously. It also lifted the odds for a December tightening to 40% from 30%. This is the third time this month the Goldman economists have changed their stance on the September meeting.

But don’t expect the volatility to just vanish. Abrupt breaks in calm have not been easily resolved in the past. In the five prior instances when turbulence spiked as it did Friday, the S&P 500’s daily swings averaged 1.5 percent in the next 20 days. That’s 2.5 times the move in the previous 20 days.

Oil futures dropped after the International Energy Agency cut its crude forecast, warning that supply will continue to outpace demand well into 2017. Global oil consumption growth sagged to a two-year low in the third quarter as demand faltered in China and India, while record output from OPEC’s Gulf members is compounding the glut.

As recently as last month, the IEA had expected the market to return to equilibrium this year. The agency downgraded its global oil demand predictions by about 100,000 barrels a day for this year to growth of 1.3 million barrels a day and cut its forecast for 2017 by 200,000 barrels to growth of 1.2 million a day. And as demand weakens, “Global inventories will continue to grow: stockpiles in July smashed through the 3.1-billion-barrel wall.”

With its first long-range electric car, General Motors has released figures that show it’s focused on beating Tesla at its own game. The new Bolt will be rated at 238 miles on a single charge when it comes to showrooms later this year, giving it a longer range than the Model 3, which is expected to have a range of least 215 miles and isn’t expected to go on sale until 2017. The Bolt is also likely to be priced at about $37,500, close to the same price point as Tesla’s first mass-market car.

The record-breaking installations of solar panels in the U.S. continues with 2 gigawatts installed in just the second quarter of this year, according to new data from GTM Research and the Solar Energy Industries Association (SEIA).

The solar industry installed 2,051 megawatts between April and June, marking the eleventh consecutive quarter in which the U.S. saw more than a gigawatt of solar capacity added to the grid. The volume of installations also marks 43 percent growth from the same quarter in 2015.

Nevada regulators are set to decide this week on a settlement between Berkshire Hathaway’s utility, NV Energy, SolarCity and the state’s consumer advocate to roll back rate increases for customers who installed rooftop solar systems prior to this year.

The three-member Nevada Public Utilities Commission has scheduled a September 16 vote on a proposal to shield more than 32,000 rooftop solar customers from increases that took effect in January.

Last year, NV Energy proposed increased charges and reduced payments to rooftop solar customers, saying the existing model forced non-solar customers to subsidize those who did use the green power. SolarCity, Sunrun and other solar installers stopped taking customers in the state soon after a December decision by the commission to raise rates on all solar homes.

They sued after regulators denied an appeal of the ruling. The proposal would put existing solar homes back onto the rates they paid before the increases started. NV Energy asked the PUC to grandfather those rates for as many as 20 years.

Phoenix-based Freeport-McMoRan will sell its deep-water Gulf of Mexico assets to Anadarko Petroleum for $2 billion. The deal is expected to close before year’s end. Freeport’s sale all-but ends a disastrous diversification from copper and gold mining into energy drilling, a move that received widespread investor criticism and is at the heart of the company’s 66% share price collapse over the past three years and the suspension of its quarterly dividend.

Fewer Americans lived in poverty in 2015 and median incomes charted their first increase since the Great Recession, according to data released today by the Census Department. The official poverty rate fell 1.2 percentage points between 2014 and 2015 to 13.5%, and the number of people in poverty fell by 3.5 million.

The threshold for a family of two adults and two children to be considered living in poverty was $24,036. Real median household income rose 5.2% during the year, the first annual increase in median household incomes since 2007. Earnings also increased: 1.5% for full-time year-round male workers, and 2.7% for female workers. That was the first significant annual increase in median earnings for either gender since 2009.

A measure of small-business sentiment declined in August as owners became more hesitant, with election worries at the forefront. The National Federation of Independent Business small-business optimism index fell 0.2 points to 94.4. The outlook for business conditions in the next six months had the most dramatic change, dropping seven points.

Boeing reports Chinese airlines are likely to purchase 6,810 planes worth just over $1 trillion in the next 20 years as they expand fleets to cater to growth in tourism.  Boeing will also unveil its T-X trainer plane today, designed jointly with Sweden’s Saab AB. The company is counting on the model to train generations of U.S. fighter pilots, and keep alive its St. Louis manufacturing base.

A second Hanjin vessel will dock and unload at the Port of Los Angeles after more than a week stranded off the Southern California coast. The move raised hopes that gridlock could be easing after a U.S. bankruptcy judge issued an order Friday allowing the financially ailing Hanjin Shipping Co. provisional protection from creditors so vessels could dock and unload products.

Meanwhile, the South Korean government is sticking to its hard-line stance on Hanjin Shipping. Government money will not be used to bail out the shipping company, although aid may be extended to small-to-medium sized businesses jolted by the process.

Starting in 2011, Wells Fargo employees opened 2 million bank and credit card accounts in customers’ names without their knowledge. The goal was to generate fees for the company and hit aggressive sales targets for employees.

After an investigation, the bank was accused of improperly opening accounts by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles prosecutor. Last week we told you the bank and regulators had settled for $185 million. But wait, there’s more.

The Senate Banking Committee has scheduled a hearing for September 20^th to investigate the matter. Moody’s, a credit rating agency, issued a warning that the settlement may have a negative effect on Wells’ debt because of image concerns and called the incident “highly disturbing.” Today, Treasury Secretary Jack Lew said Wells Fargo had participated in “bad behavior,” and that the accusations showed bank regulation should not be rolled back.

Wells CEO John Stumpf, in an interview with the Wall Street Journal, said that there “was no incentive to do bad things” at Wells and laid the blame on the employees rather than the culture of the firm.

CFO John Shrewsberry said the fraudulent accounts were not opened in order to generate revenue for the bank. Instead, a few employees opened them to boost their performance. The bank claims that 5,300 lower level employees were fired in relation to the cross-selling shenanigans, however that number is now in question.

That figure covers terminations over the period that the regulators investigated, from 2011 through 2015. The regulators did not start investigating until 2014.

Most of the firings were probably not related to the scandal. Or if they were firing employees for opening phony accounts, it means upper management was aware of fraudulent activity and failed to report it.

But wait, there’s more. Wells Fargo executive Carrie Tolstedt tendered her resignation in June and is scheduled to leave the bank at the end of the year. Wells Fargo says her retirement is not a result of the findings of the investigation.

She is in line to receive roughly $125 million in stock and other compensation from the bank; a golden parachute. Tolstedt was in charge of community banking during the entire time the “sandbagging” operation took place.

Her success in cross selling was repeatedly cited in annual proxies as the reason for her $9 million a year in compensation, plus the retirement package. When she resigned, John Stumpf said Tolstedt had been one of the bank’s most important leaders and “a standard-bearer of our culture and a champion for our customers.”

I’m not sure what kind of culture Stumpf champions, but it looks like modern day bandits are more likely to be inside the stagecoach than outside it.

Financial Review

ECB Day

Sinclair Noe — April 21, 2016

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

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DOW – 113 = 17,982
SPX – 10 = 2091
NAS – 2 = 4954
10 Y + .02 = 1.87%
OIL – .71 = 43.47
GOLD + 3.70 = 1249.00

The European Central Bank held its key interest rate at 0% and its deposit rate at negative -0.40%. European Central Bank President Mario Draghi brushed off German criticism of his ultra-loose monetary policy and vowed to use all the tools at his disposal for “as long as needed”.

He said the ECB’s policy was working, which helped boost the euro. Draghi also stepped up his calls on euro zone governments to help get the region’s economy on a more solid footing through fiscal policy and more ambitious reforms.

According to a poll of over 1,000 American adults, even with the Dow Jones industrial average near its record high, only slightly more than half of Americans (52%) say they currently have money in the stock market, matching the lowest ownership rate in Gallup’s 19-year trend. Although Americans in all income groups are less likely to have stock investments now than before the Great Recession, middle-class Americans have been the most likely to flee the market.

Nearly three in four middle-class Americans, with annual household incomes ranging from $30,000 to $74,999, said they invested money in the stock market in 2007. Today, only half report having stock investments. This 22-percentage-point drop is more than double the changes seen in stock investing among higher and lower income groups.

Regulators released long-awaited proposed rules that would restrict how big financial institutions can pay their top executives. The new rules would make bankers wait at least four years to receive portions of their bonuses and force banks to find ways to claw back bonuses from bankers if their behavior leads to big financial losses. The new rules would apply only to incentive-based compensation, generally bonuses.

The structure of executive pay packages before the financial crisis was blamed for encouraging bankers to take unnecessary risks. The 2010 Dodd-Frank legislation required the major financial regulators to collaborate on rules aimed at encouraging a longer-term approach to compensation at big financial institutions. The regulators were supposed to propose the rules within 90 days of the law’s passage; and now, more than 5 years later, we have a proposal.

Commodities were booming in early trading today, with crude oil hitting a new 2016 high of $44.49 today. However, Kuwait said it boosted oil output, and Libya said it could soon do the same. Iran also reiterated that it will not be part of any oil production freeze. Ahead of this past weekend’s Doha meeting, a key Saudi prince said his country had the capacity to unleash a million barrels of oil a day on the market, while reiterating a “we won’t freeze if everyone else doesn’t” stance.

One of the more interesting moves has been in the grains market. Soybeans blew through the big $10.00 resistance level, with very little resistance. Corn got a good pop above $4.00 and wheat traded above $5.00. The grains and beans have been on a two-week run. You might suspect there is bad weather, horrible growing conditions, but there is no news. Maybe the markets are factoring in some kind of risk premium and we just don’t know what it is yet, or maybe this market just got a little carried away, and is way overbought at these levels. Beats me.

The number of Americans filing for unemployment benefits fell last week, hitting its lowest level since 1973. Initial claims for state unemployment benefits declined 6,000 to a seasonally adjusted 247,000 for the week ended April 16. The labor market is strengthening despite signs that economic growth slowed sharply in the first quarter. Employers are holding onto their employees in convincing confirmation of the strength of the nation’s labor market.

The Conference Board’s index of leading indicators rose 0.2 percent in March to 123.4, snapping a three-month streak of declines. The index’s six-month growth rate points to “slow, although not slowing, growth in the coming quarters,” said the group in a release. “Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”

Solar energy company SunEdison filed for Chapter 11 bankruptcy protection this morning, becoming one of the largest non-financial companies to do so in the past 10 years. Once the fastest-growing U.S. renewable energy developer, SunEdison embarked on an aggressive acquisition strategy that left it struggling with $12 billion in debt.

In its bankruptcy filing, the company said it had assets of $20.7 billion and liabilities of $16.1 billion as of Sept. 30. And if you are wondering what the bankruptcy of SunEdison says about the prospects for renewable energy, the answer is: not much. The failure of SunEd is the story of a company that took on too much debt and charted an overly aggressive growth strategy.

Volkswagen has reached a settlement in principle with the Environmental Protection Agency, California officials and consumers over a plan to fix or buy back nearly half a million vehicles that violated emissions standards. The deal includes “substantial compensation” for owners of cars powered by 2.0-liter diesel engines that were fitted with software to cheat emissions tests. Consumers will be allowed to sell their vehicles back to Volkswagen or get repairs. But financial details of the offer, which is still being finalized, were not disclosed.

The cost to buy back all of the cars affected by the scandal would be more than $7 billion. Volkswagen will also be required to invest funds to “promote green automotive” initiatives and establish an environmental remediation fund after years of cars spewing nitrogen oxide emissions at harmful levels. A US district judge in San Francisco set June 21 as a deadline for the parties to file preliminary proposals on the settlement, after which the public will have a chance to comment before he signs off.

General Motors’ first-quarter earnings and sales beat analysts’ estimates by a wide margin as it posted record results in North America and stepped toward a 15-year goal of ending losses in Europe. Net income more than doubled to $2 billion and adjusted profit rose to $1.26 a share, easily topping estimates of $.99-cents per share.

Verizon Communications said profit in the first quarter met expectations as strong tablet sales helped it add new subscribers, though an ongoing strike by its wireline workers was expected to hurt earnings in the current quarter. Still, the No. 1 U.S. wireless carrier stood by its full-year profit forecast.

Southwest Airlines reported a quarterly profit above analysts’ estimates and said it expected unit revenue to rise “modestly” in the second quarter. Southwest said it earned $511 million in the first quarter, up from $453 million a year earlier.

Under Armour reported earnings of 4-cents per share, beating estimates of 2 cents; and revenue rose 30% to $1.05 billion versus estimates of $1.04 billion. But if you listening to the earnings call, you might have missed the numbers. CEO Kevin Plank mainly raved about basketball player Stephen Curry.

After the closing bell, Google parent Alphabet reported first-quarter earnings that fell short of analyst expectations as growing losses from the tech giant’s investments in speculative new businesses overshadowed Google’s booming advertising business. Alphabet reported earnings per share excluding certain items of $7.50. Analysts had expected $7.96, according to S&P Global Market Intelligence.

Alphabet reported $17.26 billion in revenue. It was the second time that Alphabet reported financial results after restructuring as Alphabet. Now Google’s core business is separate from its “other bets” or so-called “moonshots,” many of which lose money such as smart gadget maker Nest and experimental lab X.

Microsoft’s quarterly adjusted profit missed analysts’ estimates as a continued slump in personal computer sales hurt the company’s core Windows business. Microsoft earned 62 cents per share. Analysts on average had expected a profit of 64 cents per share. Worldwide PC shipments fell 11.5 percent in the first quarter, according to research firm IDC.

Starbucks reported a 16% increase in second quarter earnings.  Sales were the best of any non-holiday quarter ever, jumping 9.4% to $4.99 billion, from $4.56 billion in the year-ago quarter. That came in slightly below what analysts expected. Earnings per share came to 39 cents, in line with analyst expectations. Same store sales increased 6% globally.

Amazon has won a deal worth about $30 million to provide e-books to New York City, the nation’s largest school district. The city’s Panel for Educational Policy voted in favor of the three-year contract for the Department of Education, which will take effect in the coming school year. For New York, there may be savings in buying more digital books, as well as the prospect of saving storage space for printed texts.

The Federal Aviation Administration has issued the first approval for flights of small commercial drones at night, in the latest sign of how quickly U.S. regulators are moving to authorize expanded uses of unmanned aircraft. The clearance comes weeks before the FAA is expected to issue long-awaited rules for widespread commercial operations of small drones. So far, such unmanned vehicles have been conducting commercial flights based on thousands of individual exemptions previously permitted by the agency.

Financial Review

Most Powerful Might Not Be Enough

Sinclair Noe — February 3, 2016

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

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DOW + 183 = 16,336
SPX + 9 = 1912
NAS – 12 = 4504
10 Y + .02 = 1.88%
OIL + 2.41 = 32.29
GOLD + 13.20 = 1143.20

Activity in the services sector slowed to a near two-year low in January. The Institute for Supply Management (ISM) said its index of non-manufacturing activity fell to 53.5 last month, the lowest level since February 2014, from 55.8 in December. A reading above 50 indicates expansion in the service sector. Service industries reported growth in new orders continued to slow, with export orders contracting last month.

Private-sector employment gains increased in January but at a slower pace than in the prior month. Employers added 205,000 jobs in January, according to Automatic Data Processing Inc. ADP tweaked December’s gain to 267,000 from a prior estimate of 257,000. The ADP report is used as an early predictor of the government’s monthly jobs report, due out Friday morning.

The Fed’s adding a new twist to its severely adverse scenario in this year’s stress test – asking lenders how they would handle a prolonged period of rates below zero. Ninety-day bill rates slipped below 0% a number of times over the past few years, but never stayed there for very long. Negative rates, of course, are breaking out all over Europe, and the Bank of Japan last week introduced negative deposit rates as part of its latest attempt to spur the economy into faster growth.

Japan could introduce more stimulus. Speaking this morning, Bank of Japan governor Haruhiko Kuroda said last week’s decision to introduce negative interest rates was “the most powerful monetary-policy framework in the history of modern central banking.” Kuroda also noted that if the policy weren’t enough to jump-start the economy, new tools could always be invented. Minutes released by the BOJ overnight showed an intense debate by board members over Friday’s sub-zero measures. Nikkei-3.2%.

ChemChina is offering to buy Switzerland’s Syngenta in a deal worth more than $43 billion – which would be the largest ever international takeover by a Chinese company. Syngenta’s board has recommended the 480 francs per share deal (a 20% premium based on Tuesday’s closing price) to shareholders. If completed, the transaction would help ChemChina transform into the world’s biggest supplier of pesticides and agrochemicals, and a major supplier of seeds.

China, the world’s largest agricultural market, is looking to secure food supply for its population. Only around 10 percent of Chinese farmland is efficient. Years of intensive farming combined with overuse of chemicals has degraded land and poisoned water supplies, leaving China vulnerable to crop shortages. Syngenta’s portfolio of chemicals and patent-protected seeds fits into Beijing’s plans to modernize agriculture over the next five years.

Home Depot is hiring more than 80,000 workers nationwide for its busy spring season, the same level as in recent years. The retailer estimates that more than half of the temporary workers stay on for permanent employment. The part-time and full-time jobs include sales, operations and cashier positions across all departments in stores as well as jobs at its distribution centers.

Home improvement and appliance giant Lowe’s is buying smaller Canadian counterpart RONA in a $2.3 billion deal. Lowe’s is expected to pay cash and acquire all issued and outstanding common shares of RONA for $24 in Canadian dollars per share. The estimated $2.3 billion transaction represents a premium of 104% to RONA’s closing share price on Tuesday.

General Motors posted a record net profit of $9.7 billion last year; more than double GM’s 2014 earnings and aided by a $3.9 billion fourth-quarter accounting gain because prospects for turning a profit in Europe are good. The company expects to break even there this year. Excluding special items, GM earned $5.02 per share for the year, beating Wall Street estimates of $4.82. Profits were fueled by strong SUV and truck sales largely in North America. Earnings were so strong that most of GM’s 49,600 hourly workers will get $11,000 profit-sharing checks on Feb. 26.

Toyota has issued an official statement that Scion will be killed off and folded into the Toyota brand. As of August, Scion models will be sold as Toyotas. Toyota didn’t specify how the company will support the 1,004 dealers selling Scion vehicles. Resolving franchise agreements with dealers of discontinued brands can be costly.

Sandeep Mathrani, CEO of General Growth Properties, was asked on an earnings call about mall traffic over the holiday season. He answered that traffic was up and attributed some of the increase to the number of items consumers buy online and then return to brick-and-mortar stores. Then he added, “and this case in point, you’ve got Amazon opening bricks and mortar bookstores and their goal is to open as I understand 300 to 400 bookstores.” Amazon said it does not comment on rumors.

Merck, the second-largest US drug maker behind Pfizer, forecast full-year earnings of $3.60 to $3.75 per share, well below the average estimates. Fourth-quarter revenue fell 3 percent to $10.2 billion, below analysts’ expectations of $10.3 billion. Sales would have risen 4 percent if not for the stronger dollar. Net income fell to $976 million from $7.3 billion. Merck reported disappointing fourth-quarter sales of its Januvia diabetes treatment and its Remicade arthritis drug.

British-based drug maker GlaxoSmithKline posted a loss of $616 million for the fourth quarter of 2015.

Comcast posted better-than-expected fourth-quarter revenue and added the most video customers in any quarter in eight years.

Just ten days after Moody’s put over half a trillion dollars in energy debt on review for downgrade, S&P decided it wanted to be the first one out of the gate with actual cuts. Companies that saw their ratings cut by one notch: Chevron, Apache, Continental Resources, Devon Energy, EOG Resources, Hess, Hunt Oil, Marathon Oil, Murphy Oil and Southwestern Energy. Oil futures settled below $30 a barrel again yesterday, but prices have taken a positive turn this morning after two days of steep declines.

Looking to return to the international capital markets, Argentina has agreed to pay $1.35 billion to a group of Italian investors whose bonds the country defaulted on in 2001, marking the first time the Latin American nation has reached an accord with holdout creditors. The deal sets a tough precedent for parallel negotiations taking place in New York between Argentina and another group of holdouts led by billionaire Paul Singer’s Elliott Management, who are seeking to be paid around $3.50 on the dollar, or a total of around $9 billion.

The European Union and United States have reached a deal over trans-Atlantic data sharing that would potentially extinguish the risk of costly litigation against companies by consumers worried about their privacy. The two sides have been trying to forge an agreement since October, when Europe’s top court struck down the previous pact in existence since 2000, known as the Safe Harbor agreement. Separately, the EU and U.S. are trying to bring the Transatlantic Trade and Investment Partnership to a close by the summer.

Some of the biggest names on Wall Street have piled into one trade – shorting the Chinese yuan. This, despite the fact that the Chinese government has threatened to punish anyone trying to pull the currency down. These aren’t empty threats, either. China has used its reserves to buy yuan and squeeze short sellers out of their positions. The country has $3 trillion in foreign exchange reserves to do this.

And yet no one is afraid – especially guys with huge funds like Pershing Square’s Bill Ackman and Hayman Capital’s Kyle Bass, who have admitted to being on the short side.  Barclays thinks that the country will, later this week, announce the largest single-month drop in its reserves in modern history.

This was surely a painful day for yuan-shorts. The dollar had its biggest decline in 7 years, and the drop started right after the ISM report on the service sector. The dollar’s pullback this week has reversed all the yen’s decline against the greenback on Friday when Bank of Japan introduced negative interest rates.

Currency traders are catching up to the bond market, where 10-year yields sank to the lowest in a year Wednesday, while futures are sending the strongest signal yet that traders expect the Fed to stand pat this year. The January employment report on Friday may determine whether the dollar selloff will continue. The jobs report will probably show the economy created fewer than 200,000 jobs for the first time since September.

As the dollar dropped, oil prices jumped higher, in part because oil is priced in dollars and a weaker dollar means more dollars to buy the same amount of oil. The markets shrugged off government data showing U.S. crude and gasoline inventories rose to record levels last week. Crude soared 7.8 million barrels higher, topping analysts’ expectations for a rise of 4.8 million barrels, as imports jumped and refiners trimmed throughput.

So, there is still a glut of oil. Total U.S. supplies stood at 503 million barrels a day for the week ended Jan. 29. The EIA said that’s “near levels not seen for this time of year in at least the last 80 years.” But now when the price moves, it squeezes the short positions, and that’s why we see so much volatility in oil prices, to the tune of 8% in one session; it is just plain old gambling, and that is a volatile game. And as oil moves it has been dragging stocks with it. Today, Exxon Mobil and Chevron were the big gainers in the Dow Industrials.

Financial Review

By Land and Sea

Sinclair Noe — January 11, 2016

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

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DOW + 52 = 16,398
SPX + 1 = 1923
NAS – 5 = 4637
10 Y + .03 = 2.16%
OIL – 2.04 = 31.12
GOLD – 10.40 = 1095.20

Chinese stocks saw another big drop. China’s Shanghai Composite tumbled 5.3% on Monday, bringing its 2016 loss to 14.8%. The sell-off did not trigger circuit breakers because the Chinese exchanges gave up on that idea after last week’s big declines. The decline came even after the yuan gained following a second intervention from the central bank.

Oil prices are sharply lower to start off the week as concerns over demand from China impact trading again, along with some fresh worries. Morgan Stanley is the latest major investment firm to forecast oil prices could fall into the $20s with the U.S. dollar continuing to strengthen against major currencies. WTI crude futures dropped under $32 a barrel; that is a 12-year low. And remember this is at a time of increased tension in the Middle East; forget the fear premium, at least unless shipments are actually disrupted.

Meanwhile, oil is being pumped out of the ground as if price doesn’t matter. Maybe we need to re-think the idea that oil-dependent economies like Saudi Arabia aren’t so much pumping oil now to defend market share but to get oil out of the ground while it has any value at all.

Arch Coal filed for Chapter 11 bankruptcy. The company said it has an agreement with a majority of its lenders to erase $4.5 billion in debt from its balance sheet and allow it to keep operating without interruption. The bankruptcy court filing listed $5.8 billion in assets and $6.5 billion in debt. Coal’s share of electricity generation in the US fell to 30 percent in April, as the historically popular fuel was overtaken by gas for the first time. Coal still generated more than 40 percent of electricity globally.

If you want to see how much of a slowdown we are really seeing, look to the rails. Analysts at Bank of America say railroad cargo in the US dropped the most in six years in 2015. According to the research note, “Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009.”

And the BofA researchers put the data in historic perspective: “Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009 … all either overlapped with a recession, or preceded a recession by a few quarters.”

You could argue that a shift away from coal, the slowdown in the industrial sector, and weakness in the oil patch would lead to fewer goods being moved by rail. So, for confirmation, look to the sea. Commerce between Europe and North America has literally come to a halt.

Over the weekend, not one cargo ship was in-transit in the North Atlantic between Europe and North America.  All of them (hundreds) were either anchored offshore or in-port.  Nothing was moving. The reason commerce has stopped is simple: People are not buying things. The Baltic Dry Index, an assessment of the price of moving major raw materials by sea, dropped to 468, the lowest since the index began in 1985.

After the close of trade today, Alcoa kicked off the unofficial start to earnings reporting season. Profit excluding one-time items was 4 cents a share, beating estimates of 2-cents per share. Sales dropped to $5.2 billion. With aluminum trading near six-year lows, the company is planning to separate its manufacturing units from its legacy smelting and refining business, creating two companies later this year. Raw-aluminum prices have fallen over 25% in the past year.

To cope with falling aluminum prices amid rising low-cost output from China, Alcoa has divested, closed or curtailed about a third of its global smelting capacity since 2007. Meanwhile demand from aerospace companies, Alcoa’s largest source of revenue after primary metals, has increased along with soaring aircraft production. This morning Alcoa announced it has struck a $1.5 billion long-term supply contract with General Electric’s aviation unit to supply it with advanced nickel-based super alloys, titanium and aluminum components for engines and for engine parts made by GE.

Expectations for earnings season are low, with strategists expecting a 5.3% decline in earnings in Q4, which would mark the third straight quarter of year-on-year declines for corporate profits, the first such period since 2009.

For-profit education provider Apollo Education Group said today it will consider selling itself among other options. Apollo, which had a market value of $714 million as of Friday, has been struggling with increased regulatory scrutiny that has squeezed federal aid. High debt loads and poor job prospects have kept students away. The company also reported a drop in revenue for the 18th straight quarter as new degree enrollments at University of Phoenix fell 38%. The stock lost more than three-quarters of its value in the past year.

Drugmaker Shire Plc says Baxalta International has agreed to a $32 billion cash and stock offer. The London-listed Shire first approached the US-based Baxalta with an all-stock offer in July. Shareholders will receive cash and stock with an implied total value of $45.57 per share based on Jan. 8 prices. The deal marks a strong start to mergers and acquisitions (M&A) in healthcare in 2016 after the sector saw its biggest deal-making streak in history last year, with global deals totaling $673 billion.

Asahi Group Holdings is expected to make an offer for SABMiller’s Grolsch and Peroni beer brands as early as this week. The beer properties could be sold to Asahi for as much as $3.4 billion. Grolsch and Peroni are seen as necessary merger casualties due to acquirer’s Anheuser-Busch’s deep penetration in Europe.

The Supreme Court heard oral arguments today in the case of Friedrichs v. California Teachers Association, where the plaintiff seeks to bar public-sector unions from collecting “fair-share” fees from non-members, a move known as free-riding, that could reduce union membership drastically and drain union coffers. The fair share or “agency” fee is widely seen as a compromise between the First Amendment rights of public employees who may not wish to join a union and the material interest of the unions, which are required by law to bargain on behalf of all members of a given unit, regardless of membership status.

A 1977 decision known as Abood, ruled the fees constitutional. Freidrichs is a teacher in California, and along with other teachers recognized in the case they say they don’t want to underwrite union activities that are contrary to their beliefs.

Should the Supreme Court rule for the plaintiffs, the result will hit the labor movement hard. That’s because members in non-right-to-work states will find themselves newly able to receive the benefits of a union contract without having to pay for them. Public-sector unions are the only part of the labor movement that’s thrived in recent decades: Nearly 36 percent of public-sector workers are unionized, compared to less than 7 percent of private sector workers.

A decision for the Friedrichs plaintiffs would not affect private sector unions because most of these are governed separately under the National Labor Relations Act, from which public-sector workers are excluded. Nor would it necessarily lead to a later decision applying the same reasoning to private unions, because the link to First Amendment rights might be less clear in a private-sector context.

General Motors is set to go to trial today in a lawsuit over its 2014 recall of millions of vehicles for a faulty ignition switch linked to nearly 400 injuries and deaths. In the lawsuit, plaintiff Robert Scheuers claims he was injured in an accident and the air bag did not deploy, which Scheuer blamed on the switch.

It is the first of six trials this year before U.S. District Judge Jesse Furman in the Southern District of New York, who oversees litigation from crash victims and from customers who say their cars lost value. While not binding on other cases, the verdict will provide insight into the strengths of both sides’ evidence as GM looks to wrap up the remaining switch litigation. It has already agreed to pay roughly $2 billion in civil and criminal penalties and settlements over the switch.

Apple Music is reported to now have more than 10 million paying subscribers. Back in October, Apple reported 6.5 million subscribers. Industry leader Spotify said in June it has 20 million paying subs. Spotify needed six whole years to attract its first 10 million paying customers, but it took Apple Music just a few months to hit the same milestone.

Looking at the bigger picture, though, Apple Music’s milestone becomes somewhat less impressive. Apple preinstalls the Apple Music app on every iPhone, and there are about 90 million iPhones in the US alone. No matter how Apple got there, it looks bad for Spotify.

The College Football Championship game between Alabama and Clemson kicks off in about 2 hours, and the winner is … Nike. The brand renewed its deal with Clemson in August, signing an eight-year contract reportedly worth $23 million to the school.

Alabama is even pricier: Nike signed an eight-year, $30 million deal with the school in 2010. That means Nike gets to grab all the television eyeballs for itself. And college football’s biggest stage draws many, many eyeballs. Last year 33 million watched. Good news for the Valley of the Sun as well.

Financial Review

Worst Ever

Sinclair Noe — January 7, 2016

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

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DOW – 392 = 16,514
SPX – 47 = 1943
NAS – 146 = 4689
10 Y – .02 = 2.15
OIL – .74 = 33.23
GOLD + 15.40 = 1110.20

The Chinese stock market was open for about 15 minutes; stocks dropped 5%, triggering circuit breakers, or rules that suspended trading. When trading resumed, it was all downhill and that triggered another level of circuit breakers, shutting down trading for the day; 29 minutes in total, the shortest session in Chinese market history.

Circuit breakers are a new idea for Chinese markets; they have only been used since Monday, the start of the New Year. Trading was halted on Monday for 30 minutes. We have circuit breakers in place on Wall Street, and the idea is to allow a cooling off period when stocks are in freefall. In the US, trading is halted temporarily after declines of 7% and 13% in the Standard & Poor’s 500 Index, and only suspended for the rest of the day if losses reach 20%.

In China, it only seems to make investors more nervous and they scramble to sell before getting locked out. After the trading halt, Chinese regulators decided to scrap the circuit breaker rule for the foreseeable future.

The Shanghai Composite Index finished down 7% at 3,125, bringing its losses over just four trading days to 11.7%. It is on track for the largest weekly loss since the week ended Aug. 21. Stock markets fell across the region: Hong Kong’s Hang Seng Index was down 3.1%, the Nikkei Stock Average lost 2.3%, Australia’s S&P/ASX 200 dropped 2.2% and South Korea’s Kospi was down 1.1%.

What’s triggering the panic selling?   The selloff was sparked after the central bank cuts its yuan reference rate by the most since August. China’s foreign reserves dropped by a record $108 billion in December as its defense of the yuan becomes costlier. The economy is decelerating to its slowest annual pace since 1990, but that’s been known for some time.

Analysts are predicting a 6.5% economic expansion this year, but the continued slide in the yuan is weighing heavily on investor sentiment, as it suggests all the government’s stimulus efforts aren’t working. A currency devaluation is seen as a last-ditch effort to boost exports, and the fear is China won’t be able to maintain its growth targets. Global equities have lost $2.5 trillion in value in the first three trading days of the year. It’s the worst start of a New Year for stocks since 2008, and we all remember that year.

Actually, with today’s losses, this is the worst start ever for the S&P 500 – ever.  Earlier today, George Soros compared the current market to 2008, and said the market is now “facing a crisis and investors need to be very cautious.” And then he went on to describe all the things we’ve been telling you about for some time here on the Review.

Of course the big question is where stocks go from here. Stocks are in a downtrend. The S&P 500 is down over 8% from its May high, but the average stock in the larger S&P 1500 was down 24% from its high as of yesterday’s close, according to new research from Bespoke Investment Group.

A bear market is defined as a decline of 20% or more, meaning the average stock has already reached. The S&P 600 Small Cap Index is down 27.6% from its 52-week high. In the midcap S&P 400, the average decline is 23.6%. The S&P 500, the benchmark for US stocks, hit a record high close of 2130 on May 21^st, or about 8%. But the stocks in the S&P 500 have seen an average decline of just over 20%.

Now the reason for the discrepancy between the index and the average stock in the index, is that the indexes are weighted to give greater importance to the larger stocks, and a few of the larger stocks have performed very well; specifically, the FANG stocks: Facebook, Amazon, Netflix, and Google/Alphabet.

The S&P 500 is trading below its 200 day moving average and the 50 day moving average. The next significant levels of support at 1867, the lows set back in August. Likewise, the Dow Industrials are below the 50 and 200 day moving averages. And we are heading into earnings reporting season with expectations for a 4.7% decline in fourth quarter earnings, which would be the third consecutive quarter of declining earnings.

And while any single day of trading isn’t likely to tell you where stocks are headed, trading in the month of January can give you a pretty good clue about the rest of the year. The idea is called the January Barometer, devised by Yale Hirsch, the founder of the Stock Trader’s Almanac, in 1972.

Simply put, if the Standard & Poor’s 500 index ends January with a gain, the odds favor a rising stock market for the year. But if stocks end January in the red for the month, there is a very strong probability the year will finish negative. According to Jeffrey Hirsch, the son of Yale and the current editor of the Almanac, “The January barometer has registered eight major errors since 1950 for an 87.7% accuracy ratio.”

The January Barometer is not a guarantee of performance for the year, just a look at probabilities. And it is still too early to say whether January will be positive or negative. And even if January shows losses, it doesn’t mean you should sell everything; it would just be an alert telling you to be cautious, make sure you have an exit strategy, and make certain you know just how much risk you’re willing to take.

Oil futures in New York slid to the lowest in 12 years with West Texas Intermediate dropping as much as 5.5 percent in overnight trading. Volatility in the oil market may increase today as tensions in the Middle East rise following Iran’s accusation that Saudi Arabia was responsible for a missile attack on its embassy in Yemen. Oil closed down 2.2% at $33.23. By the way, I paid $1.80 a gallon the other day to fill up the tank. When oil was trading at $100 a barrel, (in other words 3 times more than today) the price for a gallon was not $5.40. The oil companies are still ripping us off at the pump.

According to the World Bank, the global economy will sputter along this year as China’s slowdown prolongs a commodity slump and contractions endure in Brazil and Russia. As a result, the international institution cut its forecasts for the third straight year, predicting 2016 growth to fall by 0.4 percentage point to 2.9%. With regards to the U.S., the World Bank decreased its 2016 prospects to 2.7%, down from 2.8 percent from June, citing the dampening effect on exports from the surging dollar.

Late yesterday, the Federal Reserve released the minutes from the last FOMC meeting. Today, Richmond Federal Reserve President Jeffrey Lacker today said the Federal Reserve might need to raise interest rates more than four times this year if oil prices stabilize, the dollar stops appreciating and inflation surges toward the U.S. central bank’s 2 percent target. Lacker’s comments are in-line with Fed vice-chair Stanley Fischer, which would indicate fed funds rates at just over 1% by the end of the year.

So, on one hand we have markets in China dragging down markets around the globe, even though the economy in the US is decent. Nobody thinks the U.S. or European economies are in high gear, and bears point to weakening corporate profits and tighter monetary policy by the Federal Reserve, but this doesn’t look like 2008 in the broader economy.

The number of Americans who applied for new unemployment benefits in 2015 fell to the lowest level in 42 years. This week’s figures show 277,000 people filed initial jobless claims in the seven days running from Dec. 27 to Jan 2. That is down 10,000 from an unrevised 287,000 in the prior week.

In a separate report, global outplacement consultancy Challenger, Gray & Christmas said U.S.-based employers announced plans to cut 23,622 jobs in December, the fewest since June 2000. That was down 24% from November and the lowest December job-cut total on record.

The Department of Labor will report on December payrolls tomorrow morning; the consensus estimate is for somewhere around 205,000 to 215,000. This should be a major tell on whether the Federal Reserve is on the right track or whether their forecasts are nothing more than hooey.

Yahoo is working on a plan to cut its workforce by at least 10% and it could start the process as early as this month. The layoffs, which would result in more than 1,000 people leaving the tech giant, are set to affect the company’s media business, European operations, and platforms-technology group. The move also follows Starboard Value’s letter to Yahoo yesterday, which took aim at CEO Marissa Mayer, her leadership team, and raised the prospect that a proxy battle may be on the way.

Macy’s had a tough Christmas. The department store chain says it will eliminate about 4,500 jobs, or about 3 percent of its work force, in a major restructuring drive designed to save about $400 million.  Macy’s said sales at its Macy’s and Bloomingdale’s stores fell 4.7% in November and December.

Here’s the latest Consumer Electronics Show news: BlackBerry has unveiled plans for building autonomous car software to capture a piece of the ballooning industry. The company wants to extend its QNX software (already used by automakers to build in-car entertainment systems) to self-driving technology, and plans to launch the product in the second quarter of 2016.

CES attendees also saw General Motors show off its Chevrolet Bolt, the automaker’s newest electric vehicle that has a range of 200 miles. The Bolt is likely to be priced at $38,000 and cost around $30,000 after the federal $7,500 income-tax rebate for electric car purchases.

 Meanwhile, Volkswagen assumes it will have to buy back about 115,000, cars in the United States as a result of its emissions crisis. The rest of VW’s 500,000 U.S. vehicles will need major refits, incurring significant costs for parts and a long stay at the garage as sections of the exhaust must be reconstructed and approved.

Financial Review

The Day of Futures Past

Sinclair Noe — October 21, 2015

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

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DOW – 48 = 17,168
SPX – 11 = 2018
NAS – 40 = 4840
10 YR YLD – .04 = 2.03%
OIL – 1.08 = 45.21
GOLD – 9.10 = 1167.70
SILV – .22 = 15.78

Oil futures settled at their lowest level in nearly three weeks. OPEC is holding a special meeting in Vienna with cartel members and non-members Russia and Mexico to discuss ways to prop up oil prices. Don’t hold your breath. Meanwhile, the U.S. Energy Information Administration reported a much bigger than expected increase of eight million barrels in crude supplies for the past week.

The European Commission has ruled that Starbucks and Fiat Chrysler’s tax deals with the Netherlands and Luxembourg are illegal state aid, ordering the respective governments to recover as much as $34 million from each. The ruling follows an EU investigation launched in June 2014. It looked into whether the two companies were given so-called sweetheart tax deals that effectively lowered their corporate taxes.  Who’s up next? European regulators are finishing up investigations into McDonald’s and Amazon’s tax affairs in Luxembourg and Apple’s arrangements in Ireland.

Outgoing House Speaker John Boehner said Republicans will meet on Oct. 28 to nominate a candidate to replace him. Last night, Rep. Paul Ryan of Wisconsin said he would run for the job if certain conditions were met. With a critical deadline just two weeks away, House Republican leaders are discussing options for raising the U.S. debt limit.

Last week, Treasury Secretary Jacob Lew moved the cutoff for raising the debt limit to Nov. 3, earlier than the Nov. 5 date he had set earlier. After that point, Lew said, the Treasury would have less than $30 billion to fund the government, “far short” of expenses on certain days.

Syrian President Bashar al-Assad arrived in Moscow on an unannounced visit on Tuesday, in the leader’s first known trip outside his country since the start of the country’s civil war. During the meeting, Russia’s Vladimir Putin reiterated his commitment to support Assad through military and political channels, and said he would call on other world powers to look into a potential diplomatic solution to the conflict.

A group of high-profile lawyers plans to file a request today to begin impeachment proceedings against Brazilian President Dilma Rousseff. Today’s move is only the first step in a drawn-out process which could take up to eight months. The Brazilian real is down 32% this year.

General Motors and EMC released their latest earnings reports before opening bell this morning. GM posted adjusted earnings of $1.50 per share, a 55% year over year increase that beat estimates of $1.18 per share. EMC reported earnings of 43 cents per share and revenue of $6.08 billion for the third quarter. Analysts had been looking for earnings of 44 cents per share and $6.17 billion in revenue.

Coca-Cola said revenue fell a worse-than-expected 4.6% in the third quarter despite improvements in volume, as the beverage giant said currency fluctuations will hurt results for the year more than expected.

Boeing posted a $1.7 billion net profit, up from $1.3 billion during the same period last year. Boeing delivered 199 commercial jets in the third quarter, up from 186 during the same quarter last year. And more of those jets are expensive wide-bodies, such as the 787 Dreamliner.

During this quarter last year, 31 Dreamliners were delivered to airlines; this year Boeing delivered 37. The challenge now for Boeing is to bring down the production cost of the long-delayed Dreamliner so it can bring in more cash and maybe, someday, breakeven on the plane whose development costs ran over budget.

Credit Suisse reported worse than expected third-quarter results with net income falling 24 percent and the investment bank posting a pre-tax loss of 125 million francs. Separately, the bank announced a plan to raise $6.3 billion in new capital and a corporate reorganization.

Western Digital agreed to buy SanDisk for about $19 billion. SanDisk is one of the largest makers of Nand flash memory chips, which store data in mobile devices and are increasingly being used in hard drives in computing. The technology uses less power and is faster to access information, making it more useful in cloud-computing data centers.

Lam Research is buying KLA Tencor for about $10.6 billion. The merger will create a $19 billion semiconductor firm that will rival Applied Materials, and serve 42% of the wafer fabrication equipment market when the deal closes in the middle of next year. The offer of $67.02 per KLA Tencor share represents a 24% premium to Tuesday’s closing price.

According to Hedge Fund Research, hedge funds suffered their largest quarterly loss in assets since the financial crisis during the three months that ended in September. The third-quarter saw the average fund lose 3.9% driven by slowing growth in China, sliding commodities prices and a likely U.S. Fed rate hike that sent stocks tumbling. Notables: David Einhorn’s Greenlight Capital is down 17% YTD, and Bill Ackman’s Pershing Square has now fallen 12.6% for the year (down 12.5% for September.)

Today, Ackman’s Pershing Square just purchased 2 million more shares of Valeant Pharmaceuticals. It’s either brilliant or insane; time will tell.  In September Valeant dropped 23% and Ackman’s large 5.7% stake in Valeant really hurt his returns for the month; so he doubled down. And today, Valeant dropped another 30%. We don’t know when Ackman bought in today.

Citron Research, a stock-commentary site run by a short seller, said Valeant is using a couple of specialty pharmacy called Philidor RX Services and R&O Pharmacy to store inventory and record those transactions as sales; comparing the accounting and auditing to Enron. Valeant has been at the forefront of an intensifying debate over price increases for older drugs in the U.S. Last week it said it had received subpoenas from the U.S. Attorney’s Offices in Massachusetts and Manhattan.

Here’s the kicker. R&O Pharmacy has sued Valeant. The lawsuit says that R&O believes that both Valeant and R&O are “victims of a massive fraud perpetuated by third parties” or that “Valeant is conspiring with other persons or entities to perpetuate a massive fraud against R&O and others.”

I think I’ll go with insane.

The chairman of the Commodity Futures Trading Commission, Timothy Massad, says that the regulator is very concerned about the potential for disruptive events in the U.S. Treasury market and is already taking steps to address the growth of automated trading and increasing cybersecurity risks. New proposals include requirements for pre-trade risk controls and other measures to reduce risks of automated trading. The CFTC also wants to increase transparency regarding market maker incentive programs and self-trading to make sure it isn’t illegal wash trading.

Toyota is recalling about 6.5M vehicles worldwide to fix a defective power window switch in models including the Yaris/Vitz subcompact, Corolla, Camry and others. Debris caused by wear from the electrical contact points can accumulate and cause a short circuit. That in turn could make the switch assembly overheat, potentially leading to a fire.

Yahoo has signed a search advertising deal with Google. The deal builds on an existing search partnership with Microsoft under which the company gets a percentage of revenue from ads displayed on its sites. The move also follows disappointing Q3 results from Yahoo that missed expectations and unveiled cost cuts, content write-offs, and more soft guidance.

Today is the day that Marty McFly flies the time traveling Delorean to Hill Valley California, and if the flux capacitor is correct, he landed there about 18 minutes ago. We’re talking about the movie Back to the Future, Part 2. And if you don’t really remember the movie or you haven’t heard the news stories over the past few day, the intrepid time traveler from 1989, played by Michael J. Fox, set his time machine to October 21, 2015. Today is the day of futures past.

And it has been intriguing to look back at the movie to see how their fictional predictions have panned out. Of course, one of the favorite futuristic gizmos was the hoverboard; it isn’t a ubiquitous toy but a couple of companies have built functioning hoverboards. The garbage powered portable nuclear fission machines – not so much. Fax machines everywhere – nope. Cubs win the World Series – still within the realm of possibility but the odds are astronomical; however there is now a major league team in Miami.

Still the movie got some things right: Flat panel TVs with built in video-conferencing were in the movie, and I actually have a flat screen at my home with the Skype app. Wearables, such as Google Glasses or Apple Watch – yep. Biometrics – sort of; Biff paid for a taxi with his thumbprint; I can’t do that but I can pay for stuff with my phone and my phone can be unlocked with a thumbprint.

Programmable, automated homes – yes; my home is not automated but the technology exists. 3D holographic entertainment, advertising, and gaming – yes we have that; still working out the specifics, but we have it. The Black & Decker food hydrator – not exactly but I do have a microwave, which is probably worse. There are other examples, but you get the idea.

The writers, 30 years in the past, actually did a pretty good job of predicting the future. New ideas and technologies have completely changed the way we live, learn, and work. So, the next question is: What will our world look like in 2045, thirty years from today?

Maybe we’ll make a mess of everything but I hope and believe that 30 years from now we’ll be doing much better. Maybe we’ll have peace, or end poverty, or find cures to horrible diseases. Try to imagine the world you want to live in 30 years from today, and then move in that direction. And if the future has hoverboards for everybody, that’s just a bonus.