Financial Review

Cookies, Milk, Cannoli

Sinclair Noe — November 15, 2016

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DOW + 54 = 18,923
SPX + 16 = 2180
NAS + 57 = 5275
10 Y + .02 = 2.24%
OIL + 2.51 = 46.45
GOLD + 6.50 = 1228.50

Another record high for the Dow.

The dollar pulled back from close to 14-year highs, euro zone government bond yields fell and the price of copper tumbled as traders cashed in recent gains. US Treasury yields fell slightly; the carnage in bonds placed on temporary pause but it didn’t last.

Oil prices, which hit three-month lows on Monday, rose after the U.S. Energy Information Administration said U.S. shale oil production was expected to fall in December for the 12th month in 13. Still, the US has more gasoline than it knows what to do with.

Exports have risen above imports for three consecutive weeks as recurring pipeline outages and higher production levels by refiners caused Gulf Coast inventories to grow. The abundance of gasoline pushed Gulf Coast gasoline prices to an eight-month low last week and spurred the longest losing streak since 2012 in futures, making U.S. gasoline an affordable buy.

Valero Energy shipped excess supplies to Canada instead of Colombia and Phillips 66 sent the first gasoline shipment in 16 months to Egypt. Oil trader Mercuria Energy Group is said to be storing a 60,000-ton parcel of gasoline blending components produced in India at an offshore site in the Bahamas. U.S. gasoline exports reached 1.07 million barrels a day in the week ended Nov. 4, the first time the figure has topped 1 million in U.S. Energy Information Administration data going back to 2010.

Retail sales increased 0.8 percent last month, as households bought cars and a wide range of other goods, including building materials – as households cleaned up and made repairs in the wake of Hurricane Matthew. Adding to the report’s bullish tone, September retail sales were revised up to show a 1.0 percent increase instead of the previously reported 0.6 percent rise. The combined September and October sales gain was the largest two-month rise since early 2014.

Sales were up 4.3 percent from a year ago. The strong retail sales suggest that third quarter GDP estimates could be revised higher. It also reinforced views that the Federal Reserve will raise interest rates at its Dec. 13-14 policy meeting.

Manufacturing in New York State improved more than expected in November. The Empire manufacturing index came in at 1.50, above economists’ expectations of -2.50. This was the first time the headline number pulled out of negative territory in four months.

U.S. import prices rose for a second straight month in October as the cost of oil and automobiles increased, but a strong dollar continued to keep underlying imported inflation subdued. The Labor Department said import prices increased 0.5 percent last month after an upwardly revised 0.2 percent gain in September. It was the second straight month of gains.

In the 12 months through October, import prices fell 0.2 percent, the smallest decrease since July 2014, after declining 1.0 percent in September. The strong dollar has resulted in the country importing deflation, helping to hold inflation persistently below the Federal Reserve’s 2 percent target.

At a meeting of almost 200 nations in Morocco to work out ways to implement the 2015 Paris agreement to limit greenhouse gas emissions, U.N. Secretary-General Ban Ki-moon said action on climate change has become “unstoppable” and predicted that President-elect Donald Trump would drop plans to quit the global accord. China worked closely with the US to build momentum ahead of the 2015 Paris Agreement on climate change. The partnership of the two biggest greenhouse gas emitters helped get nearly 200 countries to support the pact at the historic meet in France’s capital.

Trump has called global warming a hoax created by China to give the country an economic advantage, and said he plans to remove the United States from the historic climate agreement; he has appointed noted climate change skeptic Myron Ebell to help lead transition planning for the Environmental Protection Agency.

Beijing is poised to cash in on the goodwill it could earn by taking on leadership in dealing with what for many other governments is one of the most urgent issues on their agenda. Zou Ji, deputy director of the National Centre for Climate Change Strategy and a senior Chinese climate talks negotiator, told Reuters: “China’s influence and voice are likely to increase in global climate governance, which will then spill over into other areas of global governance and increase China’s global standing, power and leadership.”

But before we deal with meaty issues such as the environment or the global supply chain, the Trump Transition team has to get through the actual transition. Former congressman Mike Rogers announced in a statement today he parted ways with President-elect Donald Trump’s transition team. Rogers, who had been working on the transition team for months under Chris Christie, was sidelined as the campaign and transitions merged into one presidential team.

Meanwhile, Paul Ryan unanimously won the nomination of his House Republican colleagues to continue as speaker. Ahead of the vote, Ryan told reporters, “Welcome to the dawn of a new unified Republican government.”

Britain has no overall plan for Brexit and the strategy for leaving the EU might not be agreed for six months due to divisions in Theresa May’s government, that per a leaked memo seen by BBC and The Times. The document, apparently, an internal report by the consultant firm Deloitte – not commissioned by the government, said government departments were discussing more than 500 Brexit-related projects and might require an additional 30,000 civil servants to cope with the immense workload.

The report detailed what is widely understood: The government has not yet finished its internal debate on what kind of relationship it wants with the European Union, nor has it set its priorities for any negotiation; and the cabinet remains divided between those favoring as clean a break with Brussels as possible and those who want to preserve duty-free access to the huge European market.

Alphabet’s Google and Facebook have announced measures aimed at halting the spread of “fake news” on the internet by targeting how some purveyors of phony content make money: advertising. Google said it is working on a policy change to prevent websites that misrepresent content from using its AdSense advertising network, while Facebook updated its advertising policies to spell out that its ban on deceptive and misleading content applies to fake news.

WhatsApp is finally launching video calling for all its one billion users (the service will be fully encrypted). It’s simple – just click the call icon to make a voice call then select “video call” to activate it. A major plus for WhatsApp’s video calling is cross-platform support, unlike FaceTime, which only works with Apple devices, and Google Duo, which isn’t compatible with older versions of iOS.

Close but no cigar… Reynolds American has rejected British American Tobacco’s $47 billion takeover bid, but B.A.T. may be willing to up its offer. More M&A? Estee Lauder is buying millennials-focused makeup brand Too Faced for $1.45 billion and Regency Centers has agreed to acquire Equity One for about $5 billion, creating the largest shopping center REIT by market cap.

General Electric said its software unit bought ServiceMax, a cloud-based provider of software used in inventory and workforce management, for $915 million. GE said the deal was part of GE Digital’s strategy to advance its “Industrial Internet” vision.

Warren Buffett is loading up on airlines. A 13-F filed on Monday showed Buffett’s Berkshire Hathaway amassed holdings in American Airlines, Delta Air Lines, Southwest, and United Continental. Buffett wouldn’t say why he’s now investing in a sector that in the past he’s labeled a “death trap” for investors. He’s been down on airlines since getting burned on a USAir Group investment in 1989. But Warren has always been a fan of buying at “stupid cheap” levels, and that probably explains the purchases.

George Soros’s hedge fund Soros Fund Management bought stakes in Google’s holding company Alphabet and Netflix in the third quarter, per a regulatory filing on Monday. The hedge fund also reported ownership of Biogen, Hewlett Packard Enterprise and Priceline Group at the end of September. During the same period, Soros liquidated its shares of Disney, General Motors, Hershey, Anthem, Delta Airlines, Monsanto, and Pandora.

David Einhorn’s Greenlight Capital bought Calpine and US Steel, and trimmed stakes in Apple and GM. David Tepper’s Appaloosa hedge fund took new stakes in Apple, Yahoo, Bank of America and Facebook, while dumping shares of 21^st Century Fox.

The head of the SEC is stepping down. Securities and Exchange Commission Chair Mary Jo White announced that she will leave her post at the end of the Obama administration.

Home Depot reported third-quarter profit and sales that beat analysts’ estimates. Home Depot said the number of customer transactions rose 2.4 percent in the third quarter. Customers also spent 3 percent more on average per transaction, which was the strongest in two years. The company also raised its full-year earnings forecast. Housing data for September had also suggested that overall residential construction may rise again in the current quarter.

Financial Review

Groundwork for Fed Minutes

Sinclair Noe — August 16, 2016

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DOW – 84 = 18,552
SPX – 12 = 2178
NAS – 34 = 5227
10 Y + .02 = 1.57%
OIL + .84 = 46.58
GOLD + 7.20 = 1346.80

Housing starts ran at a seasonally adjusted 1.21 million annual rate in July, a 2.1% increase over the June figure. Permits were at a 1.15 million annual rate in July, essentially flat from a revised June reading. Single-family starts edged up 0.5% to a 770,000 annual pace.

Most of the strength in July came from multifamily starts, which popped 8.3% to a 433,000 annual rate. Overall housing starts are 5.6% higher compared to a year ago, and July’s figure was the second-best of the recovery.

The consumer price index rose 0.8% compared to a year ago. The Labor Department said core CPI, which strips out food and energy, rose 2.2%. The cost of food was unchanged in July, and has risen 0.2% over the past year, the smallest increase since the 12 months ending in March 2010.

Energy prices declined 1.6% and are 10.9% lower for the year. (However, today, oil posted its fourth straight session of gains.)

Real hourly wages, those which account for inflation, increased 0.4% in July. Wages are up 2.0% over the year.

Medical care prices jumped 0.5 percent in the month for a year-on-year rate that leads the major readings, at a downright inflationary 4.0 percent.

Housing costs rose 0.3 percent in the month with this year-on-year at 2.4 percent which, next to medical care, is the second highest on the list.

Industrial production in July saw the biggest one-month gain in 20 months, suggesting a hint of strength in manufacturing. Industrial production climbed 0.7% in July, the biggest percentage rise since Nov. 2014. Compared to the same period of 2015, production is still down 0.5%. The factory sector has been hammered by the strong dollar, lower commodity prices and weak growth overseas. Vehicle production was exceptionally strong in June and was also very solid in July.

New York Federal Reserve President William Dudley said an interest rate hike in September is still possible. Dudley said, “The labor market is getting tighter and we’re starting to see signs of wage gains starting to accelerate, so I think we’re getting closer to that point in time when it will be appropriate to actually raise short-term rates again.”

The markets still think there is just a 12% chance of a rate hike in September. Dudley says the markets are too complacent about a possible rate hike in September. We might learn more tomorrow when the Fed releases the minutes of the FOMC July policy meeting.

Atlanta Federal Reserve Bank President Dennis Lockhart said today that the US economy is likely strong enough for at least one interest rate increase before the end of 2016, as job gains continue and inflation moves in a “healthy” direction, and he thinks 2 rate hikes are still a possibility.

Lockhart said recent U.S. gross domestic product data overstated weakness in an economy whose fundamentals remain on track for moderate growth through this year and next. He added, however, that he is not locked into a particular date for a rate increase.

Warren Buffett’s regulatory filings show he has taken a large bite out of Apple, raising his stake in the stock by 55%. Berkshire Hathaway’s holding in the tech giant was first revealed in May and shares have since risen more than 20%. The move contrasts with Carl Icahn and George Soros, who both sold Apple entirely. Buffett also took a dimmer view on Walmart, cutting his stake in the retailer by 27%.

Hedge funds of a certain size are required to disclose their long stock holdings in filings known as 13-Fs. Of course, the filings only provide a partial picture since they do not show short positions or wagers on commodities and currencies. These filings come out 45 days after the end of each quarter, so it’s possible they could have traded in and out of the position. Still, it does provide a glimpse into where some of the top money managers have been placing money in the stock market.

George Soros has become more bearish on equity markets, nearly doubling his short bet against the S&P 500, following similar moves by Jeffrey Gundlach, Carl Icahn and David Tepper. According to his 13F filing, Soros now holds put options on roughly 4 million shares in SPY, the S&P 500 Exchange Traded Fund, also known as Spiders.

Soros Fund Management LLC, which took a $263 million stake in Barrick Gold in the first quarter, and then cut its holdings by 94 percent in the ensuing three months. Looks like Soros timed that trade to perfection; after climbing 169% in the first half, Barrick’s best-ever performance for the period, shares have slipped from a three-year high reached last month.

Hedge fund manager Paul Tudor Jones, the founder of Tudor Investment Corp, doubled-down on his bet against the stock market, according to his fund’s most recent 13-F filing. During the second quarter, Tudor Investment bought put options on over 5.95 million shares of Spiders. The fund now owns puts on 8.34 million shares of the exchange-traded fund, making it the fund’s largest position.

Aetna is withdrawing from 11 of the 15 states where it currently offers plans through the Affordable Care Act exchanges. Aetna will leave nearly 70% of the counties in which it currently sells coverage. Aetna’s decision follows similar moves from UnitedHealth and Humana, and it puts at least one county, Pinal in Arizona, at risk of having no insurers offering exchange plans in 2017 (a circumstance that would present a major challenge to the basic mechanics of ACA).

Some states like Alaska and Oklahoma will be left with only one participant selling individual coverage in 2017. Aetna has said it has been swamped with higher than expected costs, particularly from pricey specialty drugs.

The Environmental Protection Agency and the Department of Transportation issued new rules today to reduce greenhouse gas and set new fuel efficiency standards for medium-and heavy-duty trucks and buses. EPA estimates the standards, as proposed, would: Reduce carbon pollution by one billion tons and cut fuel use by 1.8 billion barrels of oil by 2027. The proposals are expected to save vehicle owners $170 billion in fuel costs over the lifetime of the vehicles, and save the average American household $150 a year by 2030.

Transportation recently surpassed power plants as the leading US source of carbon pollution. The EPA and the Transportation Department are near the mid-point of a program expected to raise the average fuel economy of passenger cars to more than 50 miles per gallon by 2025. It has also tackled emissions from power plants and the electrical grid.

The Department of Justice has found Volkswagen liable for criminal wrongdoing. Volkswagen is expected to face criminal and civil penalties for violating the Clean Air Act by installing software on vehicles that violates environmental standards meant to reduce smog, but prosecutors have yet to decide the specific criminal charges they might bring against the automaker.

Volkswagen admitted to installing the emissions-cheating software. The automaker expected to receive credit from prosecutors for cooperating with the investigation and agreeing to a civil accord in June with regulators and consumers that could separately cost the automaker up to $15 billion. The credit could reduce the financial penalty Volkswagen receives, among other things, in the final settlement with the Department of Justice. Volkswagen set aside roughly $21 billion to deal with the fallout

We’ve heard plenty lately about self-driving cars; Google has built an autonomous vehicle and logged about 1.8 million miles, but most of the autonomous systems are really driver-assisted. That is changing. Ford Motor plans to have a fully autonomous vehicle – no steering wheel, no gas or brake pedals – available by 2021 for ride-hailing services. Fiat Chrysler has teamed with Google to develop 100 self-driving minivans. Ford conducted unsuccessful negotiations with Google prior to the Chrysler deal.

GM has spent almost $600 million – and will spend more – acquiring self-driving software maker Cruise Automation and invested $500 million for a 9 percent stake in ride-hailing company Lyft. GM is testing Cruise’s self-driving software on Chevy Bolt electric cars in Scottsdale.

Google has launched a new video-calling app called Duo. If you have used Apple’s FaceTime, then Duo won’t seem like a big deal but Duo works on both Apple and Android devices. You can initiate a call using a phone number rather than a Google account or Gmail address, making it easier to call friends, family and other people already stored on smartphone contact lists. Google’s main innovative feature is “Knock Knock ,” which lets you see live video of your caller before you answer, unlike Apple’s FaceTime. It runs on Wi-Fi and cellular networks, automatically switching between different types and speeds of connection and adjusting video quality.

Google is a little late to the messaging party; there is already plenty of competition. Even if Apple users are enticed by the cross-platform functionality–they can only make Apple-to-Apple FaceTime calls– Google still has to win over Android consumers—that’s over 80% of the worldwide smartphone market—who can use Microsoft’s Skype and Google’s own Hangouts. Plus, these platforms offer file transfers, text messaging and group calling. The main draw of Duo seems to be that it is so basic, even I could use it.

Financial Review

Worst Ever

Sinclair Noe — January 7, 2016

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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

Justice Delayed is Par for the Course

Sinclair Noe — February 18, 2015

 

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DOW – 17 = 18,029 SPX – 0.66 = 2099 NAS + 7 = 4906 10 YR YLD – .08 = 2.06% OIL – 2.56 = 50.97

The S&P 500 closed above 2,100 for the first time ever on Tuesday, delivering year-end target goals to Goldman Sachs, Credit Suisse and Barclays nearly 11 months early.

Greece confirms that it plans to submit a request to the euro zone tomorrow to extend a “loan agreement” for up to six months, but EU paymaster Germany says Athens must stick to the terms of its existing international bailout. Greece wants to maintain a budget surplus before interest payments equal to 1.5 percent of gross domestic product; the current plan calls for a budget surplus equal to 4.5 percent of GDP. It’s still unclear what the terms of the extension will look like, as both Athens and its creditors seem determined not to compromise over the loan’s conditions.

The Federal Reserve released minutes from the January 27-28 Federal Open Market Committee meeting. The minutes reveal that “Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.” Allow me to translate; the Fed would like to put off raising interest rates because the economy is still a bit risky.

Well, that’s good news and bad news; good that the Fed isn’t going to raise rates; bad because the economy is still not recovered. The FOMC says the risks are “nearly balanced” but then they list the risks: a strengthening dollar, international flash points from Greece to Ukraine, slow wage growth, and even lower energy prices. Wait a minute; low energy prices are supposed to be a positive for the economy, and they are except some people in the energy industry are losing their jobs, and when people save money at the gas pump they aren’t spending it elsewhere. So, lower energy prices are good except maybe the energy market is telling us something.

Beyond that, low energy prices mean next to no inflation, so why raise rates when there are no inflationary pressures? Fed members who supported an early move said they were concerned that holding rates low for too long might lead to asset bubbles, but backers of waiting longer said an early move would result in the Fed’s having to cut rates back to zero afterward.

Speaking of asset bubbles; for the first three quarters of 2014, companies spent $420 billion on share buybacks, on track to set a record. As buybacks and dividends have risen, so has corporate debt. Since 2012, annual U.S. corporate bond issuance has topped $1 trillion a year. About $503 billion of corporate debt is set to mature this year, and each successive year will see higher amounts of debt maturing, with about $3.7 trillion is set to mature through 2019, according to Standard & Poor’s RatingsDirect.

So, the Fed is playing a delicate balancing act and we should not expect any sudden movements from the Fed; they will eventually raise rates but they will move at about the pace of an arthritic tortoise.

As widely expected, the Bank of Japan maintained its massive 80 trillion yen annual stimulus program today, its main tool to hit 2% inflation by next fiscal year. Data earlier this week confirmed that the country pulled out of recession in the fourth quarter of last year, although annualized growth of 2.2% was much weaker than expected. The Nikkei closed up 1.2% at 18,199 following the decision, its highest level since July 2007.

Bank of England officials voted unanimously to leave the central bank’s benchmark interest rate unchanged at 0.5% this month and the stock of assets purchased under its bond-buying program unchanged at £375 billion.

Construction on new U.S. homes dropped 2% in January to an annual rate of 1.07 million units, as heavy snowfall hindered builders in some regions such as the Midwest and Northeast.

Industrial production rose a seasonally adjusted 0.2% in January, well short of expectations. Another sign of weakness came in a slight downward revision to output in the past four months. Even with the revisions, industrial output advanced at a 4.3% annual rate in the fourth quarter.

Wholesale prices posted a record 0.8% decline in January. Low energy costs kept a lid on Producer Prices, but even when you strip out food and energy costs, the so-called core index dropped 0.3%. The price of goods fell sharply owing to a 10.3% decrease in energy costs. Gasoline prices in particular tumbled 24%, the biggest drop since 2008. Producer prices have shown zero change in the past 12 months because of plunging energy costs. The core PPI is up 0.9% in the same span, however.
 
So, what is the “Big Money” doing? SEC filings are showing us who has been buying or selling, and what:
Warren Buffett dumped Exxon Mobil. The billionaire’s Berkshire Hathaway holding company disclosed that it sold a $3.7 billion stake in the energy giant as oil prices have plunged. The company also purchased a 5% stake in agriculture equipment maker John Deere, plus shares of Twenty-First Century Fox and Restaurant Brands International, the owner of Burger King and Tim Hortons.
Soros Fund Management, the family office of billionaire hedge fund manager George Soros, cut holdings of U.S. stocks in the fourth quarter and shifted assets globally. Soros, which manages almost $30 billion, moved about $2 billion into companies in Asia and Europe. Warren Buffett and George Soros both boosted their stakes in General Motors.

Carl Icahn’s equity holdings declined by 5.2% during the fourth quarter to $31.9 billion as of Dec. 31, even as he bought more EBay and Hertz.

Daniel S. Loeb’s Third Point acquired five million shares of Phillips 66, a stake worth $384.5 million. And Leon G. Cooperman’s Omega Advisors acquired a 2.1 million-share position in Laredo Petroleum and a 652,500-share position in Sanchez Energy. At the same time, Omega sold about 29 percent of its big stake in Sandridge Energy, ending the quarter with 32.2 million shares. ValueAct Capital Management, an activist hedge fund, acquired big new positions in Halliburton and Baker Hughes, two oil field services companies that agreed to a $34.6 billion merger in November.
In the technology sector, David Einhorn of Greenlight Capital reduced his fund’s stake in Apple by about 6 percent, to 8.6 million shares, a stake worth more than $1 billion as of Tuesday. Another hedge fund, Coatue Management, which focuses on technology, reduced its Apple holdings by about 15 percent, to 8.9 million shares, as of the end of 2014. Appaloosa Management, David Tepper’s hedge fund, sold its entire 1.2 million-share stake in Apple, as well as its stakes in Facebook and the Chinese Internet giant Alibaba. Appaloosa Management had $2.74 billion less in U.S. stocks in the fourth quarter, a 40 percent drop from the previous quarter. Louis Bacon’s $14.8 billion Moore Capital Management had $2.3 billion in U.S. equities at the end of the year, about 25 percent less than the end of September.

Are you familiar with Snapchat? Let me explain how it works. Remember the old Mission Impossible shows? The team would get their mission and then the message would self-destruct in 10 seconds. That’s the idea behind Snapchat; it’s an app for your phone, and after you receive a message, the message will erase after a few seconds. Last month Snapchat received $485 million in funding, valuing the company at about $10 billion. Now Snapchat is looking to raise an additional $500 million, which would put the valuation “as high as $19 billion.” That would make the disappearing messaging platform the third-most-valuable VC-backed startup, behind Xiaomi and Uber, and give it a valuation nearly equal to the $22 billion paid by Facebook for WhatsApp.

Now for today edition of “Banks Behaving Badly”:
Switzerland raided HSBC. Police searched the bank’s Geneva offices for evidence of money laundering, in the wake of leaks that document HSBC’s attempts to help clients evade taxes through the use of private Swiss accounts. The story about leaked documents aired 10 days ago. The actual leaked documents were leaked 6 years ago. Justice delayed is par for the course.

BNY Mellon has restated its Q4 results it announced in January, taking a $598M litigation charge that suggests it is on course toward a settlement of cases, including a three-year-old forex lawsuit filed by the DOJ. The adjustment lowers net income for the year by about a fifth, to $2.5 billion. BNY Mellon (NYSE:BK) is one of the many banks under investigation for forex manipulation.

Next, let’s give credit where it is due: Citigroup says it will commit to spend $100 billion on initiatives to help combat climate change over the next ten years.

According to the company’s release the money will be used “to finance activities that reduce the impacts of climate change and create environmental solutions that benefit people and communities.” In 2007, Citi pledged $50 billion over ten years and met that goal three years early, hence the new, higher number.

Citi says it will use its $100 billion climate fund to finance infrastructure projects “that increase access to clean water and manage waste, while also supporting green, affordable housing for clients, including in low- and moderate-income communities”. Citi will also back “sustainable transportation” projects and help cities protect against climate extremes.

In 2012, Bank of America set a goal of $50 billion to provide loans and other financing for environmentally friendly energy projects over 10 years. The same year, Goldman Sachs set a 10-year target of $40 billion for investments in renewable energy projects. Clearly, Citigroup thinks they can make some money on Green Energy.

Monday, August 18, 2014 - Theory and Instinct; Nobody Knows

Financial Review with Sinclair Noe

DOW + 175 = 16,838
SPX + 16 = 1971
NAS + 43 = 4508
10 YR YLD + .04 = 2.42%
OIL - .71 = 96.64
GOLD – 7.30 = 1297.20
SILV + .04 = 19.68

Over the weekend, the geopolitical hotspots did not explode. Kurdish forces made progress against ISIS militants in Iraq; Ukrainian forces made progress against pro-Russian separatists in eastern Ukraine. The ceasefire between Israel and Hamas is holding.

In economic news, the NAHB/Wells Fargo Housing Market Index showed that homebuilder sentiment rose for the third straight month in August. That should be a positive for new home construction.

Meanwhile, mortgage-finance giant Fannie Mae cut its outlook for the housing market this year and next, because rising mortgage rates, bad winter weather and consumer “conservatism” are all hitting the housing market. In its August forecast, Fannie said it expects construction starts for single-family homes to hit 642,000 in 2014, down about 8% from its July forecast of 696,000. Likewise, Fannie cuts its outlook for new single-family homes sales in 2014 by 11% to 431,000 from 486,000.

Housing affordability hit its lowest level in nearly six years in June. The National Association of Realtors reports the mortgage payment for a median-priced US home in June requires 16.3% of median household income. Even though housing affordability is still historically quite favorable by the NAR’s index, homes are not only becoming less affordable, but affordability may be even less favorable for first-time buyers. A separate index maintained by Goldman Sachs that looks only at marginal buyers shows that housing affordability is largely in line with its historic average.

The New York Federal Reserve says a new SEC rule designed to reduce runs on the money market mutual fund industry could create runs instead. At issue is part of the new SEC rule giving funds the ability to limit outflows by restricting redemptions when liquidity runs short. New York Fed economists say: “The possibility of a fee or any other measure that is costly enough to counter investors’ strong incentives to run amid a crisis will give investors a strong incentive to run preemptively to avoid such measures.”

It is Monday, and so there was some M&A activity. Dollar General made an $8.9 billion dollar, all cash bid for Family Dollar Stores. You will recall that Dollar Tree recently made a bid for Family Dollar, which works out to $74.50 a share, while today’s bid by Dollar General works out to $78.50 a share, and it’s cash.

So, for the most part, it was a typical Monday. But we are in the Dog Days of summer, and in these seemingly quiet, low volume, illiquid sessions we can see a small move quickly turn into a bigger move; a leisurely stroll turns into a gallop, turns into a stampede. The Fed 's Jackson Hole, Wyoming, symposium at the end of the week is also expected to send a dovish message to stocks, with employment and inflation nearing Fed goals, Fed Chair Janet Yellen has consistently cautioned some labor market measures still show enough slack to warrant keeping interest rates low. Heading into this year’s Jackson Hole assembly, the labor market is giving off mixed signals even as unemployment falls. About 28 percent of all part-time workers in July reported that slack business conditions or a dearth of full-time jobs kept them from finding full-time work. That’s up from a 19 percent share at the start of the downturn.

Most people are saving next to nothing, while just a few are saving a significant amount. Those who do save are saving a lot, more than $1.2 trillion a year. According to the Fed’s financial accounts data and definitions, the personal savings rate has averaged about 10% of disposable income since the recession ended, up from around 7% before the recession. That means upper-middle class and wealthy Americans are saving nearly $400 billion more a year than they used to. The Fed has been keeping interest rates low, and part of the thinking is that it forces investors to chase yield, but Americans have nearly $11 trillion parked in cash, and bank accounts, and money market funds that pay next to zero. So, the Fed might keep rates low, until we’re all willing to gamble, at which point, rates rise, and we all lose our bets.

The high share of workers who are part time for economic reasons is one reason that the Labor Department’s broadest measure of unemployment remains far above its 8.8 percent pre-recession level. U6 unemployment, which includes involuntarily part time and discouraged job seekers in addition to the jobless, is 12.2 percent, or almost double the 6.2 percent level of the main unemployment rate. Both increased by 0.1 percentage point in July from five-year lows in June.

So, what is this market worth? Robert Shiller says the stock market is very expensive right now. Shiller is the Nobel Prize winning Yale professor who helped create the cyclically adjusted price earnings ratio, which takes average inflation adjusted earnings from the past ten years. In a New York Times article yesterday, Shiller noted that the ratio is now at 25, up from 23 a year ago, and well above the historical average of about 15. The ratio has only moved above 25 three time in the last 130 years; it happened in 1929, 1999, and 2007; and of course the markets crashed. Makes sense; to justify high valuations, earnings would need to rise significantly, or prices would need to fall.

A 5 year long rally in US stocks has taken valuations higher, leaving some investors anxious, but the CAPE is just one measure of value. The S&P 500 trailing 12 month PE is right around 17.5, which is just a little above the long-term average, but not out of line. And most estimate for the next 12 months put the forward PE multiple at about 15.

Still, the bull market is getting long in the tooth; it is now the fourth longest bull market; topped only by the bull runs ending in 1961, 2000, and 1929; and of course we know how those markets finished. The lack of a meaningful correction is a severe divergence from the norm. In the summer of 2012, stocks posted greater than a 10% pullback. Since that time, all corrections have been contained to single digits. History shows that other incidents of abnormally small corrections have preceded large corrections exceeding 20%. But it doesn’t mean a crash is imminent; the markets will eventually falter, but it could be a long, long time. Meanwhile, the Nasdaq Composite made it up to a 14 year high today. Which sounds bullish, but really means that the past 14 years were lost.

Maybe stocks will fall from here; maybe stocks will rise from here. I don’t know. Maybe the housing market will go up from here; maybe housing prices will drop. I don’t know. The yield on the 10 year Treasury note was up 4 basis points to 2.42%; nobody knows why. The price of oil dropped below $97 a barrel; apparently because the ISIS idiots did not blow up the Mosul Dam; apparently because we have built up a stockpile of oil while cutting back on demand; that could all change tomorrow.

George Soros is the biggest money making fund manager around. He’s the only hedge fund manager to have earned $40 billion in profits for his investors. George Soros just turned 84. In an article from the Irish Times they quoted his son, Robert Soros, on the success and brilliance of the co-founder of the Quantum Fund. Robert said: “you know [that] the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm and it’s this early warning sign.”

Soros has admitted to relying greatly on “animal instincts”, saying the onset of acute pain was often “a signal that there was something wrong in my portfolio”. His decisions, then, “are really made using a combination of theory and instinct”.

The economic recovery is underway, or not, depending on any expert opinion of the hour. The main stumbling block to recovery is uncertainty or not, again depending. As we wait for factories to begin operating at full capacity, investors are growing increasingly frustrated at more than half a decade of prudence, pushing chief executives to loosen the purse strings. Capital spending could increase as early indicators show that industrial companies are beginning to run at higher levels of capacity than has been the case over the last five years. When factories and the like are running at less capacity on the back of lower demand there is very low capital expenditure. In the aftermath of the financial crisis companies hunkered down and re-engineered their balance sheets, diverting funds from investment to pay off debt or stockpile cash. However, even since the recession ended and the economy has picked up, many have continued to hoard cash leading to growing calls from investors to deploy cash reserves, which earns low returns sitting on balance sheets.

It is now estimated that global firms are sitting on a stockpile of $7 trillion in cash. The world’s corporate giants are poised to tap into record cash reserves and possibly embark on a long-awaited spending spree, fuelling hopes of a massive boost to the global economic recovery.

The bulk of the cash is held by 5,100 of the world’s biggest companies, which had combined reserves – cash and short-term debt – of $5.7 trillion as of the end of 2013, according to Thomson Reuters Datastream. The cash pile total excludes financial companies such as banks and insurers, who are required by regulators to hire capital.

Corporate America dominates the pack with about $2 trillion at its disposal, led by a clutch of tech titans. Apple’s cash mountain of $140bn means it has more unspent capital than any other American company, followed by Microsoft with $83bn, and Google, which has built up $59bn of reserves.

So, investors are hollering for companies to spend their cash and deliver higher returns, because cash doesn’t pay much. There are three things the companies can do: buy other companies, return the money to shareholders, or spend the money on the business and try to grow the business organically. What will they do? Nobody knows.