Financial Review

Up and Down the Chain

Sinclair Noe — June 23, 2017

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DOW – 2 = 21,394
SPX + 3 = 2438
NAS + 28 = 6265
RUT + 10 = 1414
10 Y – .01 = 2.14%
OIL + .43 = 43.17
GOLD + 6.60 = 1257.60
BITCOIN + 0.27% = 2745.66 USD
ETHEREUM – 3.55 % = 329.50

Energy stocks led the S&P 500 higher, posting its only positive session of the week. Overall, U.S. stocks closed little changed for the week, with the Dow and S&P posting small gains in the period.

The Nasdaq posted a 1.8% gain for the week. Health care stocks pulled back about 0.1 percent today, but the sector still notched a weekly gain of 3.7 percent to outperform the other spaces.

Today is a Russell Rebalancing Day. That is the annual reconstitution of the Russell Indexes, where the index provider makes rule-based changes to composition of its indexes, to ensure that changes in market value or investment styles, like shares of companies deemed value or growth, for example, are properly accounted.

Total market capitalization for Russell components increased more than 10% to around $27 trillion since last year. Rebalancing day typically results in a little extra trading volume but not much effect on price action for the overall market.

Yesterday, the Senate unveiled its version of Trumpcare, or the Better Care Reconciliation Act. Four GOP senators announced they would not support the bill. Rand Paul, Ted Cruz, Mike Lee, and Ron Johnson said the legislation did not go far enough in its repeal of Obamacare.

Today, Nevada Senator Dean Heller said he would not support the legislation. Heller is up for reelection in 2018 in a state won by Hillary Clinton in last year’s presidential election. Nevada also expanded the Medicaid program under the Affordable Care Act, or Obamacare, and the Senate bill would phase out that expansion starting in 2020. Heller said he can’t support a bill “that takes insurance away from tens of millions of Americans and hundreds of thousands of Nevadans.”

Several other senators are leaning toward opposition, including Portman of Ohio, Murkowski of Alaska, and Collins from Maine. Look for lots of deal making and arm twisting.

Sales of newly-constructed homes rebounded in May, and government data was revised to show a stronger spring selling season than had been previously reported. New-home sales ran at a seasonally adjusted annual rate of 610,000. That was 2.9% higher than in April and 8.9% higher than a year ago.

So far in 2017, 271,000 new homes have been sold, which is 12% higher than during the same period last year. The median sales price in May was $345,800, up from $310,200 in April and $296,000 in May 2016. At the current pace of sales, it would take 4.6 months to exhaust available supply.

About a week ago, Amazon it would acquire Whole Foods, then followed that with news it will start selling Nike products directly online. Once again, Amazon is shaking up the retail universe. Amazon stock has been on a nice run the past week, adding $18 billion in market capitalization.

In contrast, $31 billion in competitor market cap has been wiped out in the same period. Walmart and Costco have been hit the hardest, both losing more than $8 billion in value since the Whole Foods deal was announced on June 16. Whole Foods stock has been trading above Amazon’s offer of $42 a share, however, signaling that investors believe a bidding war could emerge and drive up the final price for Whole Foods.

Competitors like Target, Costco, and Kroger have been rumored as potential suitors, and they would do anything to make this deal harder for Amazon. Walmart is probably the only retailer that can truly compete with Amazon, but today they said they will not bid.

At the same time, Morgan Stanley said in a research note that the retail drug space could experience a wave of M&A action as companies try to outflank Amazon. Basically, any link in the supply chain is now subject to the influence of Amazon.

Meanwhile, outdoor gear retailer Eddie Bauer has hired investment banks to explore strategic alternatives, including a potential sale of the company. Also, today, Sears Holdings is closing an additional 20 money-losing stores. The move includes 18 Sears stores and two Kmart stores. Sears is hardly the only retailer shuttering locations.

There have been about 5,300 store closing announcements so far, this year, according to Fung Global Retail & Technology, a retail think tank.

Meanwhile, Amazon has filed for a patent for beehive-like towers that would serve as multi-level fulfillment centers for its delivery drones to take off and land. The facilities would be built vertically to blend in with high rises in urban areas. Amazon envisions each city would have one. The patent application features several drawings of these buildings, such as the beehive, a cylinder-shaped center and one that looks like a UFO.

The Brexit vote happened one year ago. Britain’s stock market, the FTSE 100, has gained nearly 17% since the UK’s June 23, 2016, vote to leave the European Union. The divorce talks between Brussels and Britain finally kicked off this week, but the outcome of the final agreement remains extremely uncertain.

The government will be working against the clock to hammer out a deal before the deadline of March 29, 2019, two years after UK Prime Minister Theresa May triggered the so-called Article 50 that officially set off the Brexit process. Little progress has been made in the three months since the Brexit clock started ticking. The UK is in a weak negotiating position.

And nobody is sure what Brexit means or what it will ultimately look like.

Qatar has 10 days to meet 13 demands from the Gulf states. Qatar is being ordered to reduce diplomatic ties with Iran, sever ties with terrorist organizations, and shut down Al Jazeera and affiliated networks, among other things, before the Gulf states will lift their blockade on the country.

Another day of Fedspeak. Cleveland Federal Reserve Bank President Loretta Mester said that recent inflation weakness was likely temporary and it should not delay another interest-rate hike this year, even though there is no “immediate need” to tighten policy. Mester is considered one of the more hawkish policymakers.

St. Louis Fed president James Bullard says the Fed can afford to stop raising short-term interest rates and wait and see how economic developments and Washington policy debates play out in coming quarters. Bullard says optimism about the economy has faded since March with economic data surprising to the downside. Bullard is considered one of the more dovish policymakers, calling for rates to remain flat through 2019.

By raising interest rates for the second time this year, Federal Reserve officials doubled down on their long-held belief that inflation will level out at their 2% target, even though the numbers hint at another story.

The Fed has been singing the same tune on inflation for nearly the entirety of this decade, and one could be forgiven for wondering how much inflation is really playing into the Fed’s decision-making process at this point. Yellen and friends made the move to lift rates to between 1% and 1.25% even though most inflation readings have drifted away from its long-run target of 2% in recent months.

Instead, it seems that a marginally improved labor market, and a desire for more wiggle room to cut rates for a slowdown that is becoming increasingly mathematically inevitable, are motivating the push to tighten policy. That includes the Fed’s outline for reducing its balance sheet, the manner of which but not the timing, was unveiled alongside the rate hike.

Treasury yields have fallen from their 2017 highs recently, with the benchmark 10-year yield trading around 2.15 percent. In March, it traded around 2.6 percent. The bond market doesn’t see inflation coming in the near term, and so far, it’s been right.

Adding to the deflationary ledger – oil prices dropped about 4% this week.

Today, SpaceX successfully fired up a Falcon 9 rocket for the eighth time this year, matching its flight total for all of last year. Its next launch is scheduled just two days later, with the ramped-up cadence putting the company on track to achieve the 20 to 24 total missions it’s targeting for the year.

The launch used a “flight proven” Falcon 9 rocket booster, which means it’s flown to space previously and been returned and refurbished. The rocket carried a Bulgarian communications satellite destined for geostationary orbit.

It launched from the historic 39A pad at NASA Kennedy Space Center in Florida, where Neil Armstrong left from before landing on the moon in 1969. On Sunday, SpaceX will launch 10 satellites for Iridium Communications from Vandenberg Air Force Base on California’s central coast.

Remember Blackberry? Once upon a time, about 8 to 10 years ago, Blackberry was the mobile phone of choice. The company reported earnings of $0.02 per share, compared to an estimated zero, but revenue fell to $235 million from $400 million from the year before. The company outsourced the manufacturing of Blackberry hardware in late 2016 in order to focus on software and services. Shares were up about 50% this year, until today – down 12%.

If you use Google’s Gmail, you may have noticed a that anything in your emails is likely to pop up as an ad. It’s not just a coincidence. Gmail scans and analyzes emails – or at least they did. They will stop the practice, due to privacy concerns and the general creepiness.

But this doesn’t mean you won’t see targeted ads in Gmail. Instead, they’ll be personalized with information gleaned from other sources. For example, Google collects data about you based on the YouTube videos you watch or the searches you make.

Financial Review

Undo Send

Sinclair Noe — June 23, 2015

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

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DOW + 24 = 18,144
SPX + 1 = 2124
NAS + 6 = 5160
10 YR YLD + .05 = 2.41%
OIL + .33 = 61.01
GOLD – 7.90 = 1179.00
SILV – .33 = 15.94

This was a flat day on Wall Street. Most of the session saw the major averages hovering around breakeven. The Nasdaq Composite eked out another record high. The economic news was mixed; durable goods orders were weak but new home sales were fairly strong. While stocks have been trading in a very tight range to start the year, some might call it boring. The Standard & Poor’s 500 index hasn’t posted a gain or loss of 2 percent or more for 126 days, the longest streak since one ending in February 2007. Meanwhile, the bond market has been pretty exciting but not in a good way. Longer-dated Treasuries have been jumping all over the place, posting some of the biggest back-to-back gains and losses on record as the Federal Reserve talks about raising interest rates and European leaders act out a Greek tragedy.

The bond market is supposed to be a safe haven, and so bond investors have pulled $327 million from exchange-traded funds focused on this longer-dated debt in the past week alone, and $1.4 billion year-to-date.

The Commerce Department says non-defense capital goods orders excluding aircraft rose 0.4 percent last month. Overall orders for durable goods fell a seasonally adjusted 1.8% last month, but the decline stemmed mostly from a 35% plunge in bookings for commercial aircraft. Apart from transportation, there were increases in demand for primary metals, fabricated metal products, machinery and computers and electronic products. Orders for electrical equipment, appliances and components fell. Although the May report on durable goods was generally positive, businesses still aren’t spending and investing at a pace that would suggest they have full confidence in the economy. Business investment in the first five months of 2015, for example, was 2.6% lower compared to the same period in 2014.

New single-family homes sold at an annual rate of 546,000 in May, up 2.2% from April, and up 19.5% from a year earlier. That’s the fastest pace since February 2008. The median price of new homes, meanwhile, fell 1% to $282,800 compared with May 2014.  The S&P Homebuilders ETF (XHB) touching a new eight-year high intraday. There are several positive factors for the homebuilders, including some M&A activity; last week Ryland Group and Standard Pacific announced a merger.

But the big news in housing is first time buyers. The latest Census Bureau report in April marked the fastest back-to-back gains in household formation since the second half of 2005. Confirmed by yesterday’s report from the National Association of Realtors showing first time buyers accounted for 32 percent of purchases this month, up from 30 percent in April and 27 percent a year ago. Excluding November 2009, when demand spiked from the expiration of the first-time homebuyer tax credit, sales last month were the strongest in more than eight years for this group.  If you look at people between the ages 18 and 34, nearly a third of them are at home with their parents; if they move out, that would be 4 million households that would be created.

Atlanta Federal Reserve’s GDPNow forecast model shows the US economy is on track to grow 2.0% in the second quarter, up from earlier forecast of 1.9% growth.

Euro zone leaders welcomed new budget proposals from Athens as a basis for further negotiations to unlock billions of euros in frozen aid and avert a default. But it’s not a done deal. Greek lawmakers reacted angrily to concessions Athens offered, and parliament’s deputy speaker warned the proposals might be rejected.

While Americans are the biggest foreign owners of Greek stocks, it’s not much. Overseas investors hold 59 percent of the Greek stock market, and of that U.S. traders have about 25 percent. That comes out to $5.7 billion, about the size of doughnut maker Dunkin’ Brands Group, the 110th weighting in the S&P Midcap 400 Index. U.S. investors kept sending money to Greek stocks even as the market tanked. An exchange-traded fund tracking the shares has had inflows every week this year and received $9.5 million last week. Its market cap reached a record this month. We have clearly been programmed to anticipate bailouts. While there might not be much direct exposure to a Greek default, the spillover could still be problematic. Greece may be small but it is important geographically, geopolitically, and there is always the risk of contagion.

European shares climbed to three-week highs on today, extending the previous session’s rally on expectations that Greece was getting closer to a debt deal. Greece’s ATG share index rose 6.1 percent, adding to a 9 percent jump in the previous session. The pan-European FTSEurofirst 300 index gained 1.1 percent to touch its highest level in three weeks.

Economic activity in the Eurozone grew at the fastest pace in four years in June, providing the latest sign that a recovery in the region is gaining traction. Markit’s Composite Flash Purchasing Managers’ Index rose to 54.1 from 53.6 in May, boosted by momentum in Germany and France, the bloc’s two largest economies. The data adds to the evidence that the ECB’s massive stimulus program is taking effect.

The fast-track trade bill cleared a key procedural hurdle today in the Senate, all but ensuring it will win final passage this week and be sent to the White House for the president’s signature. Fast-track, or trade promotion authority, would allow the president to assure potential trade partners that the deals they negotiate with the U.S. will be presented to Congress for a yes-or-no vote without amendment.

Samsung Group heir apparent Lee Jae Yong apologized in a nationally televised address on Tuesday for failing to stop the spread of MERS at a Seoul hospital run by a group foundation. About half of the 175 MERS cases in South Korea have been traced to Samsung Medical Center. The outbreak has prompted travel restrictions and scared off tourists, dealing a blow to the country’s economy.

Nearly 30 percent of Americans are one emergency away from financial ruin; 29 percent of people don’t have money set aside to cover  emergencies, up from 26 percent last year, according to an annual survey from Bankrate.com. Many of the people who had savings didn’t have enough money to get them through a serious emergency or prolonged period of unemployment. About 20 percent of people said their savings would not last longer than three months. At the same time, the number of people with substantial savings is falling. About 22 percent of people had enough cash to cover six months of expenses, the lowest level in five years.

South Carolina Gov. Nikki Haley called for the removal of the Confederate flag from the grounds of the state Capitol. The flag wasn’t lowered to half-staff along with the other flags at the Statehouse after the shooting at Emanuel African Methodist Episcopal Church Wednesday because doing so is under the authority of the state’s General Assembly — and so is taking it down. The South Carolina legislature is convening to consider the proposal. Other states are also looking at taking down the flag, including Mississippi, and Virginia’s governor is calling for removing the flag from license plates. Wal-Mart, Sears, Amazon.com, and eBay all said they would stop selling products bearing the Confederate flag. Meanwhile, a chorus of corporate CEOs, from Tim Cook to Mitt Romney, are calling for the flag to be taken down.

General Mills said it would stop using artificial flavors and colors in almost all of its cereals, joining the food industry’s move towards products perceived as healthier. The packaged foods maker said it plans to have 90 percent of its cereals free of artificial flavors and colors by 2016, up from about 60 percent currently.

If you go to a restaurant there is a good chance the food comes from Sysco or US Foods; they are the two largest food distributors. Earlier this year, Sysco bid $3.5 billion to take over US Foods. The Federal Trade Commission sued to block the deal on antitrust grounds. Today, a federal judge ruled that there is a reasonable probability that “the proposed merger will substantially impair competition in the national customer and local broadline markets and that the equities weigh in favor of injunctive relief.” And that effectively kills the deal.

Netflix has approved a 7-for-1 stock split. In soaring almost 100 percent this year, Netflix shares have reached nearly $700. As of last week, Netflix was the third-most expensive stock in the S&P 500. The split will come in the form of a dividend of six additional shares for each outstanding share. It is payable on July 14 to stock owners of record at the July 2 close. Trading at the post-split price will start July 15.

Starting next month, Amazon will overhaul the way it pays royalties to self-published authors on its e-book platform, by rewarding them based on the number of pages read, rather than the number of times their book has been borrowed. The move applies to books published via the Kindle Direct Publishing service, which follows the pay-per-track model of music streaming services like Spotify.

Have you ever sent an email to the wrong person? Gmail has come up with an option to “Undo Send”. Here is how to set it up. Once in Gmail, click on the “General” tab on the top right of the screen — the one that looks like a little gear. Choose “Settings,” scroll down, click “Enable Undo Send,” and choose a cancellation period of between five to 30 seconds. That is how much time users have to hit “Cancel” above an email while it’s sending. Once pressed, users will get a chance to edit or delete their email. The only question is why did it take so long?