Financial Review

Groovin

Sinclair Noe — July 29, 2016

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DOW – 24 = 18,432
SPX + 3 = 2173
NAS + 7 = 5162
10 Y – .06 = 1.45%
OIL + .24 = 41.38
GOLD + 15.80 = 1351.40

The S&P 500 index hitting a record intraday high for the seventh time this month as gains in tech heavyweights Alphabet and Amazon more than made up for losses in energy shares. The S&P 500 index rose as much as 0.3 percent, touching an all-time high of 2,177.09, and completed its fifth straight month of gains. For the week, the Dow fell 0.75 percent, the S&P edged down 0.07 percent and the Nasdaq rose 1.2 percent. In July, the Dow rose 2.8 percent, the S&P climbed 3.6 percent and the Nasdaq gained 6.6 percent.

The U.S. economy grew far less than expected in the second quarter. Gross domestic product increased at a 1.2 percent annual rate after rising by a downwardly revised 0.8 percent pace in the first quarter. The economy was previously reported to have expanded at a 1.1 percent pace in the first quarter. This is the first estimate on second quarter GDP, but economists had forecast growth rising at a 2.6 percent rate.

Inventory investment fell for the first time in nearly five years. Once the impact of a downward inventory adjustment is considered, the underlying pace of growth looks healthier than the headline GDP number. Excluding inventories, the economy grew at a 2.4 percent rate. Consumer spending, which makes up more than two-thirds of U.S. economic activity, increased at a 4.2 percent rate – the fastest since the fourth quarter of 2014. In the second quarter, income at the disposal of households after adjusting for inflation increased to a $13.92 billion rate from a $13.81 billion pace early in the year.

An index that measures what it costs a business to employ a worker — how much Americans earn in wages and benefits — rose 0.6% in the second quarter. The ECI has risen 2.3% in the past 12 months, the fastest pace since early 2015. In the first quarter, wages increased 0.6%. Benefits increased 0.5%.

The Bank of Japan held interest rates steady and offered up only a mild dose of stimulus. The central bank announced it would purchase ¥6 trillion-yen ($57 billion) worth of exchange-traded stock funds annually, an increase from the prior amount ¥3.3 trillion-yen. The size of a key lending program was also doubled to $24 billion. But those moves were far less than expected. And the Bank of Japan left interest rates at 0.1%, which disappointed many investors.

After more than three years of pumping out wave after wave of cheap money that’s failed to secure its inflation target, the Bank of Japan policymakers declared it was time to assess the impact of their policies. Maybe that’s an admission that their policies aren’t working; maybe it is an acknowledgement that they are running out of tools. Or maybe it’s just uncertainty of diving into negative interest rates.

Or maybe this is the setup for an experiment in helicopter money, which is very different from quantitative easing. QE means new money is swapped for assets in the reserve accounts of banks, leaving liquidity trapped on bank balance sheets. This frees up new money for borrowing, which increases money circulating through the economy – at least in theory. QE still requires borrowing to take place, and if there is no demand for borrowing, QE won’t really work. Money is created when loans are made, and it is extinguished when they are paid off. When loan repayment exceeds borrowing, the money supply “deflates” or shrinks.

The alternative is to do what governments arguably should have been doing all along: issue the money directly to fund their budgets. Having exhausted other options, some central bankers are now calling for this form of helicopter money. The problem, at least one of the problems, is that helicopter money is illegal under Japanese law. That doesn’t mean it won’t happen. It just means they will need to devise creative ways to fly the helicopter.

The Nikkei Stock Index closed 0.6% higher after a volatile session. The yen jumped and Japanese government bond yields rose the most in eight years, lifting global sovereign borrowing costs. The dollar’s fall against the yen, its steepest in a month and fourth steepest this year, pulled it down against other currencies, putting the trade-weighted dollar exchange rate on course for its biggest weekly fall in two months.

The University of Michigan Index of Consumer Sentiment hit 90 in July, down from 93.5 in June’s final reading. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates.

Meanwhile of poll of British consumers saw the biggest drop in consumer confidence in 26 years in July, following the Brexit vote. A separate survey of manufacturing companies, also published on Friday, paints a similar picture. Manufacturers said that the sector’s recovery was under threat and business confidence had fallen in every region of England and Wales. The report on household reactions to the Brexit vote adds to evidence that consumers could rein in spending amid higher uncertainty about jobs, pay and the UK’s economic health.

Eurozone flash inflation increased to 0.2% in July to top the 0.1% pace seen in June and expected by economists. Eurozone flash GDP rose 0.3% in the second quarter to match estimates. The pace was only half of the growth rate from the first quarter. Inflation was at 0.2% for the quarter, and the unemployment rate was unchanged at 10.1%. European stocks were mixed across the continent after the data dump.

The European Banking Authority and the European Central Bank released the results of stress tests on the region’s major banks. The tests look at 51 major lenders, but they do not assign a pass or fail grade – rather they identify common equity tier 1 capital ratio, a measure of its resilience. The legal minimum for all banks is a CET1 ratio of 4.5 percent, plus 3.5 percent of risk-weighted assets in subordinated debt, as well as a series of buffers, which are made up of common equity. So, 8 percent is where they should be, but they are grading on a curve.

The European Central Bank, which supervises 37 of the lenders in the test, has said it will use a 5.5 percent ratio in the stressed scenario as an informal benchmark for lenders’ resilience. The final requirement set will move up or down from that level to take account of banks’ individual business models. The worst performer was Italy’s Banca Monte dei Paschi, with a negative 2.2 CET1 ratio. Monte Paschi Friday approved a plan to tap investors for the third time in two years by selling stock to replenish capital. While Monte Paschi is seeking to raise funds through private means, Italy has held talks with the European Commission seeking approval to back the bank’s recapitalization with state funds.

After the closing bell Thursday, Alphabet, the parent of Google posted earnings and revenue that beat estimates. Also, Amazon.com reported record profit for the third consecutive quarter- beating estimates – but a wave of spending could stop that streak. Amazon was long known for spending its way to a loss no matter how much revenue it brought in, but the second quarter was its fifth straight that showed a profit. Apple, Microsoft and Facebook, as well as Alphabet and Amazon, all blew past Wall Street expectations for both profit and revenue. As good as the quarter was for big tech, it was bad for big oil.

Exxon Mobil, the world’s largest publicly traded oil producer, posted a lower-than-expected quarterly profit due to weak crude prices and refining income. Net income slumped to $1.7 billion, or 41 cents per share, in the second quarter, from $4.19 billion, or $1 per share, in the year-ago period. Analysts expected earnings of 64 cents per share.

Chevron, the second largest U.S.-based oil producer, posted a second-quarter loss, its largest since 2001. It was Chevron’s third straight quarterly loss, the longest slump for the company since at least 1989. The company lost $1.47 billion, or $1.07 per share, in the quarter, compared with a net profit of $571 million, or 30 cents per share, in the year-ago period. Excluding one-time items, Chevron earned 35 cents per share. By that measure, analysts expected a profit of 32 cents per share.

Crude oil for September delivery dropped under $41 a barrel. Prices are down almost 8% for the week, and down 16% for the month. The U.S. oil benchmark is now down 20.6% from its recent high of $51.23 in June. That reflects a bear market, which is defined as a downturn of 20% or more.

NextEra Energy agreed to buy Energy Future Holdings’ Oncor Electric Delivery Co. LLC, adding the largest electric transmission operator in Texas in a deal valued at about $18.4 billion. The agreement is part of a reorganization plan designed to allow Energy Future to emerge from bankruptcy after restructuring $50 billion in debt. A takeover by Florida-based NextEra would require the approval from the court handling Energy Future’s Chapter 11 case and from Texas regulators.

SABMiller’s board unanimously recommended Anheuser-Busch InBev’s improved $104 billion takeover offer. Chinese regulators approved the merger, the last regulatory hurdle to the deal. The mega merger still requires shareholder approval. AB InBev gave in to some investors when it raised its bid once more this week to factor in the pound’s plunge in the wake of the U.K.’s Brexit vote that put minority and institutional shareholders at a disadvantage.

Financial Review

I Would Like to Thank the Academy

Sinclair Noe — February 26, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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