Financial Review

Two Days!

Sinclair Noe — May 25, 2016

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DOW + 145 = 17,851
SPX + 14 = 2090
NAS + 33 = 4894
10 Y + .01 = 1.87
OIL + .94 = 49.56
GOLD – 2.90 = 1225.00

A 2-day rally on Wall Street. The S&P 500 moved back above its 50 day moving average. Still the S&P is trading in a fairly tight range; it isn’t breaking down but it isn’t breaking out, either.

According to the American Association of Individual Investors Sentiment Survey released last week, neutral sentiment among investors has been above 40 percent for 10 straight weeks; neutrality has been above its historical average of 31 percent for 68 weeks out of the past 72. Over the past 2 years, the S&P has traded between 2135 and 1810; until it takes out the high or low, there is no reason to be anything but neutral.

Oil is at a 7-month high. West Texas Intermediate crude oil touched a high of $49.75 a barrel, the highest since the middle of October, and it comes after the Tuesday-evening release of American Petroleum Institute data that showed a drawdown of supply by 5 million barrels, double market expectations, and today the US energy department reported that crude stocks fell by 4.2 million barrels in the last week.

Exxon Mobil and Chevron held their annual shareholder meetings today. There was a resolution from activist shareholders to have the companies curtail exploration for new oil fields and funnel the money to investors in the form of higher dividends and share buybacks. Environmental critics as diverse as state pension funds and religious orders said future climate rules will soon make it unprofitable for Exxon and Chevron to harvest their reserves. The companies countered that there doesn’t yet exist a renewable fuel that can replace gasoline or diesel, and that demand for petroleum-based fuels will grow for decades, even if carbon limits are imposed. The resolution was defeated; the drilling and exploration will continue.

St. Louis Fed President James Bullard told CNBC a rate hike in June or July is not set in stone, but labor data suggests it’s time to pull the trigger.

U.S. home prices rose 5.7% in the first quarter from a year earlier; prices climbed 1.3% from the fourth quarter. It was the 19th quarter of price increases for the Federal Housing Finance Agency’s index, which tracks purchases of homes with mortgages backed by Fannie Mae or Freddie Mac. Home-price appreciation had been flat but now appears, after yesterday’s very strong new home sales report and today’s FHFA house price report, to be trending higher.

So far in 2016, Chinese companies have purchased or are buying 47 U.S. properties worth $9.3 billion, according to deal tracker Real Capital Analytics. That makes them the most active foreign buyers in the U.S., with more than double Canada’s $4.2 billion worth of deals. By contrast, for all of last year Chinese investors did 71 U.S. deals worth $6 billion.

A Federal Reserve annual survey of the financial condition of American families was released today. Almost half of American families say they would struggle to pay for emergency expenses and those with a high school degree or less are most likely to say their well-being has declined. Despite some signs of improvement overall, 46 percent say they would struggle to meet emergency expenses of $400, and 22 percent of workers say they are juggling two or more jobs. Only 23 percent of respondents said they expected their income to be higher in the year after the survey, down from 29 percent at the time of the prior survey. Among the positives were fewer Americans reporting going without medical care because they could not afford it.

Greece and its creditors reached a deal. The deal paves the way for Greece to receive €10-billion-euro from its creditors along with debt relief once the current deal ends in 2018. While it is unclear how exactly a deal will look, it could reduce the International Monetary Fund’s exposure to the country by buying back up to €14-billion-euro of its loans. Greek bond yields slid to six-month lows following the announcement.

The ECB will aim to start small when it begins buying corporate debt next month, seeking first to lure new issuers and then slowly raise the monthly pace of purchases to €5-10-billion-euro. Investment-grade corporate bonds issued in euros are the latest addition to a growing list of assets the central bank is buying as part of its effort to boost Eurozone economic growth via lower borrowing costs.

An early look at U.S. trade patterns suggest the nation’s deficit rose slightly in April, as trade remained a drag on the economy early in the second quarter. The trade gap in goods — services are excluded — rose to $57.5 billion last month from a final reading of $57.1 billion. The total trade deficit in March was $40.4 billion, a decline of almost 14% from the prior month. The government will release the full trade numbers in early June.

Alibaba Group said it was being investigated by the U.S. Securities and Exchange Commission over whether the Chinese e-commerce company’s accounting practices violated any federal laws.

U.S. antitrust officials are investigating Anheuser-Busch InBev over its new incentives that encourage independent distributors to sell more of its own beer brands at the expense of competing craft brews. Budweiser owner AB InBev has 46% of the U.S. beer market but has seen sales dwindle at least partially because of rising craft beer sales. The U.S. Department of Justice last year probed AB InBev’s plan to buy distributors in response to craft brewers’ complaints that it aimed to curb competition.

Citigroup has agreed to pay $425 million to resolve civil charges the bank attempted to manipulate several key benchmarks, including the U.S. dollar ISDAFIX, the Yen Libor and the Euroyen TIBOR. The bank was also charged with false reporting in connection with ISDAFIX benchmark rates and with false reporting of U.S. dollar Libor rates during the financial crisis to protect its reputation.

The International Swaps and Derivatives Fix publishes daily rates for various interest rate derivatives contracts. Citigroup “made false reports” that skewed its submissions, the trading commission said. The bank’s motive, the agency said, was to benefit its own trading positions at the expense of its trading partners and clients. At the time of the misconduct, which ran from 2007 to 2012, Citigroup sat on a panel of banks that each submitted what was supposed to be a reasonable bid for interest rate derivatives. An average of those submissions formed the ISDAFIX benchmark rate for that day.

Last year, the Commodity Futures Trading Commission and the Justice Department announced civil and criminal charges against four of the world’s biggest banks, Citigroup included, for a scheme to manipulate the value of the world’s currencies. And then today, despite a wealth of emails and other culpatory documentation, Citi faces no criminal charges, just a civil penalty.

Hewlett Packard Enterprise plans to spin off most of its technology services operations and merge them with those of Computer Sciences Corp., in an $8.5 billion transaction.  HP Enterprise will shed a business that accounts for roughly 100,000 employees, or two-thirds of their workforce. The deal will create a corporate technology services specialist that will be led by Computer Sciences executives and have roughly $26 billion in annual revenue.  The remaining HP Enterprise operations will concentrate mainly on software, server systems, networking and storage hardware.

So, they are splitting off their consulting unit, Enterprise Services, which was already part of a spinoff, dumping it on competitor CSC, and then HP Enterprises will own half that company. And just to make it a little more twisted, Enterprise Services was part of the old EDS, which HP acquired for about $14 billion in 2008. Over the past 7 years, HP has been spending about $1 billion a year cutting jobs. Just in case you were wondering what HP does….

Nasdaq has rejected a listing application by cannabis social networking company MassRoots on the grounds that it may aid in the use and dealing of an illegal substance. The rejection may insert roadblocks ahead of other cannabis-related companies seeking to list on a national stock exchange and make “it more difficult for cannabis entrepreneurs to raise capital.”

The SEC is concerned about the way Valeant Pharmaceuticals has been disclosing its “non-GAAP” financial measures, stripping away acquisition-related expenses from its adjusted metrics despite fueling growth through frenzied deal making. The company is also facing mounting scrutiny over its drug pricing, business practices and other methods of accounting.

Apple is upping its game in the field of intelligent assistants. After years of internal debate and discussion about how to do so, the company is preparing to open up Siri to apps made by others. The Information reports that Apple is also working on an Amazon Echo-like device with a speaker and microphone that people can use to turn on music, get news headlines or set a timer.

Microsoft announced layoffs in its smartphone business. The company says it would eliminate nearly 2,000 jobs as it looks to streamline its smartphone hardware business. About 1,350 of the job cuts will occur in Finland as Microsoft shutters its phone design and production businesses in the country. Microsoft will take a restructuring charge of about $950 million.

The next time you buy a new iPhone, it’s possible that it will have been made by a robot. Foxconn, the manufacturing company that builds electronic devices for a range of companies including Apple, Samsung and Microsoft, has reportedly replaced 60,000 human workers from one of its factories in China with robots. Foxconn still employs 50,000 humans at the factory… for now.

MasterCard has inked a deal with Pizza Hut to bring Softbank’s robot companion, Pepper, to restaurants across Asia by the end of 2016. The move is intended to push the MasterPass digital wallet, which Pizza Hut patrons can use by either tapping the Pepper icon within the app or by scanning a QR code on Pepper’s display. Besides taking payments, the robot can chat with customers, take orders and make recommendations.

Financial Review

Seven Years

Sinclair Noe — September 15, 2015

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DOW + 228 = 16,599
SPX + 25 = 1978
NAS + 54 = 4860
10 YR YLD + .09 = 2.28%
OIL + .38 = 44.97
GOLD – 3.30 = 1106.10
SILV – .01 = 14.51

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.4 percent in August after an upwardly revised 0.6 percent increase in July. These so-called core retail sales, which correspond closely to the consumer spending component of gross domestic product, provided the latest sign of sturdy economic momentum and suggested the recent stock market sell-off had little immediate impact on U.S. household spending.

A separate report from the Federal Reserve, however, showed manufacturing output fell a sharper-than-expected 0.5 percent as auto production slid, after a rise of 0.9 percent in July. Excluding autos, factory output was unchanged. The manufacturing sector has been struggling, faced with the headwinds of a strong dollar, slack economies overseas and lower oil prices.

While most economists think the Fed may wait to raise interest rates, and futures contracts show only a 30 percent probability that the Fed will boost rates on Thursday, the Treasury market is bracing for a hike. Treasuries tumbled, lifting the two-year note yield to the highest since April 2011. Treasury two-year note yields rose eight basis points, or 0.08 percentage point, to 0.81 percent. Benchmark 10-year note yields rose nine basis points to 2.28 percent.

The World Bank is warning that a Federal Reserve interest rate hike could cut capital inflows to emerging markets by as much as 45%. The paper from World Bank economists published today says, “Emerging and frontier market economies may hope for the best during the upcoming tightening cycle, but given the substantial risks involved, they would do well to buckle their seatbelts in case the ride gets bumpy.”

More stock market volatility in China extended as the Shanghai Composite Index shed 3.6% to mark its sharpest drop in three weeks. The index barely held onto the psychologically critical 3,000 level. The Hang Seng lost 0.5%, and the major index in Australia was off 1.5%. The yen broke back higher after the Bank of Japan held rates steady. The central bank warned on slowing demand from emerging markets.

Brazil announced a new round of spending cuts and tax hikes in an effort to narrow a budget deficit after the nation’s credit rating was reduced last week. The new measures total almost $17 billion, including tough cuts in public health and housing spending. Brazil is racing to get ahead of more credit agency cuts to speculative territory after S&P acted last week.

German Chancellor Angela Merkel called for an emergency summit of European Union leaders next week on the region’s worst refugee crisis since World War II after the EU failed to reach an agreement on binding quotas to distribute migrants. EU interior ministers only agreed to the broad outlines of proposals to relocate 120,000 refugees as a cluster of eastern European nations continued to balk at accepting the proposed quota system. Merkel defended her decision to allow tens of thousands of refugees into her country in recent weeks, only to then turn around and restore border controls as the flood turned into a deluge.

Inflation in the U.K. was flat during August, meeting analysts’ expectations. Food and transport prices were a significant drag on inflation during the month. The reading on prices has been flat or negative for five months out of seven as inflation in the region stays well below the Bank of England’s 2% target rate.

General Electric is moving 500 jobs to France, Hungary and China after Congress halted the Export-Import Bank’s ability to offer new financing. Positions now in South Carolina, Maine, New York and Texas, including some Houston-based packaging operations for gas turbines, are being shifted. GE has been threatening such a move for months as it urges lawmakers to revive the agency, which provided almost $1 billion in credit assistance to the company’s international customers last year.

GE says the loss of Ex-Im financing imperils overseas sales of products such as diesel locomotives, gas turbines and jet engines. While about 55 percent of GE’s 305,000-person workforce was outside the U.S. at the end of 2014, the shifting of domestic jobs is a sensitive political issue. GE has been threatening such a move for months as it urges lawmakers to revive the agency, which provided almost $1 billion in credit assistance to the company’s international customers last year.

Hewlett-Packard is splitting into two separate entities, and will cut 25,000 to 30,000 more jobs as part of a $2.7 billion restructuring. These cuts will be focused on HP’s Enterprise Services Division, the consulting arm of the company. HP has so far let go over 51,000 people.

FedEx just increased its shipping rates by 4.9%; the higher rates go into effect on January 4. And since right now all markets can think about is the Federal Reserve and its dual goals of maximum employment and price stability, the quick reaction to the news was that this is a sign inflation is perking up. Actually, FedEx increased rates by the same amount last year. And this at a time when fuel costs are down. Go figure.

The United Auto Workers union said just after midnight Tuesday it would extend its national labor agreement with Fiat Chrysler on an hour-by-hour basis. The contract expired at 11:59 PM Monday, but talks continued past the deadline. Typically, during talks, the UAW will agree to extend the current agreement indefinitely once it expires. To do so by the hour is an unusual move. The UAW’s contracts with the Detroit car makers cover about 140,000 U.S. hourly workers. For now, those workers will operate under the terms of the 2011 contract until a new agreement can be reached.

BMW and Toyota are looking to expand their partnership in a bid to lower global manufacturing costs and explore hydrogen car options. The two automakers have already worked together on a hydrogen prototype of the BMW Series 5. Toyota and BMW are out in front of peers in hydrogen development. Speculation on strategic alliances between automakers has been a large focus of the Frankfurt Motor Show this week, although most executives have danced around questions on major mergers.

Porsche’s new 600-horsepower concept car, unveiled Monday at a German auto show, can speed from 0 to 60 mph in about three seconds — but that’s far from the most interesting thing hidden under the hood. The four-seat sports car is all electric. Not only can the Mission E drive more than 300 miles without powering down, it can recharge almost completely within 15 minutes.

Ford will start using an advanced Alcoa aluminum alloy for several parts of its top-selling F-150 pickup, and the companies will collaborate on using the next-gen “Micromill” process aluminum in other vehicles through a joint development agreement. The steel-replacing alloy has been a key target for automakers seeking to meet tougher fuel standards with lighter vehicles while meeting safety standards. Ford’s F-150 sales in the U.S. have picked up momentum this summer, as production has ramped up.

The US Court of Appeals for the 9th Circuit has issued a ruling that could change the contours of fair use and copyright takedown notices. The three-judge panel found that Universal Music Group’s view of fair use is flawed. The record label must face a trial over whether it wrongfully sent a copyright takedown notice over a 2007 YouTube video of a toddler dancing to a Prince song. That toddler’s mother sued Universal in 2007, saying that its takedown practices violated the Digital Millennium Copyright Act. The judges ruled today that copyright holders “must consider the existence of fair use before sending a takedown notification.”  Universal will now have to face a trial over whether it “knowingly misrepresented” its “good faith belief the video was not authorized by law.”

Exactly 7 years ago today, Wall Street came closer to imploding than at any other time since the Great Depression. That was when the investment bank Lehman Brothers filed for bankruptcy on Sept. 15, 2008, amid the global mortgage meltdown, triggering a cascade effect across Wall Street. Within days, the insurer AIG had to be bailed out by the federal government while other investment banks, including Morgan Stanley and Merrill Lynch, were pushed to the brink. Merrill, in fact, was eventually sold amid panic to Bank of America.

Seven years later, and the anniversary is a good chance to reflect on the lessons learned. For individual investors you have probably turned a bit more cautious. For Wall Street it looks like nothing was learned; there is still a big revolving door between Wall Street and Washington; regulators are still dysfunctional; the foxes still guard the hen house; the biggest banks of 7 years ago are even bigger today and just as dangerous. You might not have remembered the exact date, but you probably remember the moment, even if you probably haven’t fully recovered.