Financial Review

Cats and Dogs

Sinclair Noe — May 25, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

DOW + 70 = 21,082
SPX + 10 = 2415
NAS + 42 = 6205
RUT + 0.88 = 1383
10 Y – .01 = 2.25%
OIL – 2.50 = 48.82
GOLD – 3.20 = 1256.40
BITCOIN + .29% = 2483.51
ETHEREUM - 8.01% = 174.63

The S&P 500 and Nasdaq hit record closing highs. The surprising part is that retail led the charge.

Best Buy beat profit expectations, reported a surprise increase same-store sales and provided an upbeat outlook. The net profit for the quarter dropped to $188 million, or 60 cents a share, from $229 million, or 70 cents a share, in the same period a year ago. Still they blasted through analyst estimates.

Best Buy shares jumped 22% today.

Tommy Hilfiger owner PVH was the second-biggest S&P gainer with a 4.8-percent jump to a near 6-month high on strong results.

Dollar Tree reported earnings that matched estimates. Sales rose 4%, while same-store sales rose 0.5%.

Sears posted a quarterly loss on an adjusted basis. Revenue dropped. Same-store sales fell 11.2% in the quarter. But Sears recently announced cost cutting measures and they still have cash on hand for operations.

Today, shares popped 12%.

The trade gap in goods—services are excluded—widened to $67.6 billion in April from $65.1 billion in March, the government said in its advanced report. The full report will be released on June 2. Exports of goods fell in April, while imports expanded; that means the trade gap will likely cut into second quarter gross domestic product.

There had been hope for a big bounce back in the second quarter to make up for extremely sluggish first quarter growth of 0.7 percent, which had been blamed on temporary factors like weather.

Housing data this week was also disappointing when new home sales fell 11.4 percent and existing home sales fell by 2.3 percent in April.

Initial jobless claims rose by 1,000 to 234,000 in the seven days stretching from May 14 to May 20. That’s just a few notches above the post-recession low set in February, and near the lowest level since April 1973.

The U.S. economy has been churning out new jobs at a rapid pace since 2011, pulling the unemployment rate down to 4.4% and eliciting widespread complaints from businesses that they cannot find enough skilled workers to fill open positions, although not enough to push wages significantly higher.

OPEC agreed to extend oil production cuts for another 9 months, as expected. Oil traders were not impressed, maybe even disappointed cuts weren’t extended for 12 months. Production cuts have bolstered prices in the past, at least for a while, and then the euphoria fades – it just seemed to fade real fast today.

Of course, there is more at play. The biggest beneficiary of price cuts might be the US shale producers, who are expected to increase their output by about 900,000 barrels a day this year, soaking up much of OPEC’s production cuts.

Short-term projections call for a draw down in storage tanks in the coming weeks as the summer driving season gets underway, but the oil glut is likely to continue absent a big increase in demand – and the long-term outlook for demand faces headwinds from improved efficiency and conservation.

And a move to more electric engines.

There is a definite move away from diesel. The whole idea of clean diesel is being shot down in lawsuit after lawsuit. It started with Volkswagen cheating on diesel emissions; then Mercedes, Peugeot, Renault, and Fiat Chrysler. Add GM to the list.

GM is accused in a lawsuit of rigging hundreds of thousands of diesel trucks with devices like those used by Volkswagen AG, to ensure they pass emissions tests. The proposed class-action lawsuit covers people who own or lease more than 705,000 Chevrolet Silverado and GMC Sierra pickups fitted with “Duramax” engines from the 2011 to 2016 model years.

It said GM used at least three “defeat devices” to ensure that the trucks met federal and state emission standards, even if they generated more pollution in real-world driving. The complaint was filed in the federal court in Detroit.

In a 10-to-3 decision, a federal appeals court affirmed the freeze on the second iteration of President Trump’s executive order on immigration from six majority Muslim countries. The court said that national security “is not the true reason” for the order, despite Trump’s insistence to the contrary, saying it “drips with religious intolerance, animus and discrimination.”

Writing for the majority, Chief Judge Roger Gregory said Mr. Trump’s statements on the campaign trail concerning Muslims showed that the revised order was the product of religious hostility. Such discrimination, he wrote, violates the First Amendment’s ban on government establishment of religion.

Trump issued his initial order on Jan. 27, a week into his presidency. Less than two weeks later, the Court of Appeals for the Ninth Circuit affirmed an order halting it. Though Trump vowed to fight the ruling, he did not appeal to the Supreme Court. Instead, he issued a revised executive order. Now that it has been struck down, he is again faced with the choice of whether to appeal to the Supreme Court.

President Trump was in Brussels for a NATO meeting and he intensified his accusations that NATO allies were not spending enough on defense and warned of more attacks like this week’s Manchester bombing unless the alliance did more to stop militants.

In unexpectedly abrupt remarks as NATO leaders stood alongside him, Trump said certain member countries owed “massive amounts of money” to the United States and NATO — even though allied contributions are voluntary, with multiple budgets.

His scripted comments contrasted with NATO’s choreographed efforts to play up the West’s unity by inviting Trump to unveil a memorial to the Sept. 11, 2001, attacks on the United States at the new NATO headquarters building in Brussels.

Now, two of Germany’s leading newspapers are reporting that in a meeting with the EU’s top leadership he insulted Germany, calling the Germans “bad, very bad” for their running a trade surplus with the US and threatening to cut off car imports to the US.

The European Union said it doesn’t share a common position with Trump on Russia, while differences remain in key policy areas, including climate change and trade, adding to signs of strain in the world’s closest political and economic alliance.

Senate Republicans are weighing a two-step process to replace Obamacare that would postpone a repeal until 2020, as they seek to draft a more modest version than a House plan that the nonpartisan Congressional Budget Office analysts said would undermine some insurance markets.

Republicans say they may first act to stabilize premium costs in Obamacare’s insurance-purchasing exchanges in 2018 and 2019. Major insurers have said they will leave the individual market in several states. A Senate plan is likely to continue subsidies that help low-income Americans with co-pays and deductibles.

The Congressional Budget Office said Wednesday that the House plan narrowly passed May 4 would result in 23 million more people without insurance and, in some states, plans that are too costly for older or sicker people. A Quinnipiac University national poll released today said Americans voters disapprove of the House measure by 57 to 20 percent.

Nvidia has enjoyed a particularly charmed existence since November 8. The graphics-chip maker’s stock price has exploded 95% higher since then, the biggest gain in the S&P 500 by almost 30 percentage points.

On one hand, the company has been targeted by large speculators as a stock likely to decline, as reflected by the roughly $3 billion in short positions held by hedge funds. But it’s also one of the favorite stocks for millennial investors. And while share prices across the technology industry have soared since the election, Nvidia has even more going for it than strength by association and the adoration of millennials

On Wednesday, SoftBank announced a $4 billion stake in the company, sending shares climbing even higher. In the grand scheme of things, this discrepancy between large institutions and individual investors is nothing new to the stock market. Some people get drawn in by the hype and the prospect of a quick profit, while others get worried that valuations are overextended.

The United States can expect an Atlantic hurricane season with more than the usual number of storms. The season, which begins June 1 and runs to Nov. 30, is likely to produce 11 to 17 named storms.

Experts at the National Oceanic and Atmospheric Administration say as many as nine of those could become hurricanes, with winds of 74 miles per hour or higher, and as many as four could be major hurricanes with winds of 111 m.p.h. or greater, also known as Category 3 or higher.

In an average season, 12 named storms develop, and three of them become major hurricanes. The agency said there was only a 20 percent chance of a below-normal season this year. In 2016, NOAA forecast 10 to 16 named storms; fifteen storms developed, including four hurricanes of Category 3 or higher.

Phoenix is the nation’s fifth largest city. Estimates released today by the U.S. Census Bureau show Phoenix last July surpassed Philadelphia, its closest population rival, for the first time after losing the title in 2010.  The 2016 data puts Phoenix’s total population at 1,615,017.

The average 88 people per day the city added between July 1, 2015 and July 1, 2016 gives Phoenix another national distinction: It’s the fastest-growing city in the country, based on numeric increase. Phoenix isn’t the only place growing in Arizona. Maricopa County has the nation’s highest annual population increase among counties, according to recent census statistics.

Financial Review

Hat Trick

Sinclair Noe — February 9, 2017

Podcast: Play in new window | Download (Duration: 12:08 — 6.9MB)

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DOW + 118 = 20,172
SPX + 13 = 2307
NAS + 32 = 5715
RUT + 19 = 1378
10 Y + .05 = 2.40%
OIL + .71 = 53.05
GOLD – 12.40 = 1229.60

We have new record high closes for the Dow, S&P, and Nasdaq. It’s a hat trick.

The chief executives of several airlines, as well as executives from air cargo companies, were invited to a breakfast meeting at the White House this morning. Trump called the air-traffic control system “outdated” and he told the execs: “We have an obsolete plane system, we have obsolete trains, we have obsolete airports, we have bad roads. And we’re going to change all that.”

Trump also said: “We’re going to be announcing something I would say over the two or three weeks that will be phenomenal in terms of tax and developing our aviation infrastructure.” He gave no indication of what the announcement might entail. Presumably the “phenomenal” tax and infrastructure plan does not apply solely to the airline industry, and Wall Street lapped it up. He went on to say: “Lowering the overall tax burden on American business is big league.”

The rally had stagnated in recent days as investors sought details about Trump’s policy agenda. Financials, which have soared since the election, were the best-performing group, up 1.4 percent after three sessions of declines, while energy shares gained 0.9 percent. Those sectors stand to benefit should lower taxes spur economic activity as interest rates and the demand for energy would presumably rise.

After 18 months of courtship and court cases, two massive deals that would have reshaped the U.S. health insurance industry have both been declared dead. Anthem’s $48 billion deal to buy Cigna was blocked by a federal judge late Wednesday, weeks after another judge halted Aetna’s bid for Humana. Reasons given: The mergers would have led to less competition and higher prices for Americans.

Applications for unemployment benefits in the U.S. unexpectedly declined last week to an almost three-month low. Jobless claims fell by 12,000 to 234,000 in the week ended Feb. 4. The latest results extend a trend of historically low claims, with applications staying below 300,000 in the longest streak since 1970. A shortage of skilled workers is prompting companies to hold on to existing employees while continuing to add more workers to help fulfill demand.

The Senate has confirmed Jeff Sessions as attorney general largely along party lines. The 52-47 vote capped weeks of divisive battles over Sessions, an early supporter of President Trump. Next up is Representative Tom Price, Trump’s pick for health secretary and a staunch advocate of repealing Obamacare. A vote come could come later tonight.

Secretary of State Rex Tillerson met his Canadian counterpart for the first time on Wednesday for talks that touched on NAFTA, the trade agreement President Trump has pledged to renegotiate. The top US diplomat also met with Mexico’s foreign minister to discuss collaboration on law enforcement, migration and security, and agreed to visit the country in the coming weeks.

A US court of appeals is reviewing arguments on whether to reinstate the Trump administration’s temporary ban on immigration, with the outcome likely to be appealed to the Supreme Court.

Meanwhile, Trump’s first executive order, signed January 25, entitled: “Border Security and Immigration Enforcement Improvements” resurrects some of the most controversial immigration enforcement programs of recent years, seeks to deputize state and local law enforcement as immigration officials across the country, and threatens major cuts to federal funding for cities that fail to fall in line with the administration’s vision.

Trump has called for the construction of new immigrant detention facilities along the U.S. border with Mexico – including through private contracts – as quickly as possible, and there have been requests for additional asylum officers at 2 for-profit Detention Centers in Arizona.

A Dallas federal judge has upheld the Labor Department’s fiduciary rule, dealing a setback to the financial industry’s attempts to kill the measure. But the legal move may not mean much for the regulation’s fate. Last Friday, President Trump issued a memorandum to study the rule’s impact and rescind or revise it if it isn’t consistent with his administration’s regulatory principles. A status report will be published on March 10.

Boeing won orders for 39 wide-body aircraft from Singapore Airlines; a deal worth about $14 billion, as Southeast Asia’s biggest long-distance carrier upgrades its fleet over the next decade with more fuel-efficient models to cut costs.  The airline agreed to buy 20 777-9s, which are set to debut at the decade’s end, and 19 787-10s, the longest Dreamliner model.

There’s a good chance you can’t get there from here. More than 2,700 flights were canceled and all public schools in New York City, Boston and Philadelphia will be closed today as the region braced for a winter storm that could dump a foot of snow or more.

President Trump has written a letter to China’s President Xi Jinping in his first direct communication with the leader of the world’s second-biggest economy since he took office. With currency wars threatening to raise their head again, China has managed to get the yuan exactly where it wants it.

The nation’s authorities have let the currency rise against the dollar, making it harder for the U.S. administration to accuse it of undervaluing the exchange rate, while at the same letting the yuan weaken against a trade-weighted basket of currencies.

Greece’s two-year bond yield climbed above 10 percent as negotiations to release further IMF funds remained deadlocked. The International Monetary Fund weighed in this week, publishing a long-awaited analysis of the challenges the Greek economy still faces. The report has been the focal point of heated disagreement between the fund and Europe in terms of what Greece needs to do to get back on track.

The fund has argued that, in addition to needed reforms, European governments must provide debt relief to Greece for the country’s economy to recover fully. Meanwhile, Astellon Capital, a hedge fund based in London, published analysis saying that some form of restructuring is essential for Italy, given the inability of the country’s economy to grow.

The Astellon report also notes that the E.C.B. and sickly Italian banks have been the main buyers of Italian government bonds over the past three years. Also, Mediobanca, the Italian investment bank published a report which highlights just how little Italy has benefited from being in the euro: Growth has been literally zero, and the economy’s competitiveness as an exporter has deteriorated.

Twitter reported fourth-quarter revenue was $717 million, missing the $740 million average analyst estimate. Sales growth of 1 percent slowed dramatically in the period from the 48 percent gain a year earlier. Twitter added 2 million new users, bringing the total number of people who log in monthly to 319 million. Twitter has had trouble persuading advertisers to spend more money on its social-media platform as fewer people join.

Coca-Cola offered up a flat earnings report. Excluding items, the company earned 37 cents per share, in line with estimates. Net operating revenue fell about 6 percent to $9.41 billion, the seventh straight drop, but slightly ahead of estimates. The company forecast 2017 adjusted earnings to fall 1-4 percent from 2016. Coca-Cola has been offloading much of its bottling business to cope with falling demand for carbonated beverages in North America. Coke said it was on track to complete re-franchising of its US bottling operations by the end of this year.

Whole Foods is shrinking its store count for the first time since the recession. After reporting disappointing earnings, the upscale grocer says it will close 9 stores; including one in Prescott.

With about 70 percent of the S&P 500 having reported results, fourth-quarter earnings are on track to have climbed 8.5 percent, which would be the best performance since the third quarter of 2014, according to Thomson Reuters.

Financial Review

Uncertain

Sinclair Noe — February 6, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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Financial Review by Sinclair Noe for 02-06-2017
DOW – 19 = 20,052
SPX – 4 = 2292
NAS – 3 = 5663
RUT – 11 = 1366
10 Y – .08 = 2.41%
OIL – .72 = 53.11
GOLD + 15.70 = 1236.20

Traders around the world seem uncertain about whether to buy or sell. European markets were mixed. Most Asian markets ended the day with gains. This follows a week where U.S. stocks dropped and then slowly climbed back up. The Dow Jones industrial average ended the week with a 0.1% dip. The S&P 500 and Nasdaq each edged up by 0.1% over the week.

Big business in the UK is starting to feel the pain from Brexit. An Ipsos Mori poll of senior executives at more than 100 of the top 500 companies in the UK found that 58% of businesses believe they are starting to feel the impact of the UK’s decision to leave the European Union.

A decision on a Scottish referendum is coming soon. When the U.K. triggers Article 50 to leave the EU, it might also trigger a fresh independence referendum. Scotland – one of the United Kingdom’s four nations along with England, Wales and Northern Ireland – voted to keep its EU membership last June, but will leave the EU because the UK voted to do so. The British parliament could technically block the move, but to do so would likely provoke a constitutional crisis.

Top Euro Union diplomats have vowed to uphold sanctions against Russia for destabilizing Ukraine, despite US intentions to ease those sanctions. The EU imposed a series of economic and diplomatic sanctions against Russia in 2014. Over the past week, a flare-up in hostilities has erupted between the Ukrainian military and Russia-backed separatists, with each accusing the other of a new wave of shelling. Over the weekend, President Trump committed to meet with NATO leaders in Europe in May.

A federal appeals court rejected early Sunday morning a request from the Justice Department to immediately reinstate an executive order on immigration and refugees, asking for more court filings before it rules on the matter. Airlines in Europe and the Middle East respond to the suspension by allowing passengers from countries that had been blocked to fly.

Ninety-seven tech companies, including Netflix, Twitter, Apple, and Facebook filed an amicus brief on Sunday night against the executive order that places an immigration ban on citizens of seven Muslim-majority countries. The brief states that the executive order “inflicts significant harm on American business, innovation, and growth” and “makes it more difficult and expensive for U.S. companies to recruit, hire, and retain some of the world’s best employees.”

More than any other industry, tech companies hire the lions’ share of the 85,000 foreign workers allowed into the US annually under the H1-B visa program. The H1-B is a temporary visa intended to bring in foreign professionals with college degrees and specialized skills to fill jobs when qualified Americans cannot be found.

A research report from Goldman Sachs estimates that nearly one million H-1B visa holders now reside in the US, and they account for up to 13 percent of American technology jobs. The big tech companies have pressed for increases in the annual quotas, saying there are not enough Americans with the skills they need.

But many tech workers see the H-1B program as a way to pay temporary workers less; or ship their jobs abroad, or at least to bring in workers from abroad, train them, and then ship the jobs offshore.

And it’s not just tech workers. Each year, more than 6,000 medical trainees from foreign countries participate in medical residency programs through J-1 non-immigrant visas, according to the American Association of Medical College.

Once they complete their residency, physicians can either return to their home country for two years before they are eligible to re-enter the U.S. through a different immigration pathway, such as an H1-B worker visa, or they can apply for a Conrad 30 J-1 Visa Waiver. This allows them to extend their stay in the U.S. if they commit to serving in rural and under-served areas for three years.

 The point being, don’t expect a quick resolution to a complex problem.

This past Friday we focused on the January Jobs Report, but there was some other news of note. President Trump signed two executive orders dealing with Wall Street. The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

So, once again the banksters that caused the meltdown of 2008 will oversee policing their industry. What could go wrong?

The second order calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves. The orders don’t do much by themselves to roll back reforms but they do offer details on how the financial industry is likely to receive favored status over the next 4 years.

The order on the fiduciary rule is more like a memo; no extension was granted, and no guidance about seeking a stay to the rule. Nothing in the final version of this memorandum delays the fiduciary rule; still, it was enough for the acting Labor Secretary to state the Department of Labor “will now consider its legal options to delay the applicability date.”

Right now, the date is April 10. And apparently, no matter the administration, government continues to move at a glacial pace.

Over the past month, several Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its quantitative easing during and after the financial crisis. There is some concern the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities.

In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Moody’s Analytics estimates that if the Fed gets out of the bond-buying business as the economy strengthens, it could help lift 30-year mortgage rates past 6 percent within three years.

Bill Gross, in his monthly newsletter says that other central banks have stepped up bond buying as the Fed has cut back, but when those central banks stop buying bonds, there will be a bear market in bonds that will ripple out.

The global central bank balance sheet has surpassed $12 trillion, Gross said. At the same time, Fitch Ratings recently reported that global sovereign debt with negative yields still surpasses $9 trillion.

Even if central banks remain accommodative, it only serves to inflate asset prices without boosting economic growth, creating “an unhealthy capitalistic equilibrium that one day must be reckoned with.”

JPMorgan has received approval and license to underwrite corporate bonds in China’s interbank bond market, making it the first U.S.-headquartered bank to do so. China is the third largest bond market in the world with $6.3 trillion outstanding at the end of 2016, with the interbank bond market accounting for over 90%.

U.S. energy companies added oil rigs for a 13th week in the last 14. Despite OPEC cuts, U.S. crude inventories increased more than expected last week. With output being cut, more investors are betting on rising prices despite indicators such as the Baker Hughes rig count pointing to increased U.S. supply. The Commodity Futures Trading Commission says investors raised their net long U.S. crude futures and options positions in the week to Jan. 31 to a record 412,380 lots.

Canadian department store operator Hudson’s Bay, which also owns the Saks Fifth Avenue stores, has made a takeover approach to U.S. department store chain Macy’s. Hudson’s Bay could raise equity and debt against its real estate portfolio, which could be worth $14 billion, to fund the deal. The company could also bring in a partner.

The economic calendar is a bit light this week, with the JOLTS report serving as the highlight alongside the preliminary reading on consumer confidence from the University of Michigan. But we will stay busy with earnings reports. Analysts will be looking for S&P 500 companies to maintain the 7.5% average profit increase that has marked an encouraging fourth-quarter earnings season so far and will be needed to sustain the market rally.

Tyson Foods reported stronger-than-expected first-quarter earnings and sales and raised its annual outlook, citing strong beef and pork sales.

Toyota Motor reported a sharp decline in net profit for its fiscal third quarter, as the relatively strong yen continued to weigh on earnings. Toyota and other Japanese exporters are being hammered by the yen’s strength. A U.S. dollar bought 109 Yen on average in the third quarter; a year earlier, it bought 121 Yen.

Toyota has a glut of used cars in the U.S.–fueled by years of record sales–which is weighing on new car prices. Toyota said it is ramping up production of more-profitable trucks and sport-utility vehicles to increase profit.

Toyota Motor and Suzuki Motor said they plan to trade expertise in parts supplies and R&D. Any deal could see Toyota benefit from a supply chain that has helped Suzuki dominate India’s massive auto market, while Suzuki could hope to access Toyota’s innovations in automated driving, artificial intelligence and low-emission vehicles.

Hasbro’s revenue was helped in the fourth quarter by surging sales of products in its girls’ category, which include its line of Disney Princess and Frozen dolls. Profit and revenue came in above Wall Street’s expectations.

Tiffany & Co. abruptly replaced Chief Executive Officer Frederic Cumenal after disappointing financial results, just hours before the jewelry chain introduced a new campaign with the first Super Bowl ad in its history. The shake-up follows the departure of the jeweler’s top designer three weeks ago, and weak holiday sales that sent the stock tumbling.

Google used the Super Bowl to plug its Google Home connectivity service, but the TV commercial apparently confused the systems in homes of those who already have it. For them, Google Home went wacko. Apparently, the home systems heard the TV broadcasts calling its name, and it became befuddled. OK Google do not listen to the commercial.