Financial Review

Dow 20K Redux

Sinclair Noe — January 26, 2017

Podcast: Play in new window | Download (Duration: 12:01 — 5.5MB)

Subscribe: iTunes | Android | RSS

DOW + 32 = 20,100
SPX – 1 = 2296
NAS – 1 = 5655
RUT – 6 = 1375
10 Y + .02 = 2.51%
OIL + 1.00 = 53.75
GOLD – 12.90 = 1188.80

Yesterday the Dow Industrial Average, the S&P 500 Index and the Nasdaq Composite all hit record high closes, but lest you think what’s happening is merely a US phenomenon, let me remind you: The entire world is now breaking out, in concert. the MSCI All Country World Index Ex-US ETF, which holds everything else other than US stocks, just broke out to the highest level in almost 2 years.

The big focus today was another flood of earnings results. It was the busiest day for the fourth quarter reporting season as 39 S&P firms release their numbers.  After the closing bell, Microsoft report earnings of 83 cents per share, topping estimates of 79 cents, with better than expected revenue of $26.07 billion. Microsoft traded today at an all-time high.

Shares of Alphabet fell in extended trading after reporting weaker-than-expected fourth-quarter earnings. The Google and YouTube parent reported net income of $5.3 billion, or $7.56 a share, compared with $6 billion, or $7.06 a share, in the year-earlier period. Revenue topped estimates.

Intel reported quarterly earnings and revenue that beat estimates. Intel posted fourth-quarter earnings per share of 79 cents. Revenue for the quarter came in at $16.37 billion. Analysts expected Intel to post earnings of 74 cents a share and 15.752 billion in revenue. Intel has made efforts to move away from reliance on the declining PC business. The company’s focus has shifted to the “Internet of things” and to its data center group, which creates chips for large computers.

Comcast beat expectations for fourth quarter earnings and revenue. Earnings were up 9.9 percent from 81 cents per share a year earlier, while revenue rose 9 percent from $19.25 billion. The parent company of NBCUniversal also announced a 15 percent increase in its dividend and reported a 2-for-1 stock split.

Ford Motor matched estimates with fourth quarter profit of 30 cents per share after items, while revenue beat estimates. Ford posted a fourth quarter loss but full-year profit for 2016 was its second-best on record, trailing only its 2015 results. And if that sounds a bit confusing, well, add Ford to the list of companies that are reporting muddled and confusing reports. Ford reaffirmed its forecast that profits for 2017 would be lower, in contrast to more upbeat forecasts from GM and Fiat Chrysler.

Southwest Airlines earned an adjusted 75 cents per share for its fourth quarter, beating estimates by 5 cents, while revenue was also above estimates – despite higher fuel costs and pay increases for its workers.

Caterpillar reported adjusted quarterly profit of 83 cents per share, beating estimates of 66 cents, but revenue was below forecasts. Caterpillar warned of much lower profits for 2017, saying results continue to be impacted by weak economic conditions around the world.

Biogen beat earnings estimates but missed revenue forecasts. The drug maker lowered its 2017 revenue guidance.

Northrop Grumman beat earnings and revenue estimates. Northrop saw better sales of in its aerospace systems business, which is involved in F-35 fighter jet production.

Seeds and chemical maker Dow Chemical reported a better-than-expected quarterly adjusted profit, helped by its focus on consumer markets such as agriculture and automotive, and a move to take full control of its Dow Corning venture. Excluding the Dow Corning transaction, Dow’s sales rose 2.5 percent to $11.75 billion in the fourth quarter, with sales increasing in four of its five businesses.

Stanley Black & Decker earned $1.71 per share for its latest quarter, 3 cents above estimates, with revenue very slightly below forecasts. Its earnings were lower year over year, hurt by higher restructuring costs.

Whirlpool, the world’s largest appliance maker missed estimates by 11 cents with adjusted quarterly profit of $4.33 per share, though revenue did slightly beat forecasts. Declining sales in the U.K. following the Brexit vote was among the factors hurting its results.

EBay  posted quarterly results in line with forecasts at an adjusted 54 cents per share, while revenue was also in line with forecasts. The company did give a lighter than expected current quarter outlook, but made optimistic comments about its revamped platform.

Johnson & Johnson announced a $30 billion deal to acquire Actelion, a Swiss biotechnology firm; the all-cash deal includes spinning off Actelion’s research and development pipeline. The biggest European drugs takeover in 13 years gives J&J access to the Swiss group’s range of high-price, high-margin medicines for rare diseases.

WGL Holdings  agreed to be acquired by AltaGas for about $6.4 billion in cash.

McKesson is buying privately held CoverMyMeds for about $1.1 billion to strengthen its technology offerings.

United Rentals is purchasing NES Rentals Holdings II for about $965 million.

Ant Financial Services Group, an affiliate of Chinese e-commerce firm Alibaba Group, said it would buy U.S. money-transfer company MoneyGram in a deal valued at about $880 million.

And here’s a potential deal to watch. Verizon Communications is interested in exploring a combination with cable company Charter Communication as part of a long list of acquisition targets but no proposal has been made for a tie-up between the two companies.

Oprah Winfrey is starting a joint venture with Kraft Heinz called Mealtime Stories. Kraft will develop and sell the new line, which will initially focus on ready-to-eat refrigerated dishes; 10% of products’ profits will be donated to charities that seek to eradicate hunger.

The trade gap in goods — services are excluded — slipped 0.5% to $65 billion, the government said Thursday in its advanced report. The full report will be released next week. Wholesale inventories, meanwhile, jumped 1% in December and retail inventories were flat.

The number of Americans who applied for unemployment benefits climbed by 22,000 to a one-month high of 259,000 in late January.

New-home sales declined to a seasonally adjusted annual rate of 536,000, the Commerce Department said Thursday. That was 10.4% lower than an upwardly adjusted November pace of 598,000 and 0.4% lower than a year earlier.

Tomorrow we get the government’s first estimate of fourth quarter GDP. Gross domestic product, the sum of the economy’s performance, is forecast to taper off to 2.2% in the fourth quarter. The economy expanded at a 3.5% pace in the late summer and early fall.

Authorities in Brazil have issued an arrest warrant for former billionaire Eike Batista, the latest business leader implicated in a giant corruption investigation. Batista, once ranked by Forbes as the world’s seventh-richest man, is the most recent target of Operation Car Wash, an alleged multi-billion-dollar kickback scheme that has led to the arrest of hundreds of politicians and business moguls.

Federal prosecutors accuse him of laundering money and bribing state officials in exchange for lucrative construction and mining contracts. Federal police issued the warrant and raided Batista’s Rio de Janeiro mansion but did not find Batista; his lawyer says he is in New York and would turn himself in as soon as possible.

President Trump signed an order Wednesday to start the planning process to build the wall. There are already about 650 miles of fencing along the border, mostly in more populated areas. Presumably, most of that will stay in place. That means about 1,300 miles of wall need to be built.

As far as cost goes, Trump has cited a $10 billion estimate. That comes to about $7.4 million per mile. By comparison it only costs about $3 million to build a mile of a typical two-lane road. So, for $10 billion you could build a road roughly from Seattle to Miami. But other estimates have the cost of the wall climbing to as much as $25 billion not including land acquisition costs.

This morning, Mexican President Enrique Peña Nieto canceled a planned visit to the White House, saying Mexico will not pay for the wall. Later in the day, Trump said the meeting was called off by "mutual agreement". White House spokesman Sean Spicer later said that Trump would pay for the wall with a 20 percent tax on all imports from Mexico.

Financial Review

Had to Happen

Sinclair Noe — January 12, 2017

Podcast: Play in new window | Download (Duration: 12:16 — 5.6MB)

Subscribe: iTunes | Android | RSS

DOW – 63 = 19,891
SPX – 4 = 2270
NAS – 16 = 5547
RUT – 12 = 1361
10 Y – .01 = 2.36%
OIL + .80 = 53.05
GOLD + 5.20 = 1197.30

It had to happen – the Nasdaq Composite suffered its first loss of 2017, but it was a record setting run to start the New Year. The Dow Jones industrial average closed lower, with Goldman Sachs and Walt Disney contributing the most losses. At session lows, the blue-chips index had fallen more than 180 points.

Donald Trump’s press conference on Wednesday was not what investors wanted to hear; there was talk of protectionism. Trump took shots at the pharmaceutical industry, which sent health care and biotechnology stocks reeling. He also failed to provide new details on three of his key policies: tax reform, deregulation of certain sectors and fiscal stimulus. The lack of details of the President-Elects administration’s plans for economic stimulus simply left bullish investors empty handed.

European markets and most Asian markets ended the day with modest losses. Despite the negative sentiment, many global stock markets are near record highs. The USDA issued its World Agriculture Supply & Demand Estimates with bullish projections for soybeans, wheat and corn.

On the economic front:  Initial claims for unemployment benefits increased 10,000 to 237,000 in the week ended January 7. This marks 97 consecutive weeks of initial claims below 300,000, the longest streak since 1970.

Import prices increased 0.4 percent last month after an upwardly revised 0.2 percent decline in November. In the 12 months through December, import prices jumped 1.8 percent, the largest gain since March 2012. Import prices are rising as the drag from lower oil prices fades. The report also showed export prices rose 0.3 percent in December after slipping 0.1 percent in November. Export prices were up 1.1 percent from a year ago.

Several Federal Reserve officials are scheduled to speak today. St. Louis Fed President James Bullard said he doesn’t see any need to rush to raise rates in the near-term. On the flip side, Philadelphia President Patrick Harker sees three rate hikes this year, stating that the U.S. economy is “displaying considerable strength.” Fed Chair Janet Yellen is holding a town hall event with teachers tonight.

After debating seven hours through the night, the Senate narrowly passed a budget resolution early today, clearing the first major hurdle in the GOP effort to repeal Obamacare. House leaders plan to take it up tomorrow. Today’s vote was technically on a budget blueprint that sets the stage for a formal repeal vote, potentially within a few weeks. The step is, for now, procedural, but it signals Republican lawmakers are following through on their longstanding promises to axe the law.

In his press conference this week, President-elect Donald Trump assured Americans once again that Obamacare will be repealed and replaced, “essentially, simultaneously.” And we are still waiting on the replace part. The iShares US Healthcare ETF (IHF) flip flopped between positive and negative territory during the first two hours of the trading day.

And as confirmation hearings continue for the Trump Cabinet nominees in Washington DC, there is a steady stream of business leaders in and out of Trump Towers in New York. President-elect Donald Trump’s transition team has been actively considering ways to revamp a temporary visa program used to bring foreign workers to the United States to fill high-skilled jobs. Eric Schmidt, Executive Chairman of Alphabet/Google was spotted at the Tower, although we haven’t heard details of the visit.

Other deal-makers (and prospective deal-makers) are lining up in front of Trump Tower to kowtow to the President Elect include: SoftBank CEO Masayoshi Son, who wants approval for Sprint to participate in wireless consolidation, perhaps by buying T-Mobile. Alibaba CEO Jack Ma met; his company is the major asset of Yahoo in the process of a major asset sale to Verizon.

After that came the Monsanto and Bayer CEOs, who seek merger approval. Next up, AT&T leaders are arriving to talk up their Time Warner deal, which is complicated by Trump’s dislike of his coverage on CNN.

French far-right presidential candidate Marine Le Pen was seen at Trump Tower today but a spokesman for President-elect Donald Trump said she was not meeting with him or his team. “No meetings with anyone,” transition spokesman Sean Spicer said. “It’s a public building.” Although it is safe to assume Le Pen was not just loitering.

The U.S. Justice Department is not expected to bring antitrust action against U.S. airlines after finding little proof the four major carriers – Delta, Southwest, American, and United – coordinated to raise fares by curbing the supply of seats. Investigators failed to uncover sufficient evidence of collusion among airlines to restrain seats, since the DOJ’s probe began in the summer of 2015.

Delta Air Lines reported a 37 percent decline in fourth-quarter net profit to $622 million from $980 million a year earlier. Delta forecast passenger unit revenue, a closely watched metric, to be flat to up 2 percent in early 2017.

Shares in Italy’s biggest bank – UniCredit – are weakening as the firm said it’s writing off €8.1 billion ($8.6 billion) in bad loans. Shareholders are also set to vote on its plans to raise €13 billion ($13.8 billion) to shore up its finances. Several of the largest US banks are scheduled to report fourth quarter earnings tomorrow.

Johnson & Johnson has tentatively agreed with Actelion on a price to acquire the Swiss biotechnology company. Bloomberg reports the talks are now focused on valuing what would be a new unit that would house research and development assets. Before the current round of negotiations started in late December, J&J had made an offer for Actelion valued at about $260 per share, or more than $28B.

More home buyers are getting cold feet and bowing out of deals before the closing. According to an analysis by real-estate website Trulia, the percentage of homes that had an offer but failed to close rose to 3.9% in 2016, compared with 2015, when 2.1% of sales fizzled. The company defined a failed sale as any listing with a preliminary buyer agreement that reverted to for-sale status.

The highest share of failed sales overall was in the starter-home market, where 6.3% of buyers backed out of deals in 2016, up from 3.4% the year prior. That’s in part because starter homes, those valued in the bottom third of the region’s market, saw an influx of first-time home buyers last year. These buyers were more likely to hit financing hurdles or underestimate closing costs.

The Arizona Regional Multiple Listing Service reports overall sales in the Phoenix market in December rose 5.9% year-over-year. Cash sales were down to 23.1% of total sales. Active inventory is down 2.9% year-over-year.

Over the past five years, Amazon created over 150,000 jobs in the United States, growing its workforce here from 30,000 employees in 2011 to over 180,000 at the end of 2016. Today, the company announced that it plans to create an additional 100,000 full-time, full-benefit jobs in the U.S. over the next 18 months.

Apple is said to be planning to build a significant new business in original television shows and movies, a move that could make it a big player in Hollywood and offset slowing sales of iPhones and iPads.

More individuals could be charged in an ongoing investigation by U.S. authorities into Volkswagen’s diesel emissions cheating. The announcement comes after VW agreed with the U.S. government to pay $4.3B in fines and penalties, while six high-ranking employees were indicted in connection with a conspiracy to cheat emissions tests.

Fiat Chrysler shares were briefly halted after plummeting nearly 16% in response to the Environmental Protection Agency accusing the automaker of using emissions cheating software. The EPA said the software allowed excess diesel emissions in just over 100,000 U.S. trucks and SUVs sold since 2014.

The EPA said it believes the software allowed vehicles to generate excess pollution in violation of the Clean Air Act. The EPA alleges that the software was installed in light-duty models of the Jeep Cherokee for the years 2014-2016, as well as Dodge Ram 1500 trucks with 3.0 liter diesel engines sold in the United States.

Japan’s Takata Corp is expected to plead guilty to fraud charges as early as tomorrow as part of a $1 billion settlement with the Justice Department over its handling of air bag ruptures linked to 16 deaths worldwide, sources said. The settlement includes a $25 million criminal fine, $125 million in victim compensation and $850 million to compensate automakers who have suffered losses from massive recalls. As part of the deal, Takata might plead guilty to wire fraud charges, or providing false test data to U.S. regulators.

Ireland-based Shire Pharmaceuticals has agreed to pay $350 million to settle allegations that it bribed clinics and physicians to use its diabetic ulcer treatment. The U.S. attorney general for the Middle District of Florida, said Advanced BioHealing, a company Shire acquired in 2011, bribed providers with dinners, entertainment, travel and medical equipment to promote the use of Dermagraft, a skin substitute used to help treat foot ulcers. The kickback scheme caused false claims to be submitted to the Department of Veterans Affairs. Shire did not admit wrongdoing as part of the settlement.

Financial Review

Inflation and a High Pressure Economy

Sinclair Noe — October 19, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 41 = 18,202
SPX + 5 = 2,144
NAS + 2 = 5,246
10 Y + .00 = 1.74%
OIL – .15 = 51.45
GOLD + .60 = 1,270.50

The consumer price index climbed 0.3% last month. The cost of shelter — rent, new homes and previously owned homes — rose at the fastest pace since May. Energy prices, mainly gas, also posted the biggest increase since early spring. The cost of food was unchanged for the month.

Over the past year, consumer prices have advanced 1.5%. The so-called core CPI, which strips out food and energy costs, gained 0.1 percent last month. That slowed the year-on-year increase in the core CPI to 2.2 percent.

Energy costs were up 2.9 percent in September as oil and gasoline prices rebounded from recent lows. Previous price declines still mean that gas costs 6.4 percent less than a year ago. So, what does this mean for the Federal Reserve? Since one of the biggest drivers of inflation is energy prices, which the Fed does not seem to control, maybe it is possible to have what Fed chair Janet Yellen described as a “high pressure economy”, in other words a tighter labor market, without igniting inflation.

Higher gas and electricity prices may push inflation closer to the Fed’s target of 2% but it is not an indication that the economy is getting healthier, rather higher energy prices serve as a tax on economic growth.

Outside of housing and energy, there’s not much inflation. Food prices have actually fallen in the past year. Prices of durable goods are down 2.3% in the past year, a continuation of a 20-year trend of falling prices. Falling prices aren’t great for retailers’ or manufacturers’ bottom line.

The other place where inflation is running hot is medical care (up 4.9%) and drug prices (up 7%) – again, not an indication of a growing economy. Meanwhile, we aren’t seeing inflation where most of us would like to see it – in our paychecks. Real or inflation-adjusted hourly wages fell 0.1% in September. Hourly pay is up just 1% in the past 12 months.

Americans who get Social Security will get a 0.3% increase in their monthly checks in 2017. The estimated average monthly benefit for all retired workers will rise to $1,360 from $1,355. Annual increases in Social Security are made every year based on changes in a component of the consumer price index known as CPI-W. Inflation has been quite low for several years largely owing to a plunge in oil prices. Grocery prices have also fallen in the past year.

The extra benefits kick in on Jan. 1. Social Security recipients got no cost-of-living adjustment in 2016 because inflation was even lower. The Social Security administration also announced that the maximum taxable earnings will rise to $127,200 from $118,500 in 2016.

The National Association of Home Builders’ index of homebuilder sentiment fell to 63 after surging to its highest in a decade in September. Any reading over 50 signals improvement. Current sales conditions dipped two points to 69, while the measure of sales expectations for the next six months rose one point to 72. The index of buyer traffic declined one point to 46. The NAHB says builders continue to see the same fundamental drivers of demand, such as a strong job market and low mortgage rates.

First-time buyers may be entering the U.S. home market in greater numbers than industry watchers had assumed. According to a survey by the real estate firm Zillow, nearly half of sales in the past year went to people who were buying their first home. Forty-seven percent of purchases in the past year went to first-time buyers. Their median age was 33.

It’s become harder to realize the dream of home ownership without a college degree. Sixty-two percent of buyers have at least a four-year college degree. Just 12 percent of homeowners in 1986 were college graduates.

Older Americans, age 65-75, are still buying homes, but they are downsizing; the median size is 1800 square feet, about 220 square feet smaller than the homes they sold. But that smaller new home still cost more. These retirement-age buyers paid a median of $250,000, nearly $30,000 more than the home they sold.

Netflix crushed earnings.  The video-streaming giant earned $0.12 a share on revenue of $2.29 billion, topping the $0.06 and $2.28 billion that were expected. Netflix added 3.2 million international subscribers, well ahead of the 2 million that analysts were looking for. The stock was up by more than 20% in after-hours action.

IBM earnings beat on the top and bottom lines. IBM earned $3.29 a share on revenue of $19.2 billion, beating the $3.24 and $19 billion that Wall Street was anticipating. The company has seen declining year-over-year revenue for 18 consecutive quarters.

Goldman Sachs reported a profit of $2.09 billion, or $4.88 a share. That compares with $1.43 billion, or $2.90 a share, in the same period last year. Sluggish trading activity across Wall Street – particularly in fixed-income, where Goldman is strongest – dragged down earnings.

UnitedHealth Group hiked its 2016 earnings forecast again after its profit swelled 23 percent to nearly $2 billion in the third quarter. UnitedHealth earned $1.97 billion in the three-month period that ended Sept. 30, up from $1.6 billion in the previous year’s quarter. Total revenue grew nearly 12 percent to $46.3 billion in the quarter. The insurer added nearly a million customers through its employer-sponsored and individual coverage. Medicare Advantage membership grew 12 percent, and total enrollment topped 48 million in the quarter.

Johnson & Johnson, the world’s largest maker of healthcare products, reported third-quarter revenue and profit just ahead of Wall Street estimates, fueled by strong sales in its prescription drugs business. J&J earned $1.68 per share on revenue of $17.8 billion. Despite solid earnings, J&J shares dropped today on news Pfizer would begin U.S. shipments of Inflectra, its biosimilar form of Remicade, by late November at a 15 percent discount to J&J’s current wholesale prices. Remicade is J&J’s biggest product, with US sales of around $5 billion.

Burberry’s second quarter comparable retail sales rose for the first time in four quarters, growing 2% and topping expectations for a 1% increase. The U.K. luxury fashion retailer was helped by the slump in the pound following the Brexit vote in June.

A federal judge in San Francisco said today that he is “strongly inclined” to approve a record-setting $10 billion proposed buyback and compensation offer from Volkswagen for 475,000 owners of polluting 2.0-liter diesel vehicles which were equipped with illegal software to defeat emissions testing. U.S. District Judge Charles Breyer said he will issue a final decision in the matter by Oct. 25.

Of the 52 S&P 500 companies that have reported results to date for the third quarter, 81 percent have reported earnings that have topped analysts' average estimate, according to Thomson Reuters. These market-beating reports have led analysts to narrow their estimates.

Now analysts estimate earnings at S&P 500 companies rose 0.2 percent in the quarter, compared with their estimate of a 0.7 percent drop at the start of the earnings season. Profits at these companies last rose in the second quarter of 2015. If the good earnings continue, the latest third quarter will be the first since 2014 in which both earnings and revenue of S&P 500 companies increased.

According to the latest research from analysts at Bank of America Merrill Lynch, investors are increasingly worried about a massive bond market pullback. Only the “EU disintegration” beat out “Crash in bond market/rising credit spreads” in terms of what money managers feel is the biggest “tail risk”: Fund managers pushed their cash balances to 5.8 percent of their portfolios in October, up from 5.5 percent last month, matching levels not seen since the aftermath of the Brexit vote.

The share of cash hasn’t been higher than that since November 2001, shortly after the terrorist attacks in the US. There is no shortage of risks on the investor horizon, according to market participants surveyed, with 18 percent fearful of a disorderly adjustment in the bond market. Elevated cash balances potentially set the stage for a stock-market rally, triggering a contrarian buy signal.

Another consideration – even though fund managers might be turning to cash, the central banks are still investing in stocks. Among the central banks with disproportionately large equity holdings are the Bank of Russia, the Bank of China, the Swiss National Bank, the Bank of Japan, the Hong Kong Monetary Authority, the Bank of Israel, the Czech Central Bank, the Bank of Denmark.

The Federal Reserve is not allowed to buy company stocks directly; however, many market observers speculate that the Fed is using indirect methods to prop up the US equity indexes. And the Fed has certainly discussed more direct investment as a possible option in the future.

There is no doubt the Fed would like to “add to their toolkit”. If the discussion ever gets to the point where the Fed starts talking to Congress about approving Federal Reserve direct stock purchases, it would set the stage for another leg higher in this increasing tired bull market.

Central banks investing in equities are not active stock pickers. Rather, central banks use exchange-listed ETFs, which passively track a major equity benchmark index. In this way, central banks remain “neutral”, not favoring one company over another or obtaining voting rights in company general assemblies.

The central banks’ choice to use ETFs explains the success of passive investing recently, as their purchases “lift all boats”. Similarly, the outperformance of expensive large cap stocks can also be attributed to central bank equity purchases, as ETFs track generally market-cap weighted indexes.

This would also offer insight into why the markets have been able to maintain and grow despite surprisingly high valuations. Central banks are not value buyers, rather they seem to be indiscriminate. And of course, this only works when central banks continue to buy.

Disney decided against buying Twitter recently partly due to concerns that the hate speech that’s rampant on the social network would undermine Disney’s family friendly image, Bloomberg reports. Another reason is that although Twitter has a market cap of almost $12 billion, it continues to lose money, which sparked opposition to the purchase among some of Disney’s largest investors.