Financial Review

A Long Week

Sinclair Noe — August 11, 2017

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

DOW + 14 = 21,858
SPX + 3 = 2441
NAS + 39 = 6256
RUT + 1 = 1374
10 Y – .02 = 2.19%
OIL + .16 = 48.75
GOLD + 2.90 = 1289.70
BITCOIN + 0.39% = 3693.86 USD
ETHEREUM + 3.87% = 312.44

The tweets continued today.

Trump says the US military is “locked and loaded”. In Guam, they are telling the schoolkids to duck and cover. China published an editorial in a state-run newspaper, basically saying that the first one to throw a punch loses. If North Korea launches a missile first, threatening U.S. territories and triggering retaliation, China will remain neutral.

A pre-emptive strike against Pyongyang, however, would provoke a Chinese response and they would counter reunification of the peninsula. Russian Foreign Minister Sergei Lavrov said “Unfortunately, the rhetoric in Washington and Pyongyang is now starting to go over the top. We still hope and believe that common sense will prevail.”

Wall Street is betting nothing will happen, which is a smart bet in an otherwise insane news cycle. Fire and Fury. Locked and Loaded. Duck and cover. Dumb and Dumber… It’s been a long week.

And, if nobody does something incredibly stupid, we get back to business as usual, sort of. 200 S&P 500 components, or 40 percent, are in correction territory. A stock or an asset class enters a correction when it falls at least 10 percent from its 52-week high. Among the stocks in a correction were e-commerce giant Amazon.com, Goldman Sachs, Exxon Mobil, Starbucks and Netflix.

After a calm and pleasant summer, we can probably expect more volatility. August is when traders take vacation and drama hits the markets. September and October are typically volatile months; and typically trade lower. The past may be prologue or irrelevant, which is what makes stock markets so interesting.

Traders are digesting second quarter earnings and trying to decide if recent record highs are justified. In Washington, the politicians will pull up their socks and get to work on the debt ceiling, plus tax reform at some point, and maybe eventually infrastructure, and there is still work to do on healthcare – repeal has failed, so now they need to fix what they have.

Meanwhile the Fed wants to normalize and tighten, which sends shivers down the jellied spines of Wall Street traders. So, there is still plenty of stuff that could blow up. For individual investors, the key is now and will remain – discipline.

You wouldn’t know it from today, but it’s been just about the worst week all year. For the week, the S&P fell 1.4 percent and the Dow lost 1.1 percent – their largest weekly drops since the week ending March 24 – the Nasdaq was off 1.5 percent and the Russell 2000 index lost 2.7% for the week.

European stocks fell and U.S. junk bonds had the biggest drop since March. Nearly $1 trillion has been wiped out from global equity markets since Trump’s vow on Tuesday to unleash “fire and fury” on North Korea if it threatens the United States.

The VIX briefly topped 16.

Consumer prices remained soft for the fifth straight month in July. The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.2% in July while energy prices slipped 0.1%.

The core CPI, which excludes volatile food and energy costs, also rose 0.1%. Consumer prices have risen an unadjusted 1.7% over the past 12 months, up slightly from 1.6% in June.

But on a core basis, which is watched more closely by Fed officials, consumer prices remained at a 1.7% annual rate, the same rate as in May and June. The core rate was held down by a sharp decline in new vehicle prices, which fell 0.5%, the biggest decline since August 2009.

The cost of cell phones continued to decline, falling 0.3%. The index of used cars fell 0.5%, its seventh consecutive decline. The price of a car may be lower but the rent is still too damn high.

The cost of rent was up 3.8% compared to a year ago, according to the Labor Department. That’s down a tick from the 3.9% annual pace it notched in June. And it’s not as high as the 4.3% annual pace it averaged in the year before the Great Recession started.

It’s not just renters who are feeling the squeeze. The inflation category called “Owner’s equivalent rent,” which tries to quantify how much homeowners would pay for their housing if they rented it, was 3.2% higher in July than a year ago. Still, it’s growing a lot faster than wages.

Muted inflation in the July consumer price data is not something the Federal Reserve is going to be happy to see. But the central bank will have four more reports to review before it needs to decide late year whether to raise short-term interest rates again, as had been previously projected.

Shares of Snap ended down 14 percent after hitting another record low following a miss on revenue and daily active users. At least 12 brokerages cut their price targets on the stock. Valuation is disappearing faster than its messages.

Blue Apron’s stock “performance” makes one wonder why the company ever wanted to go public and why anyone agreed to underwrite it. The recipe-in-a-box startup failed to show adequate signs of life in its first quarter and even reported a very nettlesome operations problem.

Shares of APRN have fallen as far as 20% since the results came out yesterday morning and now even Blue Apron’s underwriters are admitting that they might have missed something during the IPO journey. Goldman Sachs led the underwriting and they just downgraded the stock. Maybe they can their free Blue Apron subscription to order crow.

Starbucks is now facing some serious competition. From other Starbucks. The old joke about a Starbucks on every corner may be coming true. The coffee chain’s relentless pursuit of ubiquity is becoming one of its own foils, according to analysts at BMO Capital Markets, saying the company has saturated the American market so much that it’s now losing sales competing with itself.

Market watchers have an all-too appropriate term for this phenomenon: cannibalization. On average, for every one Starbucks location in the US, there are now about four others within a one-mile radius to compete against. Over all in 2017, more than 62% of Starbucks now compete with at least one other Starbucks coffeeshop.

More than 100 Applebee’s locations and around 20 IHOPs will shutter this year. DineEquity, the parent company of both brands, is focusing on shuttering under-performing locations. An earnings report released yesterday shows sales fell by more than six percent at Applebee’s and nearly three percent at IHOP in the last quarter; meanwhile, DineEquity’s stock has lost almost half its value this year.

Diners these days tend to go either high, spending money on special, fine-dining experiences, or low, eating at cheaper fast-casual chains, meaning places in the middle are feeling the squeeze. These kinds of chains tend to suffer from bloated menus that try to do everything at once, versus the currently-booming specialty fast-casual spots that focus on doing one or two things and doing them well.

J.C. Penney finished down 16.6 percent after hitting a record low following the retailer’s bigger-than-expected quarterly loss. Its 1.3% drop in same-store sales was slightly worse than anticipated, and it lost $62 million in the quarter. The company has been trying to refocus its business more on home appliances and services and less on apparel, but the efforts evidently haven’t paid off.

Department stores almost across the board are in a period of turmoil as they battle the rise of e-commerce, especially Amazon. and in any case, are contending with shoppers who are heading out to malls and stores less often—and usually looking for deep discounts whenever they do. Many chains have announced widespread store closures, and even more may be necessary to get their businesses to the right size for the current era.

President Trump just got a nasty review of his immigration plans from the alma mater he loves to tout. A new study from the University of Pennsylvania’s Wharton business school found that the proposals he backs would dent growth and cost over 1 million jobs over 10 years.

The president has strongly endorsed a bill introduced by US Sens. Tom Cotton and David Perdue called the Raise Act, which adds to the president’s campaign promise to focus on illegal immigration by going after legal immigrants as well. Its proponents say they want to welcome only “good” immigrants — those with a lot of money and high levels of education.

But the Wharton report finds that the legislation, which is supposedly aimed at boosting economic growth and creating more American jobs, would actually have the opposite effect. According to the Wharton model, the Raise Act would reduce GDP by 0.7% and reduce jobs by 1.3 million, over the next 10 years. The estimates suggest nearly 100,000 jobs would be lost in the first year alone.

Vegetable prices may be going up soon, as a shortage of migrant workers is resulting in lost crops in California. Farmers say they’re having trouble hiring enough people to work during harvest season, causing some crops to rot before they can be picked. Already, the situation has triggered losses of more than $13 million in two California counties alone.

It’s unclear exactly how widespread the labor shortage is for farmers throughout the country, which would have a bigger impact on prices consumers pay. Ultimately, drought and flooding have a more significant impact on farms.

Low oil prices could also offset any impact of the worker shortage. But for farmers, who have seen net farm income fall 50% since 2013, any lost income could be potentially devastating.

Financial Review

War on Drugs Again

Sinclair Noe — May 12, 2017

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

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Financial Review by Sinclair Noe for 05-12-2017
DOW – 22 = 20,896
SPX – 3 = 2390
NAS + 5 = 6121
RUT – 7 = 1382
10Y – .07 = 2.34%
OIL – .01 = 47.82
GOLD + 2.90 = 1228.70

The Dow industrials and S&P 500 both snapped a streak of three weeks of gains Friday, closing lower for the session and week, while the Nasdaq finished higher for a fourth week of gains. For the week, the Dow dropped 0.5%, the S&P 500 ended the week down 0.4%. The Nasdaq posted a weekly gain of 0.3%.

After months of bashing China for its trade practices, the Trump administration said it had agreed with Beijing on a broad range of measures aimed at improving the access of American beef producers, electronic-payments providers and natural-gas exporters, among others.

The U.S. has been lobbying for China to open its market to American beef for years — it was banned in China in 2003 after a mad cow disease scare. The perception among some businessmen in the country has been that the Chinese have been sitting on the beef issue until the U.S. agreed to buy cooked poultry products made in China.

Other measures include credit card companies are trying to move into Chinese electronic payment platforms, Credit ratings agencies are looking to expand their presence in China, and the big agriculture firms will try to get genetically modified seeds to be reviewed by Chinese Ag officials – no sales yet, just consideration.

General Electric’s chief executive, Jeffrey Immelt today praised Mexico as a big part of its future growth and said the company is “very supportive” of the North American Free Trade Agreement (NAFTA).

GE plans to double its purchases from Mexican suppliers next year, according to a statement from the office of Mexican President Enrique Pena Nieto. “We’re optimistic about Mexico,” Immelt told Mexican officials at the inauguration of an expansion of GE’s operations in Monterrey. “We’re very supportive of NAFTA.”

General Electric announced that it won a contract to supply two new gigawatts of power in Mexico and had also signed a separate $120 million, multi-year deal to provide service to gas and steam turbines in Mexican power plants.

Consumer prices rebounded as expected in April as the cost of gasoline rose. The consumer price index, a basket of consumer goods that reflects price changes at the retail level, rose 0.2% from March. Compared to the prior year, CPI rose by 2.2%. Higher gasoline and heating gas costs helped lift the index. Used cars, clothes, and medical care all declined from March.

When the volatile costs of food and energy are excluded, core CPI increased by 0.1% month-on-month, and by 1.9% year-on-year, a 19-month low. Good to know for everybody who doesn’t consume energy or eat food.

Inventories at U.S. businesses continued to pile up in March. Business inventories rose 0.2% in March, the Commerce Department said Friday. This is the fifth straight month of inventory gains. Business sales were flat in March. The inventory-to-sales ratio, an indication of demand, remained steady at 1.35 in March.

Consumer sentiment brightened in an early May reading as Americans turned more bullish on their income expectations. The University of Michigan’s confidence gauge jumped to 97.7 from 97.0 in April. The survey’s tracker of current conditions was unchanged at 112.7, but the expectations gauge rose more than a point, to 88.1 from 87.0.

Consumer spending intentions were mixed: plans to buy household durables were the strongest in a decade, while plans to buy a vehicle were at a three-year low. Americans’ views are still sharply divided by political affiliation

The American consumer is alive and well. Sales at US retailers rose in April, and March sales were stronger than originally estimated. Retail sales increased 0.4% and were 4.5% higher compared to a year ago. A 0.2% monthly decline for March was revised up to show a 0.1% increase.

Sales have risen in three of the first four months of 2017. Sales at gasoline stations were 12.3% higher in April than a year ago, as the cost of oil strengthened. With motor vehicles and gas stripped out, sales were up 0.3%, after a 0.4% increase in March.

J.C. Penney said in its earnings report said “adjusted” net income was 6 cents a share. On the surface, that appeared to be a big positive surprise, because analysts were expecting a loss of 21 cents per share.

But the company snuck into its report that the “adjusted” number for the latest quarter “includes the sale of operating assets,” (specifically the sale of one of its distribution centers) which totaled $117 million. Strip that out because it is a nonrecurring item, and the result was a first quarter loss. Same-store sales declined 3.5%.

Investors weren’t fooled, and the stock plummeted 14% to a record low close of $4.55.

Dick’s Sporting Goods disclosed an accounting error. In a filing with the SEC, Dick’s said a computation error caused it to overstate earnings in its fourth quarter and full-year results by $23.4 million. Down 4.5% today.

Nordstrom dropped 10.8% after weak quarterly same-store sales. Macy’s fell 3%, bringing its loss to more than 19% in the past two sessions following its dismal quarterly report.

Amazon is now the second largest U.S. apparel retailer, behind only Wal-Mart, with Amazon taking share from department stores and Target as it rises in prominence. Nearly half of 1,000 adults surveyed in Morgan Stanley’s latest Alphawise survey (46%) reported having bought clothing from Amazon in the past year.

About the same percentage (47%) said they expected to buy more clothes from Amazon and fewer clothes from other retailers in the next 12 months. Traditional retailer should be very nervous. When online sales hit 20% of all purchases in each retail category, a surge in Amazon growth is sure to follow.

The 20% level is a threshold indicating Amazon is going to displace a legacy retailer. Twenty percent is when Amazon steps on the gas … when consumer behavior is changing. This pattern has held true for Amazon since the very first sector CEO Jeff Bezos disrupted, books, which passed the 20% mark between 2007 and 2008.

Amazon’s rapid expansion into a “store for everything” continued as online sales passed 20% for consumer electronics between 2010 and 2011, and cloud services, which Amazon dominated from the moment it launched Amazon Web Services in 2006, each time, 20% sector penetration proved the tipping point.

It’s the scandal that won’t go away. Attorneys for victims of Wells Fargo fake account scam are now saying that the bank may have been responsible for more unauthorized accounts than previously thought.

In a legal filing, plaintiffs’ attorneys in a class action lawsuit say: “Based on public information, negotiations, and confirmatory discovery, the parties estimate the number of unauthorized accounts for the period 2002-2017 is approximately 3.5 million. This number may well be over-inclusive, but provides a reasonable basis on which to estimate a maximum recovery.”

A huge cyber attack leveraging hacking tools widely believed to have been developed by the U.S. National Security Agency is spreading …, well, like a virus. Ransomware is scrambling data on computers and causing major IT disruptions.

In England, the virus hit health care facilities. Routine appointments had been canceled and ambulances were being diverted. Hospitals and surgeries across England were forced to turn away patients. People in affected areas were being advised to seek medical care only in emergencies. Scottish health boards were also hit.

Telecommunications giant Telefonica was among many targets in Spain, though it said the attack was limited to some computers on an internal network and had not affected clients or services. Sweden’s Civil Contingencies Agencies put out a warning saying that “a large-scale ransomware campaign is being carried out in several countries.

FedEx said on Friday it was experiencing issues with some of its Microsoft Windows systems. At last count, the worm has infected computers in 99 countries and it is still growing.  It is believed that a Russian hacking group known as Shadow Brokers pilfered the worm and other hacking tools from the National Security Agency’s servers.

The actual ransomware is a worm called WannaCry. If you see that file, do not click.

Attorney General Jeff Sessions made it official. The federal government will now reboot its war on drugs. The official word came down in the form of memos from Sessions that ordered federal prosecutors to cease and desist on the soft approach former Attorney General Eric Holder took toward prosecuting petty drug offenders.

Now prosecutors must demand the harshest sentence, must use the threat to pile on sentence enhancements to browbeat drug offenders into copping a guilty plea, and they must itemize the drugs an offender uses to insure they are slapped with the minimum mandatory sentence. Sessions isn’t just talking about cracking down on the use of the hard stuff, he is directing law enforcement to get tough on pot.

Sessions’ “tough on crime” attitude, which he has espoused since the beginning of his tenure, is being widely compared to the 1970s “War on Drugs” that wreaked havoc on minority communities in previous decades. That effort really ramped up in the late 1980s with the introduction of mandatory minimums for drug crimes, and peaked with the Clinton-era 1994 crime bill that established further harsh sentences and funneled billions into the nation’s prisons.

Reactions from criminal-justice reform circles have been unanimous, from lawmakers and law enforcement leaders to advocacy groups and criminologists. Prosecutors and law-enforcement leaders reacted with dismay to Sessions’ memo. Law Enforcement Leaders to Reduce Crime and Incarceration, an organization of nearly 200 current and former police chiefs, sheriffs, and prosecutors, called the move an “ineffective way to protect public safety.”

Financial Review

Shut Up

Sinclair Noe — February 24, 2017

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

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DOW + 11 = 20,821
SPX + 3 = 2367
NAS + 9 = 5845
RUT – 0.1 = 1394
10 Y – .07 = 2.32%
OIL – .42 = 54.03
GOLD + 7.60 = 1257.90

11 days of record breaking closes, the best streak of positive sessions since 1993. The longest streak of record breaking sessions is 14 in a row – back in 1897.

For most of the day, the major indices were in negative territory; Dow futures dropped more than 100 points early in the morning, and then, in the final 17 seconds, buyers jumped in again. The Dow Industrial Average is up more than1,000 points since January 1 and almost 3,000 points since the election.

This was the third up week in a row for the Dow, and the fifth straight positive week for the S&P and Nasdaq. The 10-year Treasury note has its best week since last June. Gold is up 8 of the last 9 weeks and at its highest level since October.

In economic news, U.S. new home sales rose 3.7 percent in January, below the expected increase of 6.3 percent. Meanwhile, consumer sentiment in the U.S. hit 96.3 in February, slightly above an estimate of 96. Earnings season, which is coming to an end, has been much stronger than anticipated.

Per Thomson Reuters, fourth quarter earnings growth is tracking about 7.5%. It seems US equity funds are where the world is parking its money for the time being, with over $25 billion coming into market coffers since January 1.

President Trump spoke before the Conservative Political Action Committee today, and he ramped up his attack against the news media, charging that “fake news” outlets are “the enemy of the people.” And later in the day, the White House fired a shot across the bow, blocking CNN, the New York Times, the Los Angeles Times, Politico and BuzzFeed from an off-camera White House press briefing conducted by White House press secretary Sean Spicer.

The Associated Press and Time magazine boycotted the briefing because of how it was handled. The White House Correspondents Association also protested the move.

Spicer only allowed in reporters from a handpicked group of news organizations that, the White House said, had been previously confirmed. The press session, known as a gaggle, was scheduled as a no-camera event, less formal than his usual briefings that are carried live on cable news. But past administrations have not hand-selected outlets that can attend such sessions.

Two of the barred outlets, CNN and The Times, have been a focus of Mr. Trump’s ire. And during the presidential campaign, some journalists from BuzzFeed News and Politico were prohibited from attending Trump rallies. Representatives of the barred news organizations made clear that they believed the White House’s actions were punitive.

Oil investors have placed the biggest bet in history that prices will rise. Fund managers now hold more Brent oil futures and options contracts than at any time on record, equivalent to some 480 million barrels of oil and nearly double the amount held just two months ago.

The Brent April contract now commands a premium of $1.50 over the December 2018, a condition known as backwardation. Crude inventories held in the world’s richest nations are still high, but they have begun to drain, and traders expect demand for oil to improve to the point where it overtakes supply.

Meanwhile, industry executives, analysts and investors sizing up Saudi Aramco say it may be worth nowhere near the $2 trillion that’s been touted. For example, Wood Mackenzie came up with a rough valuation of Aramco’s core business of $400 billion.

While that is significantly more than Exxon Mobil, with a market cap just under $340 billion; it is not enough to provide the capital the Saudis require to run the national budget. That’s just a guess at valuation because Saudi Aramco has never revealed financial statements.

For the Saudis, the writing is on the wall. Demand for oil will peak in the next 10 to 12 years, according to Royal Dutch Shell projections, as alternative fuels and electric cars gain popularity, putting Middle East energy producers on shakier footing.

Saudi Aramco valuations are premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields, and multiply by $8 (a benchmark used to value reserves). By that logic, though, Russian producer Rosneft’s market capitalization would be $272 billion instead of $64 billion, and the valuation of Exxon Mobil would be 53 percent smaller than it is.

Another factor for valuation – those reserves might not be all that they’re cracked up to be. Consider that Exxon Mobil just lost 4.3 billion barrels of reserves this week. Not lost really, just removed from their books. The reserves are still under the ground and controlled by Exxon Mobil but for accounting purposes, they no longer meet the SEC’s criteria for being economic to produce anytime soon, chiefly because oil prices have collapsed. Higher prices could push those reserves back onto the books, but lower demand could keep prices much lower for much longer.

Exxon Mobil CEO Darren Woods (he’s the guy who replaced Rex Tillerson) – Woods is calling for a nationwide carbon tax to discourage use of polluting fuels. In a blog post, Woods writes: It “would promote greater energy efficiency and the use of today’s lower-carbon options, avoid further burdening the economy, and provide incentives for markets to develop additional low-carbon energy solutions for the future.”

In a memo signed Feb. 21 but published late on Thursday, US Attorney General Jeff Sessions rescinded a six-month-old order that was to phase out the use of private prisons by the federal government. CoreCivic and Geo Group, two of the largest for-profit prison operators, both rose in after-hours trading. The companies have more than recovered the steep losses their shares suffered after the former administration’s September directive.

JC Penney will shutter two distribution centers and 130 to 140 stores. The closures announced Friday represent 13% to 14% of the company’s store portfolio, less than 5% of total annual sales and 0% of net income. The company is starting an early retirement program for about 6,000 eligible associates. Chief Executive Marvin Ellison said closing stores will allow Penney to adjust its business to “effectively compete against the growing threat of online retailers.”

Department store operators Kohl’s and Macy’s are betting on a potential money-spinner – carving out prime space within their sprawling stores and leasing them to other retailers. The move underscores the pressing need for the two chains to better monetize their real estate assets at a time when fewer people are visiting malls.

Meanwhile, retailers have been lobbying against a border-tax proposal that would increase the tax bite on any company that imports goods into the US. Retailers would be among the biggest losers if such a proposal were implemented in full, as much of their sales are of imported goods.

Retailers and other critics say the planned 20 percent tax on imports could be passed along in higher prices to consumers, including manufacturers that rely on imported goods to make their products. Some critics have warned of a potential global trade war which would sharply curtail US and world economic growth.

Advocates say U.S. exporters will gain as their revenues will be excluded from federal taxes. They say the tax on imports will encourage domestic production and cause the already strong dollar to rise, offsetting upward pressure on import prices. Yesterday, Trump spoke positively about a border-tax.

Today, Gary Cohn, the president’s chief economic adviser, told a group of executives at a private event in Washington that the White House does not support this initiative. If the administration can’t find unanimity in a tax plan, imagine what happens when an actual plan is subjected to public scrutiny.

Royal Bank of Scotland reported a sharp rise in losses, $8.8 billion for the full-year, marked by higher legal penalties and restructuring costs. RBS took charges to set aside money to cover legal cases in the US where analysts expect it to pay the biggest regulatory penalty in its history for mis-selling US securities backed by toxic mortgage loans.

RBS was the only British lender to fail the Bank of England’s stress test in 2016. The British government, which owns more than 70 percent of RBS, has said it will not resume selling its stake until the bank settles its US fine and resolves its state aid requirements.

MacDonald Dettwiler and Associates has agreed to buy US-based DigitalGlobe for about $2.4 billion to strengthen its position in the satellite imagery market.

China’s state-owned Sinochem is in early talks to buy an equity stake in Noble Group. And now, Iceberg Research has issued critical report that raises concerns about Noble’s accounting practices, claiming the commodity firm is not worth its book value. Noble shares are down about 17% on the news.

Google and Uber started off as friends, then became competitors, and are now adversaries in a bitter legal fight to control the future of transportation. Waymo, the Google self-driving-car group, has accused Uber of using stolen technology to advance its own autonomous-car development. Google filed a lawsuit, claiming that a team of ex-Google engineers stole the company’s design for the lidar laser sensor that allows self-driving cars to map the environment around them.

A software bug leaked encrypted personal data from hundreds of thousands of web-pages hosted by Cloudflare. The company said the bug was fixed quickly and there was no sign that the leak was exploited by hackers.

Foot Locker reported better-than-expected earnings in the fourth quarter despite a slowdown in the retail industry. Same store sales were up 5%, topping expectations.

HP Enterprise’s revenues drops 10%. Sales fell in the first quarter, which ended January 31, with sluggish demand for its storage equipment and servers.

Samsung Electronics is tightening board oversight on donations, as the conglomerate struggles with the fallout from a graft scandal. The flagship of South Korea’s top conglomerate Samsung Group has been at the center of an influence-peddling scandal that led South Korea’s parliament to impeach President Park Geun-hye in December.

Jay Y. Lee, leader of Samsung Group and Samsung Electronics’ vice chairman, was arrested last week after being named a suspect by the South Korean special prosecutor’s office. The Samsung board of directors will now vote on any financial payment of $886,000 or more and disclose any such payments publicly.

Financial Review

Bargain Bloodhounds

Sinclair Noe — November 13, 2015

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DOW – 202 = 17,245
SPX – 22 = 2023
NAS – 77 = 4927
10 YR YLD – .04 = 2.28%
OIL – .99 = 40.76
GOLD – 1.10 = 1084.90
SILV – .03 = 14.38

The S&P 500 moved into negative territory year to date, for the first time since Oct. 22. The Dow Industrial Average is also down year to date, moving below the 200-day MA, with a weekly loss of more than 650. Commodity prices are weighing heavily on the markets, following yesterday’s report showing crude oil stockpiles were 4 times higher than market expectations. Still, the IEA predicts that supplies outside OPEC will decline next year by the most since 1992 as low prices take their toll on the U.S. shale industry.  Meanwhile, the dollar index is trading just above 99. That would put it within striking distance of 100.40, its highest level in 12 years.

Retail sales rose a seasonally adjusted 0.1% last month. Sales were revised lower in September to show no gain. Sales were also flat in August. In October, sales were held down by lower spending at auto dealers, gas stations and grocery stores. Although the number of autos sold last month was quite strong, sales fell a seasonally adjusted 0.5%, perhaps suggesting heavier discounting. Stripping out gas and autos, U.S. retail sales rose a somewhat better 0.3%. Shoppers have used some of their gas savings to go out to eat more. Spending at restaurants climbed 0.5% in October.

The third quarter of 2015 was rough for American department stores. Macy’s, the nation’s largest department-store chain, had such a bad quarter that it cut its year-end forecasts across the board, lowering earnings, revenue, and same-store sales projections. And upscale competitor Nordstrom followed suit after reporting a 42% drop in profits, which caused shares to drop 15%.

But it’s not all retail doom and gloom. JC Penney reported same store sales were up 6.4%, and that helped boost net sales nearly 5% to $2.9 billion. The retailer also dialed up its year-end outlook for adjusted earnings before interest, taxes, depreciation, and amortization. All that said, JC Penney still isn’t turning a profit, but its net loss shrank 23% to $137 million. Shares were still down 16% today. Seriously, we should see some major bargains this holiday season.

Consumers were in a good mood. The University of Michigan’s consumer sentiment index rose to 93.1 in early November from a reading of 90.0 in October. The survey showed an improvement in buying plans for large discretionary purchases, especially vehicles. Lower-income households also were upbeat about their prospects in November.

The producer price index fell 0.4% in October. The index, which measures prices at the wholesale level, has been flat or lower for four straight months, contributing to a record 1.6% decline over the past year. The overall cost of services dropped 0.3% last month, reflecting lower revenue generated by wholesalers and retailers. The cost of goods declined 0.4%. Lower energy costs and cheaper imports have pushed prices down. Core producer prices that exclude the volatile categories of food, energy and trade fell a smaller 0.1% in October.

So, to recap: consumers are feeling good, wholesale prices are down (not just going up slowly, but actually down), and retail sales are flat lining right before the holiday shopping season. Here’s a thought; maybe consumers who were slammed by the Great Recession and were forced into squeezing every dime out of a dollar aren’t ready to go back to just throwing their cash at high priced department stores. We learned how to sniff out deals, we learned how to use technology to beat big margins.

The downturn turned us into bargain bloodhounds. Maybe this is the beginning of the end of department stores and malls as we know them. And maybe wage growth hasn’t yet been enough to warrant abandoning our newfound thrift. Maybe there’s even a little saving going on. The savings rate has been stubbornly high (by American standards). Or maybe everybody maxed out their credit cards. Maybe the economy is headed off the recessionary cliff. Or maybe it’s just a little statistical noise in the long term uptrend. Who knows? The salient point is that it isn’t really tough to spot the winners and losers in this market.

The federal government ran a budget deficit of $136 billion in October, up 12% or $15 billion from the same month last year. Spending in the first month of the fiscal year was $348 billion, up 4% from October 2014. Total receipts were $211 billion, a 1% decrease.

Eurozone economic growth was slower than expected in the third quarter. Eurostat said the gross domestic product of the 19 countries sharing the euro expanded 0.3 percent quarter-on-quarter for a 1.6 percent year-on-year increase in the July-September period. This outcome is lower than the ECB’s staff projections, which would add to the already strong case for the ECB to step up monetary stimulus in December.

China is moving to contain leveraged wagers on its stock market, cutting in half the amount of borrowed money investors can use to buy shares. Margin requirements will be raised to 100% from 50% starting on Nov. 23. The rule change means that an investor with 1 million yuan in their account is limited to borrowing another 1 million yuan from a broker to buy more shares. Previously, they could borrow as much as 2 million yuan. That should curtail speculation.

British prosecutors charged 10 former Deutsche Bank and Barclays employees with manipulating a benchmark interest rate, with an 11th facing indictment as soon as next week. Six traders from Deutsche Bank and four from Barclays were charged with conspiracy to manipulate the Euribor benchmark. Banks and other financial institutions have paid about $9 billion in fines tied to Libor and other key rates. So far, we are expected to believe that upper management was nothing but a bunch of overpaid, out of touch, incompetent morons who had no clue about trillions of dollars of trades resulting in billions of profits. At some point, prosecutors will have to figure out that someone in the C-suite knew what was going on and put their seal of approval on all this rigging.

The Group of 20 summit gets underway this weekend in Turkey. The primary purpose of the meeting is to look for ways to stimulate the global economy. A secondary agenda has been raised by Turkish President Erdogan to use concerns in the Eurozone over the refugee crisis to bolster support for military intervention in Syria. And while there will certainly be some lively debates at the G-20 meeting, the most likely outcome is a very nice photo-op.

Mylan failed to attract a majority of Perrigo shareholders by a Friday deadline for its $26 billion unsolicited offer to acquire the over-the-counter drugmaker. About 40 percent of Perrigo holders tendered their shares, short of the 50 percent needed to move ahead. Mylan now can’t try again for a year. Mylan offered $75 in cash and 2.3 Mylan shares for each Perrigo share, a bid that Dublin-based Perrigo had rejected as inadequate.

Cisco had a mixed quarter. The network-technology giant reported better-than-expected revenue and earnings. But guidance was a little light. Management expects to deliver $0.53 to $0.54 per share in earnings, which is below the $0.56 expected.

Hulu may sell a stake of itself to Time Warner as part of a deal that would value the streaming-video service at more than $5 billion and advance its efforts to compete with Netflix and Amazon.com. The Wall Street Journal reports, “The companies have been in talks about Time Warner becoming an equal stakeholder in Hulu alongside Walt Disney, 21st Century Fox and Comcast.

Shares of BHP Billiton fell close to a decade low today as a drop in commodity prices overnight compounded investor worries about the fallout from a dam-burst at its jointly-owned Brazilian iron-ore mine operation last week which killed nine people. Brazil President Dilma Rousseff has slapped preliminary fines of $96 million against the Samarco mine where two waste dams burst, spilling sludge and mine waste over 2 states. The fines could go much higher. Prosecutors are investigating possible crimes that could have contributed to the disaster at the mine

The Supreme Court has agreed to hear a challenge to a Texas law that would leave the state with about 10 abortion clinics, down from more than 40. The court has not heard a major abortion case since 2007, and the new case has the potential to affect millions of women and to revise the constitutional principles governing abortion rights. The case concerns two parts of a state law that imposes strict requirements on abortion providers. One part of the law requires all clinics in the state to meet the standards for “ambulatory surgical centers,” including regulations concerning buildings, equipment and staffing. The other requires doctors performing abortions to have admitting privileges at a nearby hospital. Other parts of the law have already caused about half of the state’s 41 abortion clinics to close. If the contested provisions take effect, the brief said, the number of clinics would again be halved.

The challengers’ brief said that the law “would delay or prevent thousands of women from obtaining abortions and lead some to resort to unsafe or illegal methods of ending an unwanted pregnancy.” The remaining clinics would be clustered in four metropolitan areas: Austin, Dallas-Fort Worth, Houston and San Antonio. The case, Whole Woman’s Health v. Cole, could provide the Supreme Court with an opportunity to decide whether the law interferes with its 1992 decision in Planned Parenthood v. Casey, which said states may not place undue burdens on the constitutional right to abortion before fetal viability. The court said undue burdens included “unnecessary health regulations that have the purpose or effect of presenting a substantial obstacle to a woman seeking an abortion.” The justices will hear arguments in the case within the next few months and hand down a decision by June.