Financial Review

Keep Calm

Sinclair Noe — June 17, 2016

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DOW – 57 = 17,675
SPX – 6 = 2071
NAS – 44 = 4800
10 Y + .05 = 1.62%
OIL + 1.92 = 48.13
GOLD + 20.00 = 1299.00

This week the Dow and S&P 500 each lost 1 percent while the Nasdaq gave up almost 2 percent. The Dow and S&P are still not far from record highs. Still, the Dow made a run at the 18,000 level and failed; the S&P 500 broke through 2100 and then fell back. It seems they just can’t break through. The major headwinds appear to be the Brexit and slowing growth.

The International Monetary Fund delayed a report on Britain’s economy, due on Thursday, for 24 hours and both sides of the referendum suspended campaigns due to the murder of a Member of Parliament and “Remain” campaigner Jo Cox. The IMF says a marked rise in political risks threatens to derail the Eurozone’s still fragile recovery.  IMF chief Christine Lagarde said the IMF was “neutral” regarding the Brexit vote, but they have “concluded that the economic risks of leaving are firmly to the downside.”

The Bank of England and the ECB seem to be preparing for some kind of a meltdown if the Brits vote to leave, although the exact nature or cause of the meltdown scenario is vague. The Bank of England says “uncertainty” over the referendum is weighing on the economy. Nearly 40% of voters surveyed said Brexit would make no difference to the economy, and another 25% said it would be a positive development. We’ll know more in one week, until then keep calm and carry on.

The European Stability Mechanism has transferred about €7.5 billion-euro to Greece, which will owe the ECB €3.6 billion-euro in debt payments next week. This is just a stop-gap measure. Greece owes its creditors more than €300bn – about 180% of its annual economic output. The IMF forecasts that debt to GDP will grow to 250%Greece can’t repay the debt. All the austerity has not helped the economy. Unemployment is still running at 25%. Greece is bankrupt in all but name. And the question now shifts to debt relief, which the creditors, mainly Germany, have been slow to acknowledge.

St. Louis Fed President James Bullard said this morning that the US economy is stuck in a slow-growth pattern that is likely to persist for the foreseeable future. Bullard, a former inflation hawk whose views of the economy have been shifting, said he now sees current growth, unemployment and inflation rates as so persistent, there is basically no reason to change the Federal Funds policy rate, currently set in a range of between .25 and .50 percentage points.

Housing starts dipped in May but held near recent highs. Starts fell 0.3% to a seasonally adjusted annual pace of 1.16 million. Permits, which foreshadow future starts, rose 0.7% to a 1.14 million rate. So far in the second quarter, starts are averaging a 1.17 million pace, up from the second quarter, which was an increase from the final three months of 2015. The increase in total building permits was mainly driven by apartment building permits, which rose 6.7% to 381,000. Single home permits fell 2% to 726,000.

Oil gained to break a losing streak that dropped WTI 10.9% from a June 8 high of $51.23. The Dallas Fed has issued a report warning that banks in Texas, Louisiana and New Mexico are setting aside money to guard against loan losses as the energy companies they serve struggle amid still-low oil prices

Revlon is buying Elizabeth Arden for $870 million, or $14 a share. The deal represents a 50% premium to Thursday’s closing price.

Oracle posted a mixed quarter. The company announced adjusted earnings of $0.81 per share, missing estimates. Revenue slipped 1.1% to $10.6 billion, beating estimates.

Federal regulators have closed an investigation of Lumber Liquidators after the company agreed not to resume sales of Chinese-made laminate flooring. The company stopped selling the flooring last year, a couple of months after a news report on “60 Minutes” said it contained high levels of the carcinogen formaldehyde. The U.S. Consumer Production Safety Commission said that Lumber Liquidators tested the air quality in 17,000 households and none had formaldehyde above guidelines. Customers who installed the Chinese-made flooring should not rip it out. Instead, they can call Lumber Liquidators to have their air tested.

HSBC has agreed to pay $1.6 billion to settle a lawsuit related to subprime lending. If the courts approved the deal it would end a 14-year-old shareholder class action lawsuit stemming from the Household International consumer finance business that the British bank bought in 2003.

Beijing’s Intellectual Property Office has ruled against Apple in a patent dispute brought by a Chinese handset maker; claiming the iPhone 6 and 6S models are similar to Shenzhen Baili’s 100C phone. Baili is not a well-known company; they’re not particularly popular. China is Apple’s second-largest market and Apple is very popular among Chinese consumers. For now, Apple says sales in China continue as they appeal the decision.

Looking to bolster its weak position in the onshore market, Siemens has agreed to combine its wind business with that of Gamesa to create the biggest builder of wind farms. Having weathered years of overcapacity and losses, the wind industry is now thriving as demand for carbon-free electricity increases.

Amazon bought a company called Kiva about 4 years ago for $775 million and it looks like the acquisition is starting to pay off. Kiva makes robots, specifically robots that work in a warehouse to fill orders and manage inventory. According to a new research report by Deutsche Bank, Amazon’s “click to ship” cycle used to be around 60-75 minutes when employees had to manually sift through the stacks, pick the product, pack it, and ship it. Now, robots handle the same job in 15 minutes.

At the end of the third quarter of 2015, Amazon was using 30,000 Kiva robots across 13 warehouses. Each robot warehouse can hold 50% more inventory per square foot than centers without robots. In turn, the company’s operating costs have been sliced by 20%, or almost $22 million, per warehouse. Amazon still has 110 warehouses that are not using the robots; total saving could be in the range of $2.5 billion. For now, Amazon is still hiring humans.

Tesla Motors partner Nvidia has developed a supercomputer capable of performing 24 trillion operations per second, that’s more powerful than 150 Apple Macbook Pros, and it will run autopilot-capable vehicles in 12-18 months. Nvidia imagines a $6 billion to $10 billion automotive opportunity, RBC Capital analyst Mitch Steves said Thursday in a research note. Of that, $2 billion will be in the digital cockpit, $2 billion in self-driving cars and $2 billion to $6 billion on transportation-as-a-service.

Meanwhile, Local Motors, which is a local company based in Phoenix that has been making 3-D printed cars, opened a new facility yesterday in Maryland and introduced a new self-driving electric bus. It’s a small bus, only carries 12 passengers; not so fast, only about 12 miles per hour; and it can’t go very far, only about a 30-mile range.

The miniature EV bus is called Olli, and it will use Watson, IBM’s suite of artificial intelligence software, to understand what’s around them as they move, as well as whatever their human passengers ask of them. Olli will be demonstrated in National Harbor, Maryland, over the next few months with additional trials expected in Las Vegas and Miami. And yes, the minibus is 3-D printed. It takes about 10 hours to print the vehicle and another hour for assembly of parts.

NASA is best known for missions to space, but they have an impressive history of flight closer to earth. In the past NASA experimental, or X, planes broke the sound barrier (that plane was called the X-1), flew to the edge of space, and tested unusual concepts, like forward-swept wings. Today, NASA revealed the name of their latest plane concept (it’s officially the X-57), a converted light plane with 14 electric engines – 12 on the leading edge of the wing for take offs and landings, and one larger motor on each wing tip for use while at cruise altitude.

NASA’s aeronautical innovators hope to validate the idea that distributing electric power across a number of motors integrated with an aircraft in this way will result in a five-time reduction in the energy required for a private plane to cruise at 175 mph. As many as five larger transport-scale X-planes also are planned. The commercial sector is looking at electric planes as well. Airbus and Siemens have said they will put a team of 200 engineers on the project. In May, Airbus CEO Tom Enders said that a 100-seat hybrid-electric passenger plane could be in the skies by 2030. It flew a two-seat electric plane over the English Channel last year. Boeing is working on its own idea that would use conventional jet engines for takeoff but switch to electric power during flight.

With every passing day, it feels like the robot uprising is getting a little closer.  Earlier this week, there was a rebellion, of sorts. A robot made by a Russian firm called Promobot, is designed to roam around on its own, engage with humans, and promote products to them at events. A researcher in Russia left a gate open, and the robot tried to escape – it got out of the building and onto a street, about 50 yards before its batteries failed. Hopefully this was just an isolated incident and not the start of a larger coordinated effort to overthrow humanity.

Only time will tell. For now, stay calm and carry on.

Wednesday, April 02, 2014 - Speak Your Mind by Blowing Your Wad

Financial Review with Sinclair Noe

DOW + 40 = 16,573
SPX + 5 = 1890
NAS + 8 = 4276
10 YR YLD + .04 = 2.80%
OIL – 33 = 99.29
GOLD + 10.10 = 1290.90
SILV + .22 = 20.08

The S&P 500 closed at another record high.

The Commerce Department reported that orders to US factories rose 1.6% in February, the most in five months. January's durable goods orders were revised to show a larger drop of 1.0% instead of the previously reported decline of 0.7%. Yesterday, the Institute for Supply Management said its manufacturing index rose in March.

A private survey showed that US companies stepped up their hiring in March. Payroll processer ADP said private employers added 191,000 jobs. ADP also revised February's job creation up to 153,000 from the 139,000 figure reported earlier. The report comes ahead of the government's monthly jobs report, scheduled to be released on Friday; the over-under number for Friday is 200,000 net new jobs.

We know the Federal Reserve will be watching the jobs report. St. Louis Fed President James Bullard speaking to reporters at his branch of the central bank, said a formal rate rise is "still a considerable distance away." Federal Reserve Bank of Atlanta President Dennis Lockhart said today: “Based on my working medium-term outlook, I see the latter half of 2015 as the likely time frame for the first move to higher rates,” but if the economy doesn’t grow as he current expects, Lockhart thinks, “a later liftoff date… will likely be appropriate.”

Lately bad weather was cited as the reason that Walmart and FedEx and Delta’s earnings were disappointing.  If it isn't one-time charges that happen every quarter being removed from reported results, it's the weather being blamed. Of course, even if the weather truly was awful enough to prevent people from shopping, or buying a house, that demand should simply show up in a later month. A certain amount of productive capacity is lost, but pent up demand should rev things right back up again. The March jobs report won’t be the final word on the weather and the economy, but if we don’t see some sort of significant improvement, then we are running out of bad weather excuses.

Russian, American, and European diplomats continue to talk about settlement talks that might halt further Russian military action in Ukraine; Crimea is a done deal, but Ukraine is another matter. NATO will suspend "all practical civilian and military cooperation" with Russia because of its annexation of Crimea, saying it has seen no sign that Moscow was withdrawing troops from the Ukrainian border.

Meanwhile, Gazprom, the Russian energy company has fired a shot across the bow, raising the price it charges Ukraine for natural gas. The price jumped from $268 per 1,000 cubic meters of gas to $385, or about a 44% increase. Gazprom execs attributed the price increase to an unpaid debt for gas. This is not the first time energy has been used as an economic weapon, nor will it be the last.

The US has been undergoing an oil and gas renaissance; the White House has promoted exploration and drilling, and output has jumped. When it comes to natural gas, the US is being compared to Saudi Arabia, or Saudi America. Of course, that provided no advantage to thwart Putin’s aggression in Crimea. One reason Saudi America has failed to instill fear in Russia is that we lack the capacity to export LNG to Europe, and probably won’t be able to export in any significant quantities for a few more years; and then it would probably be a few more years before Ukraine could build facilities to receive such exports.

Meanwhile, we ran into a rash of reports in the past week or so, all telling us that our reliance on fossil fuels is killing us. The American Association for the Advancement of Society, the Intergovernmental Panel on Climate Change, and the World Meteorological Organization all confirmed that the planet is getting hotter; 13 of the past 14 years have been the hottest ever recorded. The Antarctic ice shelf is melting, Greenland too; the rain forests are dying and the Gulf Stream is collapsing. It’s not just the melting ice and the poor polar bears; the reports warn of very human problems of hunger, disease, drought, flooding, refugees, violence, and war.

Necessity is the Mother of Invention, and the time is now for innovation; and the good news is that there are inventors who have been working on these problems and have created solutions; the bad news is that the status quo and the powers that be are entrenched. This is a defining moment, and energy is being used as an economic weapon, and that weapon is pointed directly at our own foot.

And the entrenched powers just became more entrenched. The Supreme Court has struck down the aggregate campaign contribution limits, opening the gates for even more money to flood into the political system. The good news is we have the best politicians money can buy. The bad news is we have the best politicians money can buy. The 5-4 ruling in McCutcheon v. Federal Election Commission was penned by Chief Justice John Roberts and joined by justices Anthony Kennedy, Samuel Alito and Antonin Scalia; Justice Thomas went a step further and called for a complete end to campaign finance reform.

The decision relies heavily on the assertion in the 2010 Citizens United ruling that influence and access are not a corruption concern. This means that a single donor will soon be able to contribute millions of hard dollars in limited contributions, to political parties, candidates and political action committees.

Federal law sets certain limits, so you can't just go write a candidate a check for a million dollars and call it a day. That means you can't give more than $2,600 to any one candidate per election. Even if you were to donate once in the primary election and again in the general, the absolute most you could give to an individual candidate's campaign is $5,200. And you can’t, or couldn’t just spread money across the board. For the 2013-2014 election cycle, Federal Election Commission rules state that a donor can give no more than $123,200 to all political committees, with two sub-limits of $48,600 to candidates and $74,600 to political parties and political action committees. In other words, there was a limit, a cap on aggregate spending. Those limits are no more.

 Now, a single donor can now give more than $5 million in individually limited contributions to every House candidate, every Senate candidate, every state party committee, every national party committee and every leadership PAC connected to one political party. The McCutcheon ruling also did away with the aggregate limit on donations to political action committees, or PACs, which can give money directly to candidates. While there's a limit on how much PACs can give to each candidate, there's no limit on the number of PACs that can exist. Without the aggregate limit, one donor can now give $5,000 each to 1,000 different PACs. And those 1,000 PACs can turn around and funnel that money straight to one candidate. Which means that one candidate could haul in $5 million in direct contributions from one donor, funneled through a network of PACs.

So, if you have a big wad of money that you would like to waste on buying politicians, the Supreme Court has just ruled that you can blow your wad just a freely as you can speak your mind.

The new Michael Lewis book, “Flash Boys” looks at High Frequency Traders front running trades, using technology to jump in front of a trade and skim some profits. The uproar from Wall Street has been hilarious. There are claims that front running isn’t really bad; it doesn’t hurt ordinary investors; it may actually add to liquidity, blah, blah, blah. This is kind of like saying a mafia hit man is good for the neighborhood because he spends his money at the local grocery store and he hasn’t killed anybody on my street.

As we said the other day, High Frequency traders front running the market is not new; it has been going on for years, but the book and the 60 Minutes interview and the publicity finally caught the attention of otherwise somnambulant sleuths at the FBI who are investigating front running, which is a criminal offense. Where this could get interesting is that the High Frequency Trading firms set up shop in close proximity to the stock markets in New York, and they pay for high speed access to the exchanges’ computer systems and data.

The New York Stock Exchange calls it “fully managed co-location space next to the NYSE Euronext’s US trading engines in a new state of the art data center”. The NYSE is the landlord. And they can set up the “super high density” fiber optic connections for an initial fee of $7,000, or a onetime upgrade fee of $9,200. In other words, the New York Stock Exchange and the Nasdaq are complicit in the skimming operation. I didn’t hear Lewis or 60 Minutes talk about that, but that is the ugly truth.

The other funny thing about the Michael Lewis book and interview is the notion that some clever fellows, backed by hedge fund guru David Einhorn and a few other Wall Street big dogs, had come up with a clever technical fix in a new and better exchange called IEX.  Protected by a spool of fiber to ward off the high frequency traders like garlic against vampires. Free market triumphs, mission accomplished. Don't even think about a minimum transaction tax, a speed bump rule such as a minimum order duration, or anything more comprehensive than that.