Financial Review

Cake and Panic

Sinclair Noe — May 17, 2017

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

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DOW – 372 = 20,606
SPX – 43 = 2357
NAS – 158 = 6011
RUT – 38 = 1355
10 Y – .11 = 2.22%
OIL + .30 = 48.96
GOLD + 24.20 = 1261.90

Today marks the 225^th anniversary of the New York Stock Exchange. On the floor of the exchange, they celebrated with cake and panic. Stocks started the session with triple digit losses on the Dow, and then drifted lower throughout the day.

It was the worst loss on Wall Street since September, while the Nasdaq Composite Index plunged 2.6 percent for its steepest drop since June 24.

The dollar fell by nearly 2 percent against the yen to its lowest level since April and hit a six-month low against the Swiss franc. The dollar index, which tracks the U.S. currency against six peers, fell 0.6 percent to its lowest level since Nov. 9, surrendering all its “Trump bump” gains.

The VIX, the volatility index jumped nearly 5 points, or 46%. The 10-year Treasury yield sank to 2.22 percent in its steepest decline since July. The spread between 10-year and two-year yields narrowed to the flattest since before Trump’s election.

Today’s drop in markets comes after Tuesday evening saw the second damaging story for President Donald Trump in as many days. The New York Times reported  that Trump asked former FBI director James Comey to end an inquiry into ties former national security advisor Michael Flynn had to Russia.

And Comey documented the meeting in a memo. The Comey memo caused alarm on Capitol Hill and raised questions about whether Trump attempted to interfere with a federal investigation, something that might constitute obstruction of justice and could potentially be invoked to impeach Trump.

And this report came just a day after The Washington Post reported Trump revealed “highly classified” information to Russia’s foreign minister. Last week, Trump fired Comey, even as the FBI was investigating possible ties between Trump’s campaign and Russia.

The market reacting negatively to Trump-related headlines is a definite change from what we’ve become accustomed to in recent months. After the market’s violent election night reaction, stocks have moved up and to the right unabated, with the political chaos in Washington seeming to have little impact on financial markets.

The difference might be that several Republican leaders are now starting to say it may be time for an independent commission or special prosecutor. House Speaker Paul Ryan held a press conference this morning; he did not call for a special prosecutor, but he said, “we have an obligation to carry out our oversight regardless of which party is in the White House.”

And just as important as what Ryan said, was what he didn’t say. Ryan did not attack former FBI Director Comey, a marked change from last week. And Ryan did not attack the media.

In a letter to acting FBI Director Andrew McCabe on Tuesday, the Republican chairman of a House oversight committee, Jason Chaffetz, set a May 24 deadline for the FBI to produce all relevant material relating to any communications between Comey and Trump. Ryan backed Chaffetz’s request.

The Senate Intelligence Committee sent two letters to former FBI Director James Comey and Acting FBI Director Andrew McCabe requesting their cooperation in the committee’s ongoing investigation into Russia’s election interference. The senators have requested that Comey appear before the committee “in both open and closed sessions.”

Senator John McCain, who has called for the creation of a special bipartisan congressional panel to investigate the Russia matter, compared the controversies enveloping Trump to the Watergate scandal that forced Republican President Richard Nixon to resign in 1974. This is not to say that Republicans have deserted Trump – far from it, but there are some cracks in the wall.

Speaker Ryan insisted the Republican legislative agenda was not becoming paralyzed, but that might be wishful thinking. There is no way this controversy will help efforts to repeal and replace Obamacare, it will not aid tax reform or infrastructure efforts. That does not mean the agenda can’t move forward, just that it will be tougher.

Apple stock was down 3.3% today. Apple stock was up 34% this year on anticipation that the next iPhone could spur a “super cycle” of sales as well as hopes that federal tax reform could enable Apple to bring home some of its $240 billion in cash and marketable securities that are held outside the United States at lower tax rates.

Apple has suggested that if the company were able to repatriate some of its overseas holdings at a lower tax rate, it would return some of the money to its shareholders.

Trump leaves Friday on a 10-day trip to Saudi Arabi, Israel, and the Vatican. Today Trump told graduates of the Coast Guard Academy that he has been treated worse than any politician “in history”, although Mrs. Lincoln probably would have disagreed.

It took nearly a decade, but debt has made a comeback. Americans have now borrowed more money than they did at the height of the credit bubble in 2008, just as the global financial system began to fall apart. The Federal Reserve Bank of New York says total household debt had reached a new peak — $12.7 trillion, exceeding its peak in the third quarter of 2008.

Student loans account for 10.6 percent of that total, up from 3.3 percent in 2003, Student borrowers today owe $1.3 trillion, more than double the $611 billion nearly nine years ago. About one in 10 student borrowers is behind on the loans — the highest delinquency rate of any type of loan tracked by the report.

While mortgage balances still make up much of household debt, they are a smaller share of total obligations and have fallen back to 2003 levels. Auto loans totaled about $1.1 trillion, or 9 percent, of all household debt. Defaults have been creeping up in auto loans.

Credit card balances shrunk by $15 billion to $764 billion, but there has been a recent uptick in delinquencies on these payments. The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also speaks to growing optimism among banks and other lenders about economic growth.

Debt can fuel consumer spending, which accounts for about 70 percent of all economic activity in the United States. But debt can be risky. The good news is that the economy is stronger than it has been in some time. Consumers were delinquent on 4.8% of total debt, a marked improvement from the 11.9% of debt that was at least 30 days late at the end of 2009.

Cisco Systems, the world’s largest networking gear maker, reported its sixth straight drop in quarterly revenue, largely due to declines in its router business. The company’s net income rose to $2.5 billion, or 50 cents per share, from $2.3 billion, or 46 cents per share, a year earlier. Revenue fell 0.5 percent to $11.9 billion.

Target reported better-than-expected first-quarter earnings and revenue. Target reported adjusted earnings per share of $1.21, beating estimates of 91 cents. Sales, at $16.0 billion, were ahead of estimates for $15.6 billion, though they were down from $16.2 billion last year. E-commerce sales climbed 22%. Same-store sales were down 1.3%.

Shares of Ascena Retail Group fell more than 30 percent in after-hours trading as the owner of Ann Taylor, Loft, Lane Bryant and other brands said it adjusted its second-half outlook to reflect worse-than-expected business conditions. In what’s been a rough earnings season for retailers, Ascena expects third-quarter comparable store sales to decline 8 percent and for full-year comparable sales to decline between 6 percent and 7 percent.

I/O is Google’s annual developer conference. And they had some interesting announcements. There are now about 2 billion active devices based on the company’s Android software. The big headline: Google Assistant is coming to the iPhone. It’s no longer stuck on Android.

Google is also expanding its third-party support for Assistant. Before, third parties could build “actions” for the Assistant in the Google Home speaker. Now they’ll work wherever Assistant is, including Android phones and the iPhone. Google Home, the company’s connected speaker, will soon let you call any number in the US or Canada from the speaker for free.

A new product, Google Lens has some of the most impressive new features. You can scan just about anything with your phone’s camera and have Assistant analyze its contents. For example, if you take a photo of a concert venue, you can listen to an artist’s music, buy tickets, and more. Or for the amateur botanists, take a picture of a flower, and Google will tell you what it is.

Google’s Daydream virtual-reality platform now supports standalone headsets, not just ones that need to be powered by smartphones. Perhaps the most ambitious program is Google.ai, or artificial intelligence. Put away your machine learning degrees — artificial intelligence is now at the stage where it’s ready to replicate and improve on itself.

Googlers have designed AIs that are capable of “learning to learn,” which they hope to use on every single product across the Google portfolio, including its cloud business. Google announced a new generation of its custom AI chips today, the second version of its Tensor Processing Units.

Google’s TPU represents a next generation of chip, one custom-built for the task of handling AI, and twice as fast. The new hardware will be available for developers on Google’s cloud service and for companies that want to add artificial intelligence to their operations when renting processing power.

Financial Review

More Shoes

Sinclair Noe — May 11, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 23 = 20,919
SPX – 5 = 2394
NAS – 13 = 6115
RUT – 9 = 1390
10 Y – .01 = 2.40%
OIL + .46 = 47.79
GOLD + 6.00 = 1225.80

This morning, we got two pieces of economic data that show the U.S. economy remains strong, with producer prices — a measure of inflation — rising 0.5% over the prior month, more than the 0.2% that was expected.

With last month’s jump in prices, the PPI shot up 2.5% in the 12 months through April. That was the biggest gain since February 2012.  Core PPI, which excludes food, energy prices and trade, rose 0.7% in April after a 0.1% gain in March. Core PPI increased 2.1% in the 12 months through April.

Additionally, initial jobless claims also topped expectations, totaling just 236,000 last week, with continuing filings for unemployment insurance hitting the lowest in 28 years. The Bank of England on Thursday left its key interest rate at 0.25%, meeting widely held expectations.

 It was an ugly day for retail stocks. Macy’s reported earnings per share of $0.24, less than the $0.35 expected by analysts, on same-store sales that dropped 4.6%. Macy’s shares were slammed for a 17% loss today.

Also in retail earnings, Kohl’s reported earnings per share that topped estimates though same-store sales declined more than expected during the quarter. Kohl’s reported adjusted earnings per share of $0.39, topping estimates for $0.29, while same-store sales fell 2.7%, more than the 1.1% expected by analysts. Kohl’s dropped almost 8% today.

Nordstrom reported better-than-expected quarterly earnings and quarterly revenue in line with expectations but it didn’t escape the pall over department stores in general. Nordstrom said it earned $63 million, or 37 cents a share, in the first quarter, compared with $46 million, or 26 cents a share, in the year-ago period. Net sales reached $3.3 billion, compared with net sales of $3.2 billion a year ago. Comparable-store sales for the first quarter decreased 0.8%. Shares dropped 4.5%.

In an interview today with NBC’s Lester Holt, President Trump called fired FBI chief James Comey a “showboat” and “grandstander”. Trump said he would have fired Comey even without a recommendation to do so by the two top Justice Department officials. That ran counter to previous administration explanations from White House aides and Vice President Pence of Comey’s dismissal.

Trump also gave further details of his account that Comey informed him three times that he was not under investigation. That interview airs tonight.

Meanwhile, on Capitol Hill, acting FBI Director Andrew McCabe directly contradicted the White House on two points related to Comey’s firing and the law enforcement agency’s investigation into Russia’s meddling in the presidential election.

McCabe said there is an investigation, it is significant and it is underway and will continue but he sidestepped the question of whether Comey directly told Trump on 3 occasions that there was no investigation. A day after the White House said Comey had “lost the confidence” of his employees, McCabe said Comey had a strong and positive relationship with the clear majority of FBI employees.

Senator John McCain, who heads the Armed Services Committee, and is no admirer of Vladimir Putin, defended Comey as an honorable man and called the firing “unprecedented,” which is true. 

Republican Richard Burr of North Carolina, who heads the Senate Intelligence Committee said today: “I am troubled by the timing and reasoning of Director Comey’s termination. I have found Director Comey to be a public servant of the highest order, and his dismissal further confuses an already difficult investigation by the Committee.”

Trump has been in office 110 days, and he’s already fired his acting attorney general, his national security adviser, and now the head of the FBI, all of whom have played key roles in the Russia investigation. What does it all mean? Well, at this point, not much. These people served at the pleasure of the president. Trump certainly has the authority to fire them.

Trump’s Director of National Intelligence Dan Coats and CIA chief Mike Pompeo, testified to a senate committee today that they agreed with a finding that Russian president Putin had directed an effort to hack and disrupt the US election, but we do not know what, if anything has turned up in the investigation into possible collusion between the Russians and Trump and/or his campaign.

If there is a connection, it would be very bad for Trump. If there is no connection, that fact will only be established after much hand wringing and gnashing of teeth. Right now, we just don’t know how this will play out.

At a security conference in Munich, Senator McCain said, “This scandal is going to go on. I’ve seen it before. I guarantee you there will be more shoes to drop, I can just guarantee it. There’s just too much information that we don’t have that will be coming out.”

Yesterday, I said the firing of Comey will consume all the oxygen in Washington. Today there was no talk of the American Health Care Act, no talk of tax reform, no talk of infrastructure stimulus. Well, maybe someone was talking about it but all eyes and ears were on the Comey situation. For today, the Trump agenda was stalled, probably tomorrow as well – possibly into the near future.

Halfway around the world, in a speech at the Bombay Stock Exchange, William Dudley, head of the New York Federal Reserve gave a full-throated economic and even political argument for resisting trade barriers that he said would hurt growth and living standards in both the United States and around the world.

“Protectionism can have a siren-like appeal,” said Dudley. “Viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short term. Viewed more broadly, it would almost certainly be destructive to the economy overall in the long term.”

Dudley said he was speaking out because “we are at a particularly important juncture” in which trade issues could imperil the long-term health and productivity of the economy and “the economic opportunities available to our people.”

Barriers to trade are very costly, he said, because they blunt export opportunities, make everyday goods more expensive, and they can often “backfire” by harming workers who can no longer compete in a global economy.

Don’t look now, but banks are failing again in America. The past several years has been relatively placid for the banking industry. After the wholesale failure of the system during the financial crisis, banks gradually recovered their footing. Aided by essentially free money from the Federal Reserve, bailouts, and widespread federal and central bank guarantees, banks once again became rock-solid American institutions.

As the expansion rolled on, companies and individuals did a much better job keeping up with their financial obligations. The result: record profits for banks and an extremely low rate of bank failure. In 2016, banks covered by the Federal Deposit Insurance Corporation reported $171.3 billion in profits.

Only five banks failed last year, and they were small, a total of just 18 branches and a mere $277 million in assets between them. In 2015, seven banks in the continental U.S. failed; they had combined assets of $826 million.

So far, this year, five banks have already failed—as many as in all of 2016. More important, the banks that are failing are significantly larger. Last week, Guaranty Bank of Milwaukee ($1 billion in assets and 118 branches) bit the dust. The week before, it was First NBC Bank of New Orleans ($4.7 billion in assets and 29 branches).

The U.S. economy is, by most accounts, rolling along. The current expansion is now in its 95^th month. The economy has added payroll jobs for a record 79 months, and the unemployment rate is at 4.4 percent. When expansions get longer, a few things happen. Banks, consumers, and companies all get more confident about their ability to handle debt, which leads to more credit being extended.

At the same time, lenders seeking growth start to become more aggressive about putting money in the hands of people. Once all the people who can easily afford to purchase cars have taken car loans or mortgages, banks must seek out more marginal borrowers to keep boosting their profits.

And once credit gets distributed a little too widely, borrowers begin to default—even if nothing else changes in the economy or the climate for credit.

For the first time in a decade, the Federal Reserve is raising interest rates—thus increasing the cost of borrowing and servicing debt. Before December 2015, when the Fed boosted the federal funds rate from zero to 0.25 percent, it had been 9.5 years since the Fed last raised the interest rates it controls.

Janet Yellen has since raised rates in 0.25 percent increments twice. Yes, interest rates are still remarkably low, and the moves have been small. But it’s the direction that matters. For a decade, people in the economy had been conditioned to think that interest rates don’t really go up—and they borrowed and planned accordingly.

After hitting the lowest level since 2006 in the third quarter of 2016, mortgage delinquency rates rose in the fourth quarter to 4.8 percent. The delinquency rate on credit card loans, while still at a very low level, rose for three straight quarters in 2016. The volume of auto loans that are delinquent is rising rapidly.

All these metrics will likely continue to rise. This doesn’t mean we’re headed for another financial meltdown, merely that the business cycle has not been repealed and this cycle is in the late stages.

Stocks Cut Prices on Disappointing Retail Earnings

Charles Schwab: On the Market

Posted: 5/11/2017 4:15 PM ET

Stocks Cut Prices on Disappointing Retail Earnings

U.S. stocks finished the regular trading session well-off the lows, but still in the red as early morning pressure mounted on the heels of some disappointing earnings figures, which weighed on the retail sector, ahead of some key consumer reports expected tomorrow. Treasuries gained ground and the U.S. dollar was flat despite a hotter-than-expected wholesale inflation report, while gold and crude oil prices were higher. In central bank action, the Bank of England kept its monetary stance unchanged as expected.

The Dow Jones Industrial Average (DJIA) declined 24 points (0.1%) to 20,920, the S&P 500 Index ticked 5 points (0.2%) lower to 2,394, and the Nasdaq Composite decreased 13 points (0.2%) to 6,116. In moderately-heavy volume, 863 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.50 to $47.83 per barrel and wholesale gasoline added $0.02 to $1.56 per gallon. Elsewhere, the Bloomberg gold spot price moved $6.64 higher to $1,225.59 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 99.64.

Macy's Inc. (M $24) reported Q1 earnings-per-share (EPS) of $0.23, or $0.24 ex-items, compared to the $0.36 FactSet estimate, as revenues dropped 7.5% year-over-year (y/y) to $5.3 billion, below the projected $5.5 billion. Q1 same-store sales fell 5.2% y/y, versus the expected 2.7% decline. M reaffirmed its full-year guidance. Shares closed sharply lower.

Kohl's Corp. (KSS $37) posted Q1 profits of $0.39 per share, versus the forecasted $0.29, as revenues were 3.2% lower y/y at $3.8 billion, below the projected $3.9 billion. Quarterly same-store sales decreased 2.7% y/y, compared to the estimated 1.2% decline. KSS was solidly lower.

Whole Foods Market Inc. (WFM $37) announced fiscal Q2 EPS of $0.31, or $0.37 ex-items, versus estimates of $0.37, with revenues rising 1.1% y/y to $3.7 billion, roughly in line with expectations. Q2 same-store sales declined 2.8% y/y, compared to the forecasted 3.0% decrease. WFM lowered its full-year EPS and revenue outlooks, while announcing a 29% increase of its quarterly dividend to $0.18 per share, and a new $1.25 billion share repurchase program. WFM also announced changes, including additions, to its Board, as well as the appointment of a new Chief Financial Officer. WFM traded higher.

Symantec Corp. (SYMC $31) reported a fiscal Q4 loss of $0.23 per share, or earnings of $0.28 ex-items, compared to the projected $0.28, as revenues rose 35.0% y/y to $1.2 billion, roughly in line with expectations. The company's Q1 and full-year revenue guidance came in below forecasts, while its EPS outlooks for the periods were mixed. SYMC finished lower.

Verizon Communications Inc. (VZ $46) announced that it signed an agreement to acquire Straight Path Communications Inc. (STRP $178) for $184.00 per share, or a total consideration of approximately $3.1 billion in an all-stock transaction. The agreement terminates STRP's previously announced deal to be acquired by AT&T Inc. (T $38). Shares of STRP were sharply lower, though they have nearly doubled AT&T's initial takeover proposal of $95.63 per share, while VZ and T were little changed.

Producer price inflation tops forecasts, jobless claims surprisingly decline

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in April rose 0.5% month-over-month (m/m), versus Bloomberg's expectation of a 0.2% gain and compared to March's unrevised 0.1% dip. The core rate, which excludes food and energy, was up 0.4%, versus forecasts of a 0.2% advance and March's unrevised flat reading. Y/Y, the headline rate was 2.5% higher, above projections of a 2.2% increase, and the core PPI increased 1.9% last month, above of estimates of a 1.6% gain. In March, producer prices were 2.3% higher and up 1.6% for the headline and core rates, respectively.

Weekly initial jobless claims (chart) declined by 2,000 to 236,000 last week, below forecasts of 245,000, with the prior week’s figure unrevised at 238,000. The four-week moving average rose by 500 to 243,500, while continuing claims fell by 61,000 to 1,918,000, south of estimates of 1,980,000.

Today's disappointing earnings reports and hotter-than-expected inflation reading set the stage for tomorrow's economic calendar, which will bring key reads on consumer spending, sentiment and purchasing power. April retail sales are projected to rise 0.6% m/m, after March's 0.2% decline, and excluding autos, sales are forecasted to grow 0.5% after the prior month's flat reading. Stripping out autos and gas, sales are expected to increase 0.4% on the heels of the 0.1% gain in March.

As noted in our recent article, Is the Retail Sector Really Dying?, the retailing sector will likely face more turmoil as a trimmed down and modernized industry reinvents itself. We don't think investors should totally shun the sector as the gloom hanging over the group may be obscuring some potential bright spots. Read more on the Insights & Ideas page at www.schwab.com and follow Schwab on Twitter: @schwabresearch. For a look at the potential of the sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest look at our Consumer Discretionary Sector Rating: Marketperform, on the Markets & Economy page at www.schwab.com.

Also, this month's preliminary University of Michigan's Consumer Sentiment Index is anticipated to remain at April's 97.0 level and the Consumer Price Index (CPI) and core CPI are both estimated to be up 0.2% m/m in April, after falling 0.3% and 0.1% in March, respectively. The headline figure is expected to dip to a gain of 2.3% y/y from 2.4% and the core rate is projected to remain at a 2.0% increase. Business inventories for March will round out the day and are expected to have ticked 0.1% higher after rising 0.3% in February.

Treasuries finished higher, with the yields on the 2-year and 10-year notes declining 2 basis points (bps) to 1.34% and 2.39%, respectively, while the 30-year bond rate dipped 1 bp to 3.03%.

For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, as well as Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com. Follow Randy and Kathy on Twitter:  @randyafrederick and @kathyjones.

Schwab's Chief Investment Strategist Liz Ann Sonders offers a look at the low volatility market action as of late in her article, Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Follow Liz Ann on Twitter: @lizannsonders.

Finally, with political uncertainty festering, exacerbated by this week's ousting of FBI Director James Comey, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Randy Frederick and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend titled, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at www.schwab.com.

Europe lower on data, Asia mostly higher

European equities finished lower, with the markets digesting a plethora of mixed earnings reports on both sides of the pond, while global political uncertainty continues to fester and the Bank of England (BoE) expectedly kept its monetary policy stance unchanged. The British pound saw some pressure versus the U.S. dollar following the BoE's decision, with Bloomberg pointing out that the pound had gained ground leading up to the decision amid speculation that there could be more than one dissenting vote. In other U.K. economic news, industrial and manufacturing production both unexpectedly declined m/m in March and the nation's trade deficit widened more than expected. The euro was little changed against the greenback and bond yields in the region were mostly higher. For analysis of the political uncertainty amid Brexit negotiations, and ahead of elections in the U.K., Germany and Italy later this year, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. 

Stocks in Asia finished mostly to the upside, with the recent weakness in the yen helping lift Japanese equities, while Japan's trade surplus also narrowed by a smaller amount than had been expected in March. Stocks trading in mainland China and Hong Kong rebounded slightly from recent selling pressure that has come from lingering regulatory crackdown concerns and a patch of softer-than-expected economic data, bolstered by optimism amid reports that Chinese authorities stepped in to support the markets, per Bloomberg. South Korean securities advanced with the markets digesting this week's Presidential election, which delivered a victory for Democratic Party of Korea Moon. Indian listings finished flat and Australian equities ticked higher. For our latest analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's CFA, article, Different Drivers: Why Emerging Market Stocks Aren't All the Same on the Insights & Ideas page at www.schwab.com, as well as Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com.

The international economic docket for tomorrow will include wholesale prices, CPI and industrial production from India, credit card balances from Australia, GDP and CPI from Germany, non-farm payrolls from France and industrial production from the Eurozone.

Financial Review

You’re Fired

Sinclair Noe — May 9, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 36 = 20,975
SPX – 2 = 2396
NAS + 17 = 6120
RUT + 0.22 = 1391
10 Y + .03 = 2.40%
OIL – .23 = 46.20
GOLD – 4.90 = 1222.10

President Trump has fired FBI Director James Comey. White House spokesman Sean Spicer said the president “terminated and removed” Comey from office “based on the clear recommendations of both Deputy Attorney General Rod Rosenstein and Attorney General Jeff Sessions.”

In Trump’s letter to Comey, the president said, “It is essential that we find new leadership for the FBI that restores public trust and confidence in its vital law enforcement mission.”

The FBI Director is appointed to a 10-year term and it is unusual for a director to be removed from the office before the term expires. Comey was appointed in 2013. Comey, who has led an investigation into Russia’s meddling during the 2016 election and possible links to Trump aides and associates, is only the second FBI chief to have been fired.

Earlier in the day, the FBI clarified a statement Comey made before a Senate panel that overstated the number of classified emails Hillary Clinton aide Huma Abedin forwarded to the personal computer of her husband, former Rep. Anthony Weiner.

Comey had come under fire from Democrats last year after announcing an investigation into Clinton’s emails right before the presidential election, while not disclosing until later a probe into ties between Donald Trump’s campaign team and Russian intelligence officials.

In a letter sent to Comey, Trump wrote: “While I greatly appreciate you informing me, on three separate occasions, that I am not under investigation, I nevertheless concur with judgment of the Department of Justice that you are not able to effectively lead the Bureau.”

Stocks trade at fresh highs (at least on the Nasdaq) and volatility across assets is so subdued it’s touching near-record lows (the VIX inched slightly higher at the close but is still in single digit territory and dipped as low as 9.56).

With the French election out of the way, investors have stopped paying what had been a five-month high in the cost of insuring against declines in the S&P 500 Index. The price of hedging against a 5 percent drop in the gauge over the next month is 36 percent below its five-year average.

For some, this sense of calm in the market is anxiety-inducing especially as valuations stretch to levels not seen since the aftermath of the 1990s-internet bubble. It has been a long time since we had a 5 or 10 percent correction, and the clock is ticking. Or maybe the bull market is just catching a breath, but the markets are almost never this calm.

Goldman CEO Lloyd Blankfein said today, “Every time I get accustomed to low volatility, like we were towards the end of the Greenspan era, and we think we have all the levers under the control … something erupts to remind us that the idea that anybody is in control of everything is hubris. I don’t know what brings us out of the doldrums, but I do know this is not a normal resting state.”

Fed funds futures pricing shows investors are almost universally expecting the Federal Reserve to raise overnight interest rates at its next meeting, with close to a 90 percent perceived chance of an increase next month. Yields on U.S. two-year notes, considered most sensitive to rate-hike expectations, rose to eight-week highs.

While the U.S. economy saw a marked deceleration in the first quarter, the overall outlook remains solid and the Fed is still widely expected to raise U.S. lending rates in June and likely again in September. The positive sentiment (or at least the ubiquitous complacency) and rising U.S. Treasury yields also boosted the dollar. The dollar index, which tracks the greenback’s value against six major currencies, rose to a three-week high, in line with the gains in yields.

Not everyone is cheerfully confident about economic growth. Commerce Secretary Wilbur Ross says the US economy won’t achieve the Trump administration’s 3 percent growth goal this year and not until all its tax, regulatory, trade and energy policies are fully in place.

US trading partners have been spooked by Trump’s vow to renegotiate or pull out of trade deals, such as the North American Free Trade Agreement. A possible rise in the use of tariffs to punish foreign companies deemed to be competing unfairly also has raised concerns of a wave of protectionism. Ross, however, insisted that the Trump administration was not aiming to restrict trade with its actions.

Kansas City Federal Reserve President Esther George said today the central bank should keep gradually raising short-term interest rates despite some economic indicators, like car sales, flashing “yellow”. Among the cautionary areas, auto sales are down from last year’s record pace, and first quarter GDP growth was up at only a 0.7% annual rate, George noted in a speech at the University of California, Santa Barbara.

But other indicators, like consumer sentiment, remain strong, and household balance sheets are, on average, healthy. And as labor markets continue to strengthen, “continuing the gradual removal of monetary accommodation is the appropriate course for the Fed,” George said. George said that rate hikes must be timed right and that a gradual pace seems appropriate. Going too fast risks derailing the economy, while moving too gradually can pose a risk to financial stability

Boston Federal Reserve President Eric Rosengren said today that efforts to overhaul Fannie Mae and Freddie Mac could lead to “a potential and significant shock” to the commercial real-estate sector.

The pair of mortgage-finance giants, which were bailed out by the U.S. government and placed in conservatorship in 2008 during the height of the financial crisis, have historically boasted outsize influence on the single-family mortgage market, but Rosengren expressed concern that the duo’s growing clout in the multifamily sector may pose risks, as the government considers new structures for the entities.

Job openings and hires moved sideways in March as economic momentum stalled out. The Labor Department says there were 5.74 million job openings, the same number as previously reported in February, which was cut to 5.68 million. Labor’s Job Openings and Labor Turnover Survey lags the closely watched monthly non-farm payroll data but provides more detail.

In March, the JOLTS report showed that the number of workers voluntarily leaving their jobs ticked up by 2.6%. That signals more worker confidence in the labor market.

South Korean liberal politician Moon Jae In has won the country’s presidential election. Moon’s win was fueled by a surge in liberal sympathy after the former conservative president, Park Geun Hye, was removed from office months ago. Park is now in a jail cell as she awaits trial on accusations she took about $52 million in bribes from major companies, including Samsung.

In light of the scandal with the former president, Moon was a seen as a clean candidate who would end corruption. The country’s National Election Commission said more than 33.8 million people voted in the election, a turnout of 77 percent, the highest in two decades. Moon has pushed for a more calm and conciliatory stance toward North Korea. Separately, the North Korean ambassador to the UK told Sky News the country will proceed with its sixth nuclear test.

Disney reported profits that topped expectations, but revenues that fell short of forecasts amid continued weakness at ESPN.  Disney said it earned $1.50 in adjusted earnings per share during its fiscal second quarter, and $13.3 billion in revenue. Revenues from Disney’s parks and resorts increased by 9% to $4.3 billion, helped by Shanghai Disney Resort.

Nvidia reported a 48 percent jump in quarterly revenue, helped by strong demand for its graphics chips and its diversification into fast-growing areas such as self-driving systems and artificial intelligence. Net income rose to $507 million, or 79 cents per share, from $208 million, or 35 cents per share, a year earlier. Nvidia’s revenue rose to $1.9 billion from $1.3 billion.

Yelp reported revenue of $197 million, just short of analysts’ estimates. Yelp cut it full-year 2017 estimates for revenue and earnings. Yelp was slammed – down 28%.

Passengers at an airport in Florida protested on Monday night after the cancellation of multiple flights, leading to a confrontation with airline employees and sheriff’s deputies who arrested three travelers while attempting to restore order. The airport altercation is only one skirmish in Spirit’s war, its customers’ discomfort a kind of collateral damage.

According to a federal lawsuit filed in the Southern District of Florida on Tuesday morning, the Miramar-based airline is accusing the Air Line Pilots Association, an AFL-CIO-affiliated labor union that represents more than 55,000 American and Canadian pilots, of arranging a pilot shortage and forcing Spirit to cancel flights to “purposely and unlawfully disrupting the airline’s operations” as retribution over ongoing pilot contract disputes.

In response to the Fort Lauderdale fracas, Spirit officials quickly passed the buck, blaming the incident on ALPA’s truant pilots. Spirit and ALPA have been at it since 2015, per CNN, but multiple contract negotiations have so far failed to produce an agreement. According to the lawsuit, Spirit has canceled about 300 flights in the past week alone.

A federal court granted Spirit Airlines a temporary restraining order today, compelling the pilots’ union to return to status quo. The pilots’ union said Spirit Airlines pilots will fully comply with the court to help restore normal operations.

Financial Review

Happy Day

Sinclair Noe — March 20, 2017

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

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DOW – 8 = 20,905
SPX – 4 = 2373
NAS + 0.53 = 5901
RUT – 7 = 1384
10 Y – .03 = 2.47%
OIL – .55 = 48,23
GOLD + 5.10 = 1234.90

The directors of the FBI and NSA appeared before a rare open congressional intelligence committee hearing today.

FBI Director James Comey confirmed the FBI is investigating Russia’s interference in the US election and investigating possible links between the Trump campaign and the Russian government. Comey said the FBI has “no information” to support President Trump’s allegation that Barack Obama wiretapped him.

NSA chief, Admiral Mike Rogers, weighed in as well, saying that he had no knowledge of anyone asking the British or any other ally to wiretap Trump. That seemed to refute another claim made by the White House.

Confirmation hearings for Trump’s Supreme Court nominee kicked off today. Trump nominated Neil Gorsuch, 49, to replace conservative Justice Antonin Scalia, who died in February 2016.

Meanwhile, Wall Street also braced for a contentious House vote on the GOP health care bill slated for Thursday. The bill’s passage is considered a first step toward enacting tax reform, but it has faced criticism from both sides of the aisle.

The Trump administration appealed Friday a temporary restraining order against its revised travel ban policy. The reworked executive order (which halts the issuance of visas to six majority-Muslim countries for 90 days and suspends the refugee resettlement program for 120 days) was set to go into effect on March 16, but federal judges and Hawaii and Maryland blocked it from going forward.

The Justice Department filed an appeal in the Maryland case, which will take that fight to the Fourth Circuit, based in Richmond, Va. Meanwhile, a federal judge in Hawaii declined a request from the Justice Department to narrow the injunction. That ruling clears the way for the Trump administration to appeal the judge’s initial decision to the 9th Circuit Court of Appeals.

Bill Gates met with Donald Trump today.  An agenda wasn’t released, but a statement from the Gates Foundation said it has “a long history of working with officials” on issues like domestic education and global health and development. Gates and Trump also met in December to discuss innovation.

On March 16, the Gates Foundation said that it was “deeply troubled” by the president’s 2018 budget request, released that morning. The proposal included deep cuts to both the EPA and non-military overseas aid. The next day, Gates responded with an article on the Gates Notes blog, “How Foreign Aid Helps Americans.”

The meeting of the Group of 20 in Germany over the weekend featured an apparent win for the US after the communique produced by the talks omitted warnings about protectionism. One thing that was repeated was the pledge to overhaul bank-capital rules, with the statement urging the Basel Committee on Banking Supervision to finalize the Basel III reforms.

Away from the G-20, German Chancellor Angela Merkel joined Japanese Prime Minister Shinzo Abe in calling for a concerted effort to defend free trade.

Nine months after Britain voted to leave the European Union, Prime Minister Theresa May is planning to open divorce proceedings on March 29.  May will trigger Article 50 of the Lisbon Treaty, the EU’s guiding document, which details how a country leaves the bloc. It’s never been activated and is only about 260 words long. It gives the departing country up to two years to negotiate “its future relationship with the Union.” If May has her way, the actual split will occur around April 2019.

Greece missed another deadline for unlocking bailout funds today, edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted nation to the edge of economic collapse. Prime Minister Alexis Tsipras had promised the latest bailout’s long delayed review would be completed by March 20, but many see that reaching an agreement even in April is now considered a long shot.

Deutsche Bank will issue 687 million new shares at a 35 percent discount to Friday’s closing price — to raise €8-billion-euros of fresh capital. In its annual report published today the bank said it expected revenue to remain broadly unchanged this year, while revealing that the bonus pool was slashed to €500-million-euros in 2016.

Britain’s Vodafone Group and Idea Cellular agreed to merge their Indian operations in a $23 billion deal. The combined entity would have almost 400 million customers, accounting for 35% of the market share.

Albertsons, the grocery-chain operator backed by Cerberus Capital Management, has held preliminary talks to merge with Sprouts Farmers Market. Bloomberg reports the discussions, which took place in recent weeks, are at an early stage and may not lead to a deal. The talks have involved a plan to take organic grocer Sprouts private and add it to Albertsons’ portfolio, which includes the Safeway store brand.

Unilever is preparing a $7.4 billion sale of some of its food brands, British newspapers reported on Saturday. The British-Dutch company is planning to sell Flora margarine and Stork butter brands. Unilever rebuffed a surprise $143 billion takeover offer from Kraft Heinz last month, saying the bid undervalued the company.

Pressure is growing on Twitter CEO Jack Dorsey to step down, per the Sunday Times, after a report from the University of Southern California and the University of Indiana alleged that up to 48 million of its accounts – equal to 15% of its users – were robots not people (that’s nearly twice the company’s own estimate).

The number of executive departures from Uber is growing. President Jeff Jones is quitting the company, citing “incompatibility with leadership,” while Brian McClendon, a VP responsible for the company’s mapping program, is leaving to return to his home town in Kansas. Uber has been recently plagued by allegations of sexual harassment and the combative behavior of CEO Travis Kalanick.

Bullish bets on West Texas Intermediate crude prices fell by a record amount in the week ending March 14, with wagers on further price falls doubling. Energy lender Arab Petroleum Investment Corp. sees oil prices remaining below $60 a barrel for the rest of the year.

Bank of America Merrill Lynch has published a giant list of asset class returns for the year so far. Here’s a quick rundown. Looking at global asset classes, the Pacific Rim, excluding Japan is up 9.6%, matched by Emerging Market equities, Industrial metals up 7.6%, US equites (7.2%), global equities (up 6.7%) And Euro stocks (up 4.9%).

By country; Russia’s stock market is the laggard this year after being one of the best performers in the world in 2016. India is the leader, year-to-date, up 14.5%, followed by South Korea (up 13.3%) and Brazil (up 12.8%). China and Hong Kong round out the Top Five. Russia is down 9%.

By sector, Biotech is the leader (up 11.9%), followed by information technology (up 11.6%), healthcare (up 9.3%), banks (up 7%), with consumer discretionary and financials both up 6%.

The strongest currencies against the US dollar are the Mexican peso, which took a hit following the US election in November, but has gained 7.8% against the dollar since the start of the year; followed by the South African rand, and the Australian dollar.

Natural gas prices have tumbled amid unseasonably warm weather, which implies weaker demand for heating. The US had its second-warmest February ever on record, per to the National Centers for Environmental Information.

Crude oil is also a big loser, likely to the dismay of the Organization of Petroleum Exporting Countries. The top gainers among commodities include iron ore (up 15.3%), lead (up 12%), aluminum (up 11.1%) and cotton (up 10.5%). Nat gas is down 20% and WTI crude is down 9%.

Or, if you want to keep it simple, Apple hit a record high today, and it is up about 23% from the start of the year. Of course, you still must decide if you want to run with the bulls or buy the dips.

Italy is ranked the healthiest country on Earth in the Bloomberg Global Health Index of 163 countries. A baby born in Italy can expect to live to be an octogenarian.

Even though economic growth in Italy has stagnated for decades, and almost 40 percent of its youngsters are out of jobs and it’s saddled with one of the world’s highest debt loads relative to the size of its economy; Italians are in way better shape than Americans, Canadians and Brits, who all suffer from higher blood pressure and cholesterol and poorer mental health.

Italy also has “an excess of doctors.” Then there is the diet, rich in vegetables and drizzled with extra virgin olive oil. Each country in the index was graded based on variables such as life expectancy, causes of death and health risks ranging from high blood pressure and tobacco use to malnutrition and the availability of clean water.

Iceland, Switzerland, Singapore and Australia rounded out the top five most-healthy countries in the index. The U.S. placed No. 34 with a health grade of 73.05 out of 100. It’s ranking for prevalence of overweight people is 67.3 — tipping the scale as one of the world’s heaviest nations.

Norway is now the world’s happiest country, per the 2017 World Happiness Report. The Central African Republic was the least happy of 155 countries. The report was prepared by the Sustainable Development Solutions Network, an international panel of social scientists convened by the United Nations.

Researchers used a scale of zero to 10, covering six areas: gross domestic product per capita, life expectancy, support from relatives or friends, charitable giving, freedom to make life choices, and perceived levels of government and corporate corruption. Norway and several other Nordic countries dominated the top of the list.

America’s rank on the happiness scale is falling.

Even as the country pulled off an economic turnaround, with increases in income and unemployment falling to historic lows, Americans are becoming less happy. When it comes to happiness, the US ranked 19th among the 34 countries in the Organization for Economic Cooperation & Development in 2016, down from third among 24 countries on a similar measure in 2007.

And today is the first day of Spring. Enjoy.