Financial Review

Meet the Press

Sinclair Noe — January 11, 2017

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DOW + 98 = 19,954
SPX + 6 = 2275
NAS + 11 = 5563
RUT + 2 = 1373
10 Y – .01 = 2.37%
OIL + 1.57 = 52.39
GOLD + 4.20 = 1192.50

The Nasdaq pushed to fresh record highs again. The S&P and Dow are very close to records. The S&P 500 index was unchanged yesterday – not a small move – unchanged.

So, we did a little digging. The last time the index ended a trading day flat was Jan. 3, 2008. Before 2008, the benchmark index had gone nearly 11 years without posting an unchanged day. Since 1980, the S&P has recorded just 10 unchanged sessions.

There were no top-tier U.S. economic reports, nor any Fed speeches. President-elect Trump held his first press conference since the election, and yes, it moved the markets.

The healthcare sector dropped after Trump said the country needs more competitive drug bidding. He said pharmaceutical companies are “getting away with murder” by charging high drug prices. Health care dropped more than 1.5 percent as the worst performer in the S&P 500, with the pharmaceuticals sub-sector down more than 1.5 percent and the biotechnology sub-sector off nearly 3 percent.

Lockheed Martin dropped about 1 percent after Trump said the F-35 fighter jet project “is way behind schedule and billions over budget.” Mexico’s peso weakened to a historic low of 22 per dollar, then bounced higher. Gold gained and the Dow dropped.

The dollar dropped as Trump talked about trade but then rebounded when Trump said: “There will be a major border tax on these companies that are leaving and getting away with murder and if our politicians had what it takes they would’ve done it years ago.”

Trump insisted he will not divest himself of his businesses as he assumes the presidency; he will turn over operations to his two oldest sons and will not be involved in operations. The Trump Organization will not enter into any new deals with foreign partners.

Prior to the press conference a Trump lawyer said any profits from foreign government payments to his hotels will be donated to the US treasury. The press conference probably raised as many questions as it answered regarding conflicts of interest.

Trump first said he thinks Russia directed cyberattacks on Democratic Party targets, but later made his view less clear. He said the hacking activity “could be others” and repeatedly deflected attention to attacks by China and other foreign countries and institutions.

He contended that Russia will no longer hack the U.S. when he is president but did not answer questions about whether he will uphold Obama administration sanctions in response to suspected interference in the 2016 election.

Trump blasted BuzzFeed for reporting on unverified allegations that Russia put together compromising information on him. Trump called BuzzFeed a “failing pile of garbage,” arguing the online media outlet “will suffer the consequences.” He also took CNN to task for “going out of their way to build it up,” before refusing to take a question from CNN’s Jim Acosta; saying, “Your organization is terrible. I am not going to give you a question, you’re fake news.”

This story about a possible Russian dossier of compromising info about Trump also raises more questions than it answers, not just about Trump, or the media, but also about the intelligence community. Strange days indeed.

So, it was an interesting and unique press conference. It also shifted focus off the confirmation hearings, which continue on Capitol Hill.

The World Bank says global growth will pick up slightly in 2017. The World Bank has lowered its 2017 global growth forecast to 2.7% from its June outlook of 2.8%, but that would still be ahead of the 2.3% growth that was experienced in 2016.

The World Economic Forum told us what to worry about. WEF’s Global Risks Report, which sets the agenda for the annual confab of global heavyweights in Davos next week, identified rising nationalist sentiment, economic inequality, technological disruption (i.e., jobs becoming obsolete), and climate change as the biggest risks in 2017.

The environment is now considered not just more likely to cause global disruption, but also more capable of generating the biggest impact. The report concludes that the biggest risk for 2017 is “extreme weather events.” It’s not as if the economic risks have just magically melted away. It’s just that environmental problems are considered more urgent than before. Solutions will be discussed by world leaders and corporate bigwigs in Davos next week.

Some of those ideas were echoed in research from Wells Fargo Investment Institute which says we are in the “age of discontent” and we should invest accordingly. The report says households across the country have felt economic recovery to very different and uneven degrees post-financial crisis, according to the report, which attributes such “discontent” for market participants to frustration across economic classes, along with increased political uncertainty on the horizon.

The stark differences in economic recovery might be found in the employed versus the unemployed, savers versus consumers, and small business versus large corporations. What’s more is economic growth is not improving quickly enough for many, the report added, citing wage and real income stagnation as forces “fueling protectionism and geopolitical unrest.”

US oil output is expected to rise in 2017 and 2018. A report released by the US Energy Information Administration on Tuesday showed US crude-oil production was expected to increase by 110,00 barrels a day in 2017 to 9 million and by another 300,000 barrels a day in 2018.

Bill Gross of Janus Capital, who was once referred to as the “Bond King,” says the 2.60% level on the 10-year Treasury yield is what everyone should be watching, as a breakout above that level would mark the end of the 30-year bull market in bonds.

Gross says the 2.6% level is “much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.”

Jeff Gundlach, CEO of Doubleline Funds (sometimes called the NEW “Bond King”) says the bond bull market is dead if the 10-year hits 3.00%. During the presentation of his 2017 outlook, Gundlach said a move to 3.00% and above would have “a real impact on market liquidity in corporate bonds and junk bonds.”  If the 10-year moves back above 3% it will be the end of lower-highs in the recent trend and signal, finally, the end of an era.

Gundlach also covered high yield or junk bonds; the major points from his presentation: defaults are high, the rally is entirely predicated upon rising oil prices but seems overdone because the last time spreads were this tight oil was at $80.

Gundlach said: “Many people seem to think that because junk bonds had a great 2016 that they’re somehow not vulnerable to interest rate hikes. Nothing could be further from the truth. The junk bond market has decent interest rate risk on it, it’s just that they were depressed with commodities so low.”

As for stocks, Gundlach says they are overvalued on almost every metric. Looking at forward price/earnings ratios Gundlach says we would need a combination of buybacks funded by repatriated cash, plus lower taxes and some pro forma magic to justify valuations.

Looking to stoke demand for electric cars, BMW, VW, Ford and Daimler are aiming to build a network of ultra-fast charging stations across Europe. The 400 next-generation 350 kilowatt chargers would be nearly three times as powerful as Tesla’s, reloading an electric car in minutes instead of hours.

Airbus’s productivity surged in December, allowing it to record a full year delivery of 688 planes, but it still fell short of rival Boeing, which rolled out 748 jets to customers. But in the race for new business, Airbus recorded 731 net orders in 2016, compared with the 668 of Boeing. Still, the combined book-to-bill ratio of the two giants dipped below 1 for the first time since 2009, placing a dent in record industry order backlogs.

Canada’s largest alternative-asset manager has submitted proposals regarding its interest in buying the yieldcos of bankrupt solar company SunEdison. Brookfield Asset Management would purchase all of TerraForm Power for $11.50 per share in cash, or a total consideration of $1.6B, and may even raise its offer to $12.50 per share if it can also buy TerraForm Global.

Financial Review

Chugging Higher

Sinclair Noe — August 3, 2016

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DOW + 41 = 18,355
SPX + 6 = 2163
NAS + 22 = 2159
10 Y + .02 = 1.55%
OIL + 1.64 = 41.15
GOLD – 5.10 = 1358.70

US services companies expanded more gradually in July, with job gains slowing in a key gauge of economic growth. The Institute for Supply Management says its non-manufacturing index fell to 55.5 in July from 56.5 in June, although any reading above 50 signals growth. New orders increased over the past month, while the index’s employment and production measures remained positive but downshifted. The ISM services index has shown growth for 78 straight months.

Friday morning, we will cover the government’s update on non-farm payrolls for July – the monthly jobs report. This morning we saw a preview (of sorts) as ADP reports private-sector hiring held steady in July, and employers added 179,000 jobs in July after a revised 176,000 job gains in the prior month. Most estimates for the Friday Jobs Report are running around 185,000 new jobs. If the labor market is able to build on its recent strength, it could make the case for the Federal Reserve to raise interest rates later this year.

Atlanta Fed President Dennis Lockhart is not ruling out a rate increase at the U.S. central bank’s next meeting in September, saying “at this point… we just have to wait and see how the data comes in.” He also expressed concern about what he called lofty asset valuations in the financial markets.

When the Fed held off hiking rates in July, equity markets surged. However, the credibility of the Fed eroded, due to their verbal chatter signaling a desire for higher rates leading up to their meeting, only to be followed by no action. The economy is not a runaway train; it is a slow moving train that has been very consistent at just chugging along. If the Fed is going to actually raise rates in September, chatter makes no difference; they are going to have to start pounding the table; and they aren’t.

Valuations in financial markets are lofty, but we aren’t seeing frothy markets. For more than two weeks, the S&P 500 has been virtually stuck in an amazing, maddening range of less than 1%. This is an almost unheard-of level of inaction.

The S&P 500 is overbought, which would normally play out in one of two ways: The market continues in a sideways consolidation where the bears balance out the bulls and put the market back into a more normal condition or we get a profit-taking pullback (where traders and investor decide to cash in on some of the profits they’ve made over the past three to four weeks). And while August is a historically volatile month, the consolidation pattern we’ve seen would argue for a breakout to the upside – again, it might be preceded by a slight pullback.

The bull stayed on track today, chugging just a bit higher, once again frustrating naysayers crying “what goes up must come down.” The S&P 500 rose 0.3% to 2163.79 today, which is not exactly a huge move. But markets looked very strong below the surface. The Russell 2000 was up 0.9%, showing pretty solid out-performance. We also saw a major intraday rebound in crude oil prices on today’s E.I.A. inventory report, which in turn pushed up energy stocks. And on the flip side, traders took profits in safety assets like gold, silver, and utilities stocks.

Of course, this market could jump the tracks in an instant. Bill Gross and Jeff Gundlach think so. Gross, a fund manager at Janus Capital once known as the “bond king” of Pimco, wrote in his monthly investment outlook for August, “I don’t like bonds; I don’t like most stocks; I don’t like private equity.” Gundlach, who manages more than $100 billion in assets at DoubleLine Capital, was even more direct in an interview with Reuters at the end of last week: “Sell everything.”

Although stocks have done well, with the S&P 500 recently reaching an all-time record high, Gundlach thinks equity investors are deluded. He says economic growth is weak and corporate earnings are stagnant. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”

The Bank of England meets tomorrow and they are expected to cut interest rates for the first time in seven years this week, in reaction to a string of data pointing to a sharp economic downturn following the U.K.’s vote to leave the European Union. The Bank of England was expected to cut rates at its July meeting, but they did not deliver.

The July minutes referred to “preliminary signs” of a post-Brexit impact on business confidence, the bank pointed out it had no official data on economic activity to warrant a rate cut. Instead, the minutes said “most members of the committee expect monetary policy to be loosened in August,” setting the stage for action this week.

Weekly applications for U.S. home mortgages fell to their lowest level in five months even as borrowing costs declined. The Mortgage Bankers Association said its seasonally adjusted index of mortgage activity for home purchases, a leading indicator of housing sales, fell 2 percent in the week ended on July 29 to its lowest level since late February. The MBA’s seasonally adjusted gauge on refinancing applications fell 4 percent from the prior week. It reached its highest level since June 2013 in the week ended on July 8. Thirty-year loan rates hit a more than three-year low last month.

Nearly 120,000 units of digital currency bitcoin worth about $72 million was stolen from the exchange platform Bitfinex in Hong Kong, in the second-biggest security breach ever of such an exchange. Bitfinex is the world’s largest dollar-based exchange for bitcoin, and is known in the digital currency community for having deep liquidity in the U.S. dollar/bitcoin currency pair. Bitcoin prices fell sharply overnight, sliding as much as 22% to $480.

HSBC  cast doubt over reaching its profitability targets after first half earnings tumbled 29% on year – just shy of expectations – due to a slowdown in its key markets of Britain and Hong Kong.

Societe Generale and Credit Agricole beat estimates, reporting a jump in second quarter net profit helped by a gain from their stake sales in Visa Europe.

Rio Tinto reported its weakest first-half earnings in 12 years, down 47% as iron ore and copper prices fell, but the results beat analyst forecasts. Rio Tinto also cut its interim dividend by 58% to $0.45 a share.

After the closing bell, Tesla Motors reported its 13th straight quarterly loss as a rise in sales of its Model S and Model X electric cars failed to make up for the huge cost of ramping up production. Tesla said its net loss widened to $293 million.

Aetna has become the last of the five major national health insurers to project a loss on Affordable Care Act plans for 2016, underscoring concerns about the stability of insurance marketplaces at the heart of Obamacare. Aetna also said it would re-evaluate its participation in the 15 state exchanges where it currently sells plans and cancel a planned expansion into more.

Wal-Mart is in talks to buy Jet.com, a year-old online rival, as part of a multi-billion-dollar revamp of its e-commerce division aimed at boosting online sales growth. The talks were reported by the Wall Street Journal, which said Jet.com could be worth as much as $3 billion. Wal-Mart is playing catch up with Amazon.com on distribution and technology.

The acquisition could give it access to Jet.com’s innovative pricing software, its network of warehouses and customer data. For the past five years Wal-Mart has been on an acquisition spree, buying 15 startups in an attempt to bring in the talent and technology needed to drive e-commerce growth.

Without giving a reason for the delay, Toyota has postponed the global launch of its plug-in Prius gasoline hybrid model to winter. It had planned to start selling the car in Japan, North America and Europe around autumn. A spokesperson also said it would reduce initial production of the model, although output would eventually pick up according to demand.

Time Warner has purchased a 10% stake in Hulu for about $583 million. Time Warner networks like Turner Classic Movies, Cartoon Network, CNN, TNT, and TBS will be available live and on-demand on Hulu’s new service—a service that will now be even more appealing to consumers looking to give up on their cable bundles.

The opening ceremony isn’t until Friday, but the Olympics officially kicked off at noon on Wednesday with a women’s soccer match between Sweden and South Africa. Every team in the women’s soccer competition is playing today, on what Google’s Olympic calendar refers to as “Day -2.” The men’s soccer competition begins on Thursday. Other than soccer, men’s and women’s archery are the only events that will start before the opening ceremony.

Michael Phelps, the most decorated Olympian of all time with 18 gold medals among his career haul of 22, will carry the U.S. flag in Friday’s opening ceremony of the Rio Olympics. The U.S. Olympic Committee announced that Phelps, who will be the first American male swimmer to compete at five Games, had been chosen in a vote of fellow team members to lead the delegation into the Maracana stadium.