Financial Review

Wild Ride

Sinclair Noe — November 29, 2017

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DOW + 103 = 23,940 (Record)
SPX – 0.97 = 2626
NAS – 88 = 6824
RUT + 29 = 1542
10 Y + .04 = 2.38%
OIL – .72 = 57.39
GOLD – 10.00 = 1284.40

Cryptocurrency

• Number of Currencies: 1,361
• Total Market Cap: $313,200,409,865
• 24H Volume: $25,745,255,963

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	24H Volume	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	10,440.0	$176.94B	$12.43B	48.17%	1	+6.76%	+28.76%
	Ethereum	ETH	447.67	$44.05B	$2.91B	11.27%	0.0445032	+6.04%	+21.31%
	Bitcoin Cash	BCH	1,389.00	$24.35B	$2.55B	9.88%	0.140411	+3.95%	+4.72%
	Ripple	XRP	0.24450	$10.06B	$559.05M	2.17%	0.00002528	+4.44%	+9.00%
	Dash	DASH	701.27	$5.64B	$460.44M	1.78%	0.0708762	+6.09%	+27.36%
	Bitcoin Gold	BTG	298.72	$5.34B	$277.71M	1.08%	0.0310805	+6.27%	+28.06%
	Litecoin	LTC	91.090	$4.96B	$827.06M	3.20%	0.00890424	+5.06%	+27.98%
	IOTA	MIOTA	1.37200	$3.83B	$309.61M	1.20%	0.00013365	+8.28%	+54.35%
	Monero	XMR	184.21	$2.91B	$191.79M	0.74%	0.0183086	+11.31%	+15.15%
	Cardano	ADA	0.114583	$2.87B	$207.27M	0.80%	0.00001074	+3.15%	+291.80%

The Dow Industrials hit another record high, even as the Nasdaq suffered a sharp drop.

The U.S. economy’s growth rate last quarter was revised upward to the fastest in three years on stronger investment from businesses and government agencies than previously estimated. Third quarter GDP grew at a 3.3% annualized rate (est. 3.2%), revised from 3%.

The performance, achieved despite two devastating hurricanes, marked the fastest expansion in gross domestic product since a 5.2 percent annual spurt in the third quarter of 2014. Consumer spending, which accounts for about 70 percent of the economy, continues to be the main driver of growth, though revisions showed it was slightly weaker than previously estimated on purchases of both durable and nondurable goods.

The biggest improvement came in business investment, which made a 1.2 percentage-point contribution to growth. In addition to greater spending on transportation equipment, the data also reflected more software spending. Nonresidential structures were revised to a bigger decline. While the first look at third-quarter gross domestic income showed a pickup, the prior quarter was revised downward by 0.6 percentage point, reflecting a smaller gain in wages and salaries.

Price data in the GDP report showed inflation remains behind the Fed’s 2 percent goal. Excluding food and energy, the central bank’s preferred price index tied to personal spending rose at a 1.4 percent annualized rate last quarter. Gross domestic income, adjusted for inflation, rose 2.5 percent after a downwardly revised 2.3 percent gain in the prior three months; second-quarter wages and salaries were revised downward by $26.5 billion.

The GDP report is the second of three estimates for the quarter; the third is due in December.

The pending home sales index, which measures signed contracts to buy existing homes, rose 3.5 percent for the month, but is still 0.6 percent lower than October 2016. That is the highest level since June. Sales were strongest in the South, jumping 7.4 percent for the month and 2 percent compared with a year ago. That was likely due to pent-up demand after two major hurricanes.

Federal Reserve Chair Janet Yellen delivered her final testimony before the Joint Economic Committee on Capitol Hill. Yellen said the country’s economic expansion had broadened and strengthened, and that she expected the growth to continue. Yellen was careful to say that the economy could be doing better. She noted that the pace of economic growth remained slow by historical standards.

The two major determinants of growth, the number of workers and the productivity of the average worker, are rising slowly. She said, “Congress might consider policies that encourage business investment and capital formation, improve the nation’s infrastructure, raise the quality of our educational system, and support innovation and the adoption of new technologies.”

She did not offer an opinion on tax policy but warned that debt-to-GDP ratios – around 75% – were high, though not excessive.  She added, “It’s the type of thing that should keep people awake at night.” In response to a question, Yellen added, “The equity of the tax code is important and should be taken into account.”

She also said changes in fiscal policy could affect how quickly the Fed raises rates. Fed officials have drawn a careful distinction between tax cuts that increase economic capacity — for example, by encouraging business investment — and tax cuts that provide a short-term sugar high, such as cuts in personal income taxes that would likely increase spending.

The Fed estimates that the economy is already growing at something close to the maximum sustainable pace. A short-term stimulus, therefore, would likely raise inflation. In turn, the Fed could seek to offset faster inflation by raising interest rates more quickly.

Also, today, at the ASU Economic Forecast Luncheon in Phoenix, San Francisco Fed President John Williams delivered an upbeat assessment of the economy, and falling unemployment is expected to put pressure on inflation… eventually, Williams anticipates the Fed will keep raising interest rates gradually.

Williams said, “The next time you see a headline about stubbornly low inflation, you can smile to yourself, knowing that the mystery isn’t all that mysterious after all. With the economy doing so well this year and based on the historical pattern, I expect to see a rise in inflation in 2018.” In a Q&A session, Williams said the Fed does not have plans to issue digital currency, but the central bank is interested in the underlying technology and is actively researching it.

Yesterday, Bitcoin hit $10,000. This morning it hit $11,000 – but by the end of the day it was back around $9,290. Wild ride doesn’t begin to describe it. Trading volume was a whopping $9.75 billion over the last 24 hours, according to CoinMarketCap, compared to $2.26 billion for digital currency Ethereum. The heaviest selling came amid reports of service outages and delays on some of the largest online exchanges. If it looks like a bubble, and walks like a bubble, and charts like a bubble….

If bitcoin is a bit too crazy for you, starting in 2018, investors can dump their money into deeply unBogle-like, totally non-passive Vanguard exchange-traded vehicles with flavors like volatility, momentum, value, and, for some reason, low liquidity. That’s right, actively managed ETFs.

Members of the Organization of the Petroleum Exporting Countries and other key producers, including Russia, meet on Nov. 30 to discuss whether to continue to limit production to drain global inventories to help push up prices. They cut production by 1.8 million barrels per day (bpd) in January and agreed to hold down output until March. The market had expected OPEC to extend the limits by another six to nine months, but this is now less certain.

The Supreme Court heard arguments today on whether police need a warrant for cellphone location data in a case that could reshape digital privacy protections. The defendant in the case was convicted of participating in a series of robberies, based in part on records provided by his cellular carrier showing his movements over several months. The defense lawyer said prosecutors had violated the Fourth Amendment, which bars unreasonable searches, by failing to get a warrant for the information.

The court’s decision in the case, Carpenter v. United States, will apply the Fourth Amendment, drafted in the 18th century, to a world in which people’s movements are continually recorded by devices in their pockets and cars, by toll plazas and by transit systems. A ruling in Mr. Carpenter’s favor could revise a fundamental Fourth Amendment principle: that people have no reasonable expectation of privacy when they voluntarily turn over information to a third party, like a phone company.

Recent Supreme Court decisions have expressed uneasiness with allowing the government to have unfettered access to vast amounts of digital data. By the end of arguments, at least five justices seemed prepared to limit the government’s power to obtain records from cellphone companies showing their customers’ locations over long periods of time. But there was no consensus about a rationale for a decision or about how far the court was prepared to go to reshape longstanding constitutional doctrines that allow the government to obtain business records held by third parties.

The Office of the Comptroller of the Currency has advised Wells Fargo’s board of directors that it is weighing a formal enforcement action against the bank over improprieties in its auto-insurance and mortgage operations. In a letter this month, the OCC said Wells had willingly hurt customers in the two businesses and had until Nov. 24 to respond. The OCC letter said Wells repeatedly failed to fix problems in a broad span of areas, not just auto insurance and mortgage-lending.

Nokia is reportedly in talks to buy Juniper Networks.  The offer would value Juniper at around $16 billion.

A scheduling glitch that allowed American Airlines pilots to take vacation at the same time has left thousands of flights during the busy holiday travel period next month without pilots assigned to them. Pilots loaded up their schedules with flights in early December, but many opted to take days off around the holidays, after the system allowed it.

American Airlines is now offering pilots 150 percent of hourly pay to work those dates. It was unclear how much the scheduling problem will cost American Airlines. Whoops.

Financial Review

Wallonia World

Sinclair Noe — October 21, 2016

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DOW – 16 = 18,145
SPX – 0.18 = 2141
NAS + 15 = 5257
10 Y – .01 = 1.74
OIL + .57 = 51.00
GOLD + .50 = 1266.70

The Dow and S&P 500 ended well off their lows of the session, while the Nasdaq rallied and all three indexes ended a string of back-to-back weekly declines. For the week, the Dow advanced 0.04%, the S&P gained 0.38% and the Nasdaq picked up 0.83%.

And we are seeing higher oil prices even as the dollar continues to strengthen, back to the highest level since February; the Dollar Index topped 98. A higher dollar should affect commodity prices as well as US exports. The US is likely to embark on raising interest rates in December while others such as England and the EU are still discussing easing monetary policies. The CME FedWatch Page now puts the odds of a rate hike in December at slightly over 74%.

There are no economic reports on today’s calendar but we do have speeches from a couple of Federal Reserve officials; Fed Governor Daniel Tarullo is kind of the Fed’s point person on regulation; he spoke today at the Columbia Law School and said the Fed may introduce new more measures to test big banks’ capital and liquidity levels are strong enough to safeguard the financial system.

San Francisco Federal Reserve Bank President John Williams called for gradual rate hikes “sooner than later,” saying that waiting too long to do so could end up forcing sharp rate hikes that could choke economic growth. Williams is not a voting member of the FOMC this year. For Williams, raising rates soon and gradually has the best chance of keeping the economy growing without letting inflation get out of control, a circumstance that would require aggressive rate increases that could tip the economy into recession.

Last week Fed Chair Janet Yellen suggested that running a “high pressure economy” may be the best way to reverse damage from the financial crisis. That phrase was taken to mean a willingness to overshoot on the Fed’s inflation and employment goals for some time.

British American Tobacco has offered to acquire the 58% in Reynolds American it doesn’t already own for $47 billion in cash and shares. BAT’s proposal is worth $56.50 a share, or 20% above Reynold’s closing price of $47.17 yesterday. The deal would bring together Newport, Kent and Pall Mall cigarettes under one umbrella and create the world’s largest publicly traded tobacco company.

Qualcomm might finally put its cash to work. CNBC reports they have agreed in a handshake deal that Qualcomm will pay $110 a share for NXP Semiconductors, in a deal that would be close to $40 billion. Qualcomm has about $30 billion in cash, most of which is overseas, so acquiring a foreign company is attractive. NXP works on chips for cars, security and the internet of things, all emerging business for Qualcomm, which specializes in wireless technology like mobile phones.

AT&T and Time Warner are reportedly discussing a merger. The two sides held informal talks to discuss potential business opportunities, including a merger. Time Warner has a stock market value of nearly $73 billion. AT&T is much larger, with a market value of $231 billion. There seems to be a theme for wireless carriers to diversify by acquiring companies that offer content. And if you are experiencing a little déjà vu right now, it means you are probably old enough to remember the last time that Time Warner was one-half of a massive merger, a catastrophically ill-fated marriage to AOL 16 years ago.

At the time, AOL was an Internet juggernaut at the peak of the dot-com bubble, with a market cap of $224 billion and an aggressive appetite for growth. The deal made a certain sort of sense: Buying Time Warner would give AOL access to the old media company’s deep well of movies, TV programming and news, while Time Warner would be vaulted into the future of online distribution. “Synergy” was the buzzword. The deal went wrong; very, very wrong. AOL Time Warner had to write off $99 billion in goodwill. Just sayin.

Yesterday we told you the Wall Street Journal was planning major revisions to the newspaper, including combining sections. Today, word the paper is telling all news employees worldwide they are eligible for an “enhanced voluntary severance benefit” – that’s the first step; the next step is “involuntary layoffs”.

The earnings season is picking up pace as investors gauge the strength of corporations amid uneven economic growth. More than 80 percent of the S&P 500 Index’s companies that have released third-quarter results so far beat expectations, but it might not be enough to avoid another quarter of declining earnings.

Schlumberger reported earnings that beat estimates, but 82 percent lower than a year ago. The oilfield services company’s revenue fell slightly short of analyst forecasts. Schlumberger said there were early signs of recovery in most parts of the world, following a two-year slump in oil prices that put the brakes on global drilling activity.

McDonald’s reported third-quarter results that beat estimates. Global same-restaurant sales increased 3.5%, and same-restaurant sales in the U.S. grew 1.3%.

General Electric posted worse-than-expected revenue growth in its latest quarter. GE’s power, aviation and renewable energy segments drove industrial revenue growth, as transportation and oil and gas continued to post declines. GE said it would increase its stock-buyback program by $4 billion.

Two weeks ago, Honeywell lowered its sales and profit outlooks and preannounced the third-quarter results, saying an unexpectedly weak September and lackluster performance in the aerospace segment hurt profit. This morning, they reported results that matched the lowered expectations. For the fourth quarter, Honeywell expects sales to fall 7% to 9% due to weakness in the business jets, defense and space areas.

SAP SE climbed as it boosted its earnings and sales estimates.

Daimler AG fell amid a lower revenue forecast.

Ericsson AB slid after posting a loss.

Dyn is one of a number of outfits that host the Domain Name System, or DNS, which functions as a switchboard for the internet. The DNS translates user-friendly web addresses into numerical addresses that allow computers to speak to one another. Without the DNS servers operated by internet service providers, the internet could not operate.

And today, the internet stopped operating, at least for a while, mainly along the east coast. Dyn was attacked, a distributed denial of service attack where hackers flood the servers that run a target’s site with too much internet traffic, until the site collapses. In this case, the attack was aimed at the Dyn infrastructure that supports internet connections.

The result is that millions of internet users temporarily lost access to some of the world’s most popular websites, including: Twitter, Spotify, Reddit, CNN, Etsy and PayPal. It was a big attack, but it is too early to determine who was behind the attacks, but they appear to be precisely calibrated and on a very large scale.

It’s not just Samsung products that are overheating — Apple now has a problem, but with counterfeits. Apple said it has been buying accessories on Amazon bearing the Apple name and found that a whopping 90 percent of those are counterfeit. Even more troubling, Apple said, the phony products “pose an immediate threat to consumer safety,” because they haven’t been put through the rigorous industry standard testing Apple uses. Apple filed a lawsuit in U.S. District Court in San Francisco against Mobile Star, the company selling many of the products Apple bought on Amazon.
 
Will Japan ever escape deflation? This should come as no surprise to anyone, but Bank of Japan Governor Haruhiko Kuroda says the Bank of Japan may once again push back its 2% inflation target, which currently sits somewhere in fiscal 2017. Kuroda started his job in early 2013 and began his turbo-charged asset-purchase policy that continues to this day; he originally hoped that inflation would hit 2% by late 2014 or 2015. Almost four years later, inflation has disappeared after an initial rise.

U.K. Prime Minister Theresa May marks her first 100 days in office today, a term that has thus far been completely dominated by the Brexit debate. Prime Minister May clashed with her European counterparts in her first EU summit, where she was only allowed to give a brief update on Brexit over dinner. Though British diplomats have been calling for preparatory talks, EU leaders have remained united that no negotiations will occur until Article 50 of the EU’s treaty, which begins the official process to leave the EU, is triggered.

Have you ever heard of Wallonia? It is not some fictional country from a Marx Brothers movie, rather it is a province in Belgium, and it is the unlikely cog in the wheel of a trade deal between Canada and The Euro Union.

The fate of the trade pact with Canada — the Comprehensive Economic and Trade Agreement, or CETA — has become a symbol of how the European Union’s ability to act decisively on the world stage is losing out to parochial concerns and rising discontent with globalization. Belgium’s prime minister can only sign off on the trade pact if all provinces approve. Wallonia’s prime minister opposes the deal because he says the accord could undermine public services and industries like farming.

MetLife decided earlier this year to cut most of its U.S. life-insurance business. Now it is cutting ties with Snoopy. The 148-year-old company first used the Peanuts’ cartoon character in advertising 31 years ago as it tried to connect with U.S. consumers.

Snoopy, created by cartoonist Charles Schulz, now appears on everything from MetLife blimps to the company’s marketing and sales materials. But that need to reach consumers will shrink when MetLife spins off the bulk of its U.S. life-insurance business in the first half of 2017. Afterward MetLife will sell mostly to corporate clients in the U.S.

Financial Review

Take the Overs

Sinclair Noe — August 19, 2016

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DOW – 45 = 18,552
SPX – 3 = 2183
NAS – 1 = 5238
10 Y + .04 = 1.58%
OIL + .27 = 48.49
GOLD – 12.50 = 1340.60

Oil has entered bull-market territory, as both WTI and Brent benchmarks extended their gains past 20 percent over the past three weeks, and up over 8% for the week. The rally has been fueled by speculation OPEC is poised to freeze production, divisions between major powers over output targets remain ahead of next month’s meeting in Algiers.

Saudi Arabia reported yesterday that it hiked its oil and refined-product exports to the highest level for June ever recorded, at 8.8 million barrels a day, as the kingdom seeks to grow market share and address its budget deficit. The S&P GSCI Crude Oil Total Return is up 15.2%, its biggest six-day gain, ending Aug. 18, 2016, since the six-day gain of 16.1%, ending on Apr. 13, 2016.

A side note: yesterday we got state-by-state reports on July Jobs figures (the national report comes out on the first Friday of each month and about 10 days later we get the breakdown by individual states). As we reported yesterday, Arizona’s unemployment rate rose 0.2% to 6%. You might think the oil producing states have suffered huge job losses; well, yes, but not so bad. Louisiana has a 6.3% unemployment rate, but about half the state is under water. South Dakota’s unemployment rate is still the lowest in the country at 2.8%; North Dakota at 3.1%; Texas 4.6%; and Oklahoma 5%.

Aiming to drill for crude in Mexico’s deep-water oil areas, Exxon Mobil, Chevron and Hess have reached an agreement to bid on producing oil in 10 areas up for auction on Dec. 5. Mexico hopes to raise $44 billion in its first-ever sale of deep-water drilling rights in the Gulf of Mexico, located in the Perdido area near the maritime border with the U.S.

The dollar trimmed its losses, rising against all 16 of its major counterparts, but that wasn’t enough to stem its second weekly decline as markets continue to waver on whether the Federal Reserve will hike rates this year. The dollar’s losing streak against this year’s best-performing G10 currency, the yen, is even longer at a fourth consecutive week of losses: The Japanese currency is trading near its strongest levels in almost three years.

San Francisco Federal Reserve Bank President John Williams joined a growing chorus of his colleagues signaling support for a U.S. interest rate hike in coming months, saying that waiting too long could be costly for the economy. Saying he is in no hurry to raise rates, Williams nevertheless warned that the economy could overheat if rates are kept low for too long, like a party at which the host fails to remove the punch bowl. The next signal of the Fed’s intent is likely to arrive next week at the Jackson Hole monetary symposium on August 26; Fed chair Janet Yellen is scheduled to speak and there is growing anticipation that she will take a hawkish stance on September rate hikes.

In a letter to investors, Elliott Management’s Paul Singer wrote that we are experiencing the “biggest bond bubble in world history” as investors continue to rush in despite low and negative yields. The man, known best for suing Argentina over its debt restructuring, called the global bond market “broken” and warned that the end of the current environment will be “surprising, sudden, intense and large.” Singer brings up a valid concern, even if he is a bit dramatic in the presentation.

About $12 trillion of the government bond market currently trades at a negative yield; that’s basically a guarantee of losses. The average yield on the 10-year Treasury note over the past 145 years is about 4.55%; the current yield is 1.58%. If that difference, or deviation, was the only thing you considered, then we might call it a bubble. But about one-third of outstanding bonds are held by central banks around the globe.

And that means that if inflation starts running wild or if liquidity dries up, the anticipated response is another round of bond buying. Central bankers have deep pockets. Singer’s latest assessment of the market is stark and bold. He said that “Everyone is in the dark, experience doesn’t count much, and extreme confidence may be fatal.” Yeah, maybe, but not today.

British Prime Minister Theresa May will not begin formal divorce talks on leaving the European Union before the end of the year. Bloomberg cited unidentified officials as saying that May is sympathetic to the case for acting by April at the latest.  Earlier media reports had suggested May would wait until later in 2017 to kick off the talks. The report suggests invoking Article 50 by April, ending speculation that the U.K. would have several years to prepare to leave the EU. The less time the U.K. has to get things in order, the greater the market fears the fallout. The British pound sterling moved sharply lower today.

Meanwhile, The City of London has relinquished hopes the U.K. will retain full access to the European single market for goods and services, according to the FT. Officials from the financial sector have concluded that a Norway-style deal is untenable, and are now looking to imitate and build on Switzerland’s deal with the EU, where only some industries have full access to the single market.

Wall Street is no longer New York’s biggest jobs engine. William Dudley, the New York Federal Reserve president, said in a Thursday speech that growth in the city’s tech sector was “picking up much of the slack created by the softness of the securities industry.” Dudley pointed specifically to jobs in the internet publishing, online shopping, and scientific research and development industries.

The battle over Sumner Redstone’s $40 billion media empire is over, according to media reports, bringing to a close a legal fight over whether the 93-year-old had the mental capacity to make decisions and if he was being manipulated by his daughter Shari. Terms of the settlement include the dismissal of Viacom CEO Philippe Dauman (with a $72M severance package), appointment of COO Thomas Dooley as interim chief executive and the expansion of Viacom’s board (based on the five choices of National Amusements).

A Deutsche Bank whistleblower won’t be accepting his award. Eric Ben-Artzi, a former Deutsche Bank risk officer, said in a Financial Times op-ed article that he would not accept his $8.25 million reward for blowing the whistle on Deutsche Bank because the firm’s executives should be the ones paying the award.

Two major institutional investors are suing Valeant Pharmaceuticals and six current and former top executives for allegedly engaging in “a fraudulent scheme” that cost shareholders billions of dollars. Mutual fund giant T. Rowe Price and insurance company Alleghany Corp. filed the lawsuit this week in a New Jersey court. The court filings allege that Valeant resorted to deceptive practices such as refilling patients’ prescriptions without permission and pushing sales of its high-priced medications through a secret channel of pharmacies across the US.

Once the scheme was unmasked the fallout was severe and investors were left holding the bag. Valeant shares collapsed by about 90% after its relationship with Philidor, a now-defunct mail-order pharmacy based in Pennsylvania, came to light and its practice of aggressively increasing the prices of its drugs faced more scrutiny. Valeant also faces a separate class action suit, and is the subject of a criminal investigation.

Now, emails from employees of Philidor and Valeant (one and the same really) ..., emails have been published and it paints a very sleazy picture of price gouging. And it is now looking like Valeant is the pharmaceutical industries equivalent of Enron.

The FCC has put together a “Robocall Strike Force,” it’s really just a group of tech companies getting together to try to stop people from annoying you with spam phone calls. The group – which includes Apple, Comcast, Google, Microsoft, Nokia, Qualcomm, Samsung, T-Mobile, Verizon, and dozens more – held its first meeting today. The strike force is expected to report back to the Commission by Oct. 19 with concrete plans for the development and adoption of new tools, as well as recommendations on the government’s role.

Robocalls span a wide range, from those that are legal but unwanted – telemarketers and public opinion surveyors – to the blatantly illegal – those violating the Do Not Call registry or trying to steal your money or identity. All 33 members of the strike force have already committed to five things: conforming to caller ID standards, adopting SS7 solutions, evaluating the feasibility of a “Do Not Originate” list, developing and implementing new solutions, and adopting call-blocking tech.

Today is Google’s anniversary; August 19, 2004 was the first day Google was publicly traded. The stock didn’t even survive to its tenth birthday. In 2014 it changed its name to Alphabet; still, it has been a pretty good run. Since the first day of trading, Google alphabet shares are up 1,500%.

The political betting site PredictIt has a market in how many totally false statements the two major presidential candidates will make. Yep, you can bet on politicians lying. PredictIt uses the analysis of the site PolitiFact, and statements rated “totally false.” The current odds suggest that Clinton is the more truthful – there’s a 65% probability Clinton will make just one totally false statement in August, according to the betting odds. The least amount of lies to bet on for Trump is four, and the market is split between five and six lies, with 26% odds on each.

That shouldn’t come as a surprise. In an analysis made in June, PolitiFact said Trump had more statements rated “pants on fire” than the 21 other candidates for president combined. That said, Americans don’t think either candidate is particularly honest, only 28% think Clinton is honest and trustworthy, and 27% think Trump is. And while I would never endorse gambling, if you feel compelled to place a wager, I would go with the overs.

Financial Review

Record Setting

Sinclair Noe — August 15, 2016

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

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DOW + 59 = 18,636
SPX + 6 = 2190
NAS + 29 = 5262
10 Y + .04 = 1.56%
OIL + 1.19 = 45.68
GOLD + 2.90 = 1339.60

The Dow Industrial Average, the S&P 500 index, and the Nasdaq Composite index all set new record highs. If you’ve been trading markets for any time, you know that when there is price movement out of the normal range and out of the established valuations – it can get scary.

We had just a couple of economic reports to start the day. Investors appeared to shrug off weaker-than-expected reading on manufacturing conditions in the New York region.  The National Association of Home Builders confidence index rose 2 points to 60.

Energy producing stocks were higher as crude oil rallied after Russian Energy Minister Novak said that Russia is open to cooperation with OPEC to help stabilize the oil market. Oil prices recently fell 20% from the June highs, largely because there is a glut of oil.

Russia and Saudi Arabia are probably the two most important oil producers on the planet, with Saudi Arabia the de facto leader of the OPEC cartel of oil-producing nations. Russia, alongside the US, is one of the two biggest non-OPEC producers. What the two nations do regarding oil policy has profound effects on the markets. For example, at April’s massively anticipated OPEC meeting about a freeze in production, Saudi Arabia refused to cooperate unless Iran joined in any production freeze; the meeting promptly ended and the proposal fell flat on its face.

Rosneft, Russia’s state-owned oil company, reported a massive fall in profits for the second quarter of 2016, with net income down from 134 billion rubles over the same period in 2015 to 89 billion rubles. If Russia can strike an agreement with Saudi Arabia that can help boost oil prices, or at least keep them stable, that will likely allow Rosneft return to stronger profitability. Rosneft’s results come just three days after a report from the highly respected International Energy Agency argued that the supply-and-demand imbalance plaguing oil was only going to get worse in 2017, something that would further depress prices.

M&A activity is kicking off the headlines this week with an array of deals. The technology sector is still leading the global M&A market this year, but the real estate segment is not far behind. The Wall Street Journal reports Honeywell is nearing a deal to acquire privately-held, JDA Software Group for about $3 billion, including debt.

Scottsdale, Arizona -based JDA, with more than 4,300 employees, provides integrated retail and supply chain planning and execution solutions. It sells software that helps retailers, including Walgreens and Advance Auto Parts, optimize their supply chains and merchandising. The company also provides warehouse management software to manufacturers and consumer products companies.

Real-estate investment trust Mid-America Apartment will buy Post Properties for about $4 billion in an all stock deal, bringing together two major apartment owners who have benefited from a boom in rental demand. Memphis-headquartered Mid-America currently owns or has ownership interest in more than 80,000 apartment units in 15 states in the Southeast and Southwest.  Atlanta-based Post Properties has more than 24,000 apartment units in 61 communities in Georgia, Texas, Florida, North Carolina, Maryland, Virginia and Washington.

Looking to become a major player in the smart meter market, Xylem agreed to acquire Sensus USA for around $1.7 billion, including debt, according to Reuters. The acquisition comes at a time when regulatory requirements and a drive for savings are pushing both companies and consumers to tightly control their water and energy consumption.

KKR is expected to bid for television distributor Entertainment One after the owner of the preschool cartoon character “Peppa Pig” rejected an offer from ITV Plc, Bloomberg reports. Last week, eOne rebuffed a $1.3 billion takeover offer from the British broadcaster, saying it undervalued the production and distribution company.

American International Group is nearing a deal to sell its mortgage-guaranty unit to Arch Capital Group for about $3.4 billion. The Wall Street Journal reported the companies could strike a deal as soon as early this week, although it added that the talks could still fall apart.

San Francisco Federal Reserve President John Williams says central bankers and governments must come up with new policies to buffer their economies against persistently low interest rates that threaten to make future recessions deeper and more difficult to avoid.

Williams said setting higher inflation targets, tying monetary policy directly to economic output, instituting government spending programs that automatically kick in during economic downturns, and boosting investment in education and research are all policies that should be considered.

Williams also called for changes to fiscal policy, perhaps tying tax rates or government spending to unemployment rates. Doing so, he said, would allow “predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries.”

Google’s high-speed-internet business is slowing down. Alphabet’s Google Fiber unit is rethinking how to deliver internet connections in about a dozen metro areas, including Los Angeles, Chicago and Dallas, after its initial rollouts proved more time-consuming and expensive than anticipated. In San Jose, Calif., and Portland, Ore., Alphabet has suspended projects while investigating alternate technologies.

Google Fiber is now considering wireless technology to connect homes rather than underground fiber-optic cables. Elsewhere, Google is leasing existing fiber or asking cities or power companies to build the networks. The strategy shift comes after Google Fiber reached just six metro areas in four years, illustrating the difficulty and expense of digging up streets and laying thousands of miles of cables.

About 40 companies have signed on to the so-called Privacy Shield agreement, the new data-protection pact that allows American firms to transfer information on European citizens to servers in the U.S. Among them: Microsoft, Workday and Salesforce.com. According to the Commerce Department, “there are nearly 200 applications currently involved in our rigorous review process” and the list will be updated on a rolling basis.

Volkswagen has won German regulatory approval for technical fixes on another 460,000 diesel cars fitted with software that cheats emissions tests, raising the number of vehicles cleared for repair to over 5 million. Approval by Germany’s motor vehicle authority KBA is valid for countries throughout Europe where 8.5 million diesel cars are affected by VW’s scandal. About 11 million autos are implicated globally.

Meanwhile, German carmaker Audi is rolling out technology that will allow its vehicles in the United States to communicate with traffic signals. It’s called vehicle-to-infrastructure technology, or V-to-I. The technology allows traffic signals and other infrastructure to exchange safety and other operational data wirelessly to vehicles over the cloud.

For example, the system allows the vehicle to display a countdown before a red light turns to green. The countdown will also appear on the dashboard if the vehicle determines it will not be able to make an approaching light before it turns red, to allow the driver to begin to brake. Audi plans to roll out the capability in five to seven U.S. cities this year.

Nissan Motor has come up with a new type of gasoline engine it says may make some of today’s advanced diesel engines obsolete. The new engine uses variable compression technology, which Nissan engineers say allows it at any given moment to choose an optimal compression ratio for combustion – a key factor in the trade-off between power and efficiency in all gasoline-fueled engines. The technology comes at a time when diesel engine technology has been tarnished by Volkswagen’s emissions cheating scandal.

The new Variable Compression-Turbo (VC-T) powertrain, expected to be officially unveiled at next month’s Paris motor show, will initially be showcased in an Infiniti car to be unveiled next year. The turbo-charged, 2-liter, four-cylinder VC-T engine averages 27 percent better fuel economy than the 3.5-liter V6 engine it replaces, with comparable power and torque. Nissan says the new engine matches the diesel engine in torque – the amount of thrust that helps determine the car’s acceleration. The engine is also cheaper than today’s advanced turbo-charged diesel engines.

Financial Review

Off to the Races

Sinclair Noe — January 4, 2016

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

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DOW – 276 = 17,148
SPX – 31 = 2012
NAS – 104 = 4903
10 YR – .02 = 2.25%
OIL – .11 = 36.93
GOLD + 13.50 = 1075.50

The Dow started the morning with a 467-point decline. An inauspicious start to trading in 2016 kicked off, or more accurately fell down, this morning in China. Traders in Shanghai reacted to growing tensions in the Middle East and a drop in one of China’s manufacturing gauges. Fresh manufacturing surveys revived concerns about Beijing’s economic slowdown.

China’s manufacturing activity contracted for the 10th straight month in December – the official manufacturing PMI stood at 49.7 in December. The yuan, which began new extended trading hours today, also hit its lowest point in more than four years in both onshore and offshore trade.

The China CSI 300 Index dropped 5% and that triggered circuit breakers that resulted in a 30-minute halt in trading of all stocks. When trading resumed, the traders were scared and they rushed to exit their positions. In a matter of about 7 minutes the Index dropped to a loss of 7%, and the next round of circuit breakers triggered a halt to trading for the remainder of the day.

The benchmark Shanghai Composite index closed the shortened session down 6.85% while the broader CSI 300 index, encompassing the largest listed firms by market capitalization in Shanghai and Shenzhen, slid by 6.98%. The small cap CSI 500 index fared even worse, finishing the day down 8.27%.

From there, the bad vibes in the market spread; the Nikkei in Japan dropped 3.1% even as the yen rallied on a safe haven play; the Hong Kong Hang Seng China Enterprises Index dropped 3.7%%. The Stoxx Europe 600 Index fell 2.6%, capping its worst start of the year ever as almost 580 of its companies fell. The MSCI Emerging Markets Index lost 3.5%, its worst day since August, when China devalued its currency. Benchmark gauges in South Korea, Taiwan, Malaysia, South Africa and Poland lost more than 2%.

The first trading day of the year does not seem to have any predictive capacity to tell us the direction of trading for the rest of the year. It’s about a 50-50 chance that the market follows the first day of trading in the year. Still, today was a big drop and it makes us look at historic data.

For example, in 1932, the market started the year trading down 6.9%; in 2001 the markets lost 2.8% on the first day of trading. We can include first day trading losses of under 2% in the 5 worst first days of trade including 1949, 1980, and 1983. Of the 5 worst, 2 came at the start of down years, and 3 came at the start of up years for the market.

Still you could be forgiven if you are concerned that today portends a theme in the markets. For global investors, China is a critical piece of the growth puzzle. As the second-largest economy, China drives demand around the world in commodities, consumer goods and other sectors.

The government has been trying to increase growth through stimulus measures and it has moved aggressively to prop up the stock market with a series of policy actions. The latest economic data and the big drop in their stock markets cast doubts about whether those measures are working. We don’t know and we will only know in time, but if today is any indication we may be in for a boatload of volatility.

Two Fed chiefs came out today to say they’re not worried about China. Federal Reserve Bank presidents, Loretta Mester of Cleveland and John Williams of San Francisco, basically said a weakening economy in China had already been built into the outlook for 2016 by Fed officials. Mester said, “There’s going to be volatility in the markets, that’s kind of the nature of financial markets.” Williams said the Fed would have to continue with “significant monetary accommodation” to keep growth above 2%.

Saudi Arabia cut off diplomatic relations with Iran on Sunday, giving diplomats 48 hours to leave the country, after protesters on Saturday stormed and torched the Saudi Arabian Embassy in Tehran. The move was in response to Saudi Arabia’s execution of 47 prisoners, including a prominent Shiite cleric. Bahrain and Sudan joined Saudi Arabia in severing diplomatic relations with Iran. Bahrain is home to the US Navy’s 5th Fleet.

The United Arab Emirates, meanwhile, recalled its ambassador from Tehran. So this is breaking down along religious lines between Sunni and Shia, but you might also suspect the timing involves Iran’s re-emergence as a major player in oil production.

Meanwhile, the first oil tanker of freely traded American crude oil launched Thursday from the Port of Corpus Christi, marking the end of a long-standing U.S. ban put in place in the 1970s. ConocoPhillips and NuStar Energy loaded the tanker with crude pumped from Eagle Ford.

AAA is projecting that gas prices will stay lower in 2016, estimating an average cost of $2.25-$2.45 per gallon. In 2015, the average price per gallon was $2.40 (Americans saved $540 on average). AAA also forecast that the national average would stay steady or drop another $0.10 in the coming weeks, and would not go above $3/gallon this year. Oil prices moved higher in early trade but closed slightly lower for the day.

Economic news today shows weakness in the manufacturing sector. The ISM manufacturing index slipped to 48.2% last month from 48.6% in November. Readings under 50% indicate more companies are shrinking instead of expanding. The ISM index has posted sub-50% readings for two straight months for the first time since an economic recovery that began in July 2009. An interview with ISM chair Brad Holcomb has been posted on this site. Meanwhile, Markit’s US manufacturing PMI fell to a 3-year low.

The Commerce Department reports construction spending sank 0.4% in November to a seasonally adjusted annual rate of $1.12 trillion. The October increase, originally reported as 1.0%, was revised down to 0.3%. In November, spending was 10.5% higher compared to a year ago. Private construction was down 0.2% during the month, but 12.1% higher for the year.

As a side note, the Commerce Department is revising how it counts construction spending to include private residential improvement spending. That sounds innocuous, but the improvements category account for about one-third of private residential spending, or 13% of the overall total. In November, improvements amounted to a seasonally adjusted annual rate of $144 billion. And these revisions go back 10 years, so there could be adjustments to GDP numbers as well.

The Atlanta Federal Reserve cut its forecast for fourth-quarter growth for the fourth time in the past three weeks. The Atlanta’ Fed’s closely watched forecast model now suggests that gross domestic product grew a scant 0.7% from October through December. In mid-December, the Atlanta Fed was predicting a 2% increase in GDP. It’s since lowered its forecast after disappointing reports on manufacturing, exports, construction spending and consumer spending.

This Friday’s jobs report for December, the highlight of the economic data due in the first full week of January, is expected to show nonfarm payrolls expanded by about 205,000. Even with weakness seen during the summer, job gains in 2015 will top 2.5 million, making it the second-best calendar year for U.S. job growth in this millennium, after last year’s 3.1 million. The last time more jobs were created in a two-year period was at the height of the dot-com boom, in 1998-1999.

After a disappointing 2015 for stocks, it appears the upcoming earnings season will not provide relief. Once again weighed down by the energy and materials sectors, the S&P 500 is expected to see a decline in earnings of 4.7% from the year-ago period, according to estimates from FactSet.

The only sectors expected to see any gain in fourth-quarter earnings are telecom, financials, consumer discretionary and health care. If fourth quarter earnings decline, it will mark the first time the index has seen three consecutive quarters of year- over-year declines in earnings since the first 3 quarters of 2009. The ongoing hope is that this will be one of those stock-market-earnings recessions that are able to avoid US economic recessions.

Nokia has officially gained control of French rival Alcatel-Lucent through a €15.6 billion-euro all-share deal after the French stock market authority declared the offer successful. The first day as an operationally combined group will be January 14.

Shire is in advanced talks to acquire Baxalta for $46.50-$48 per share, or about $32 billion in cash and stock, excluding debt. Final details of the transaction are still being negotiated, but the two drug makers are likely to announce a deal this week. Baxalta would benefit from a lower tax rate if taken over by Shire, and the enlarged company would generate $20 billion in sales by 2020, with as many as 30 new drugs to launch over five years.

Meanwhile, Baxalta agreed to pay Symphogen A/S of Denmark as much as $1.6 billion for the rights to develop and sell a handful of experimental cancer products that work by harnessing the power of a patient’s own immune system.

The Justice Department and the Environmental Protection Agency have filed a civil lawsuit against Volkswagen, Porsche, and Audi alleging Europe’s largest automaker knowingly sold nearly 600,000 diesel vehicles with “illegal defeat devices,” which allowed the cars to cheat state and federal emissions tests.

The suit alleges violation of the Clean Air Act and could face up to $18 billion in fines. The Justice Department is also investigating VW for possible criminal conduct related to the devices; plus, as many as 12,000 VW, Audi and Porsche owners have signed onto a class action lawsuit.