Financial Review

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Sinclair Noe — January 25, 2017

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DOW + 155 = 20,068
SPX + 18 = 2298
NAS + 55 = 5656
RUT + 13 = 1382
10 Y + .05 = 2.52%
OIL – .36 = 52.82
GOLD – 7.90 = 1201.60

The Dow Industrials topped 20,000 for the first time ever. The S&P 500 and the Nasdaq Composite closed at record highs yesterday. European markets traded higher, with many indexes up by about 1%. Most Asian markets ended the day with gains.

The Dow Industrials first hit 10,000 back in 1999 and for the next 10 years, the Dow went up and down multiple times before finally breaking out in 2009. The Dow topped 15,000 in 2013. It only took 43 days to go from 19,000 to 20k. Can it go higher? Sure, a trend in place is more likely to continue than it is to reverse – until it reverses.

The Dow Industrial Average first started in 1896 – only one company on that original list is still on the list: General Electric. And the 120-year old Dow hit 1,000 for the first time in 1972; then it crashed 40% and didn’t make it back to 1,000 until 1980. Go figure.

President Trump signed an executive action today directing federal resources toward building a border wall with Mexico. Trump said construction of the wall would begin within months, with planning starting immediately. Initially the US will pay for the wall, but Trump insists that Mexico will reimburse the costs later. Mexico’s President Enrique Peña Nieto is scheduled to visit Trump in Washington on Jan. 31.

The border wall is included in an executive action titled Border Security and Immigration Enforcement Improvements, which calls for hiring more Border Patrol agents, stricter enforcement, and expanding detention capacity, possibly with more private prisons. A second executive action, titled Enhancing Public Safety in the Interior of the United States calls for withholding federal funds from sanctuary cities.

Today’s executive actions also seek to force other nations to take back criminal aliens by using leverage such as withholding U.S. visas. And it will allow Immigration and Customs Enforcement to more aggressively arrest, detain and remove people from the US.

President Trump said today he would seek a major investigation of alleged voter fraud in the November election. Trump said on Twitter: “I will be asking for a major investigation into VOTER FRAUD, including those registered to vote in two states, those who are illegal and…even, those registered to vote who are dead (and many for a long time). Depending on results, we will strengthen up voting procedures!”

And it didn’t take long to find someone registered to vote in 2 states – Steve Mnuchin, Trump’s nominee for Treasury Secretary is registered in New York and California – which is legal – although he can only vote once. And Steve Bannon, Trump’s senior counselor was registered in New York and Florida – not that there’s anything wrong with that.

Trump also said he wants to “fight fire with fire” when it comes to stopping terrorism, suggesting that he could be open to bringing back torture because he “absolutely” believes it works. The Trump administration is also considering a 120-day suspension of refugee admissions and cutting the total number allowed into the U.S. in the current fiscal year from 110,000 to 50,000, actions that could be announced as soon as Thursday.

When will the gavel drop? According to WSJ, President Trump has culled the candidates to fill a vacancy on the Supreme Court to a handful of federal appellate judges. The list includes Neil Gorsuch, Thomas Hardiman, Raymond Kethledge and William Pryor. Trump said he would make his nomination next week, replacing the late Justice Antonin Scalia.

Trump on Tuesday signed executive actions to advance the approval of two controversial oil pipelines — Dakota Access and Keystone XL. Trump’s administration has instructed the Environmental Protection Agency to remove the climate change page from its website.

The Trump administration has also instituted a temporary gag order against government scientists at the Environmental Protection Agency and Department of Agriculture, barring the agencies from publishing any news releases, blog or social-media posts or otherwise communicating with the public about taxpayer-funded research.

The Twitter account of Badlands National Park posted a series of climate-change factoids on Tuesday, apparently, an act of defiance against President Trump, who has said he believes climate change is a hoax. The tweets were removed hours later.

Heavy pollution enveloping much of Europe has prompted emergency measures across the continent, as extreme cold, no wind and heavy burning of coal and wood for heating left many regions shrouded in smog. In several countries, including Britain, France and Belgium, officials have cautioned against physical exertion for children and the elderly. Hundreds of flights have also been canceled and heavy polluting vehicles have been ordered off the road.

Puerto Rico’s new governor wants to replace a law that allows the U.S. territory to redirect revenues earmarked for bondholders to pay for essential services. The government planned to introduce legislation on the so-called debt moratorium law today.

It’s another busy day for earnings reports. Before the opening bell, Boeing beat analysts’ profit estimates despite another charge for its military tanker aircraft and said it expects to deliver more planes and higher earnings in 2017, though revenue likely will fall. Boeing profit rose as the 787 Dreamliner emerged from a decade of losses.

United Technologies posted a fourth-quarter profit, compared with a year-ago loss, and reiterated its 2017 profit and sales forecasts. The company reported Wednesday income from continuing operations of $1.024 billion and net income, which includes results from discontinued operations, of $1.013 billion.

Under the diluted earnings (loss) per share of common stock heading, the line item for continuing operations showed $1.26, but the line for discontinued operations just showed a loss of 1 cent. For investors to get net earnings per share, they are required to subtract a penny from $1.26, to get $1.25. It’s simple math but not necessarily easy. The SEC is supposed to keep an eye on this kind of garbage accounting.

Freeport-McMoRan reported a lower-than-expected profit before the opening bell but said it would double gold sales to 2.2 million ounces this year, while selling less copper. Freeport is being helped by higher prices for both metals but its copper business has been dented recently by a ban on exports of copper concentrates in Indonesia. Since November 8, Phoenix-based Freeport has experienced an increase of just over 50%.

Alcoa Corporation logged a net loss of $125 million or 68 cents per share for the fourth quarter of 2016. Barring one-time items, adjusted earnings came in at 14 cents per share for the reported quarter, missing. Revenue topped estimates. This is the company’s first quarterly report as a standalone, publicly traded company.

Qualcomm slid after the chip maker issued a weak second-quarter outlook amid ongoing legal and regulatory challenges. Apple earlier this month filed a suit against Qualcomm for allegedly leveraging its monopoly position to demand onerous royalty rates. The Federal Trade Commission last week also filed a complaint against the company for anti-competitive practices.

AT&T reported fourth-quarter earnings in line with expectations and sales slightly below forecasts.

Cisco Systems has agreed to buy software maker AppDynamics for $3.7 billion. AppDynamics had been planning to price its IPO tonight.

Following activist investor pressure for a split, Bob Evans Farms has agreed to sell its restaurant business to PE firm Golden Gate Capital for $565 million. Bob Evans will now focus on packaged foods.

Amazon.com now has a market cap of $390 billion, and per research from Credit Suisse, the retail giant is now worth more than the top eight traditional brick-and-mortar retailers combined. For the record, that roster includes Best Buy, Macy’s, Target, JCPenney, Nordstrom, Walmart, Kohl’s and Sears.

Bottled water – not soda – is taking center stage in PepsiCo’s war against Coca-Cola. Pepsi has bought a 30-second Super Bowl ad to debut the company’s new premium bottled water brand, “LIFEWTR,” that is positioned to compete with its archrival’s “smartwater.” The product will be priced at around $2.70 for a 1-liter bottle.

Financial Review

A Weak Week

Sinclair Noe — April 8, 2016

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DOW + 35 = 17,576
SPX + 5 = 2047
NAS + 2 = 4850
10 Y + .03 = 1.72%
OIL + 2.46 = 39.72
GOLD – 1.90 = 1239.40

Fed Chair Janet Yellen says the economy is on “a reasonable path” and the rate hike in December was not a mistake. Yellen said, “We think a gradual path of rate increases will be appropriate” given the progress the economy has made and is likely to continue to make. Yellen said she doesn’t think there is a bubble, even though the market rally is stretching into year 7. And she’s still worried about the rest of the world. She said the U.S. is “suffering from a drag from the global economy.” And that is the main reason the Fed didn’t raise rates in March and almost certainly won’t do it at its next meeting in April

Meanwhile, in a speech this morning, New York Fed President William Dudley, who gets a vote at every Federal Open Market Committee meeting, said the risks to the economy are more to the downside than the upside. “The low levels of energy and commodity prices may signal more persistent disinflationary pressures than I currently anticipate, while renewed tightening of financial market conditions could have a greater negative impact on the U.S. economy. Given my outlook and risk assessment, I judge that a cautious and gradual approach to policy normalization is appropriate.” Dudley said the Fed had to be cautious about lifting rates because of the “limited” ability to reduce them.

Fed jawboning should have been sweet music to Wall Street, and stocks started the session with triple digit gains but it took a rally in the final 30 minutes to hold onto gains for the day. The major averages declined more than 1 percent for the week, the worst since Feb. 5 for S&P 500 and NASDAQ composite and the worst since Feb. 12 for the Dow Jones industrial average. The S&P 500 clung to year-to-date gains in the close after briefly erasing them as the major averages temporarily turned lower in afternoon trade.

Next week kicks off the earnings reporting season as Alcoa reports after the close on Monday. The relevance of Alcoa’s results and outlook is fairly limited; it doesn’t tell us much beyond what may be useful for the broader industrial metals space. Q1 estimates fell sharply over the last three months and are continuing to come down. Total earnings for the quarter are expected to be down -11.1% on -2.3% lower revenues. The negative earnings growth in Q1 will be the fourth quarter in a row of earnings declines for the S&P 500 index.

The headwinds remain unchanged from other recent periods, essentially a combination of Energy sector weakness, the dollar strength and global growth constraints. Please note that Q1 earnings growth would still be in the negative even on an ex-Energy basis. The magnitude of negative revisions that Q1 estimates suffered over the last three months has been the highest of all recent quarters in the comparable periods.

Fresh weakness in oil prices at the start of the period was no doubt a big driver of pushing estimates down. And there is a good chance things won’t get much better. Total 2016 Q2 earnings are currently expected to be down -5.5% on -2.1% lower revenues, a growth pace that will go down more in the coming days as companies report Q1 results and guide lower for Q2.

Oil prices jumped over 6% today, posting their largest weekly gain since February – up 8% – as draw-downs in U.S. crude stockpiles fed hopes that a punishing global oversupply may be nearing tipping point. Gasoline and diesel prices rallied along with crude, rising more than 5 percent each. Crude stockpiles fell by nearly 5 million barrels last week versus analysts’ forecasts for a build of 3.2 million barrels.

The shutdown of the Keystone crude pipeline that delivers oil to Cushing also contributed to a drop of more than 480,000 barrels at the Oklahoma delivery point for U.S. crude futures. The pipeline leak was discovered on Saturday and forced a key section of the controversial pipeline to be shut down. TransCanada initially told regulators the spill totaled about 187 gallons of oil but on closer examination they now say the leak in South Dakota is up to 16,800 gallons. Oilfield services firm Baker Hughes reports the number of oil rigs operating in US oil fields fell by 8 to a total of 354 in the previous week. At this time last year, drillers had 760 oil rigs online.

Japan’s Finance Minister has described the dollar’s recent fall vs. the yen as “one-sided movements” and vowed to intervene if necessary to continue the country’s fight against deflation. The greenback sank to a 17-month low. The dollar has tumbled nearly 10% against the Japanese currency this year. The dollar lost more than 3 percent for the week against the yen, its worst week since the one ended Feb. 12. The dollar index was slightly lower with the euro near $1.14, and the index ended the week 0.4 lower for its fifth negative week in six.

The World Trade Organization has revised its 2016 global trade forecast downward by more than one percentage point, warning that a slowdown in China and broad market volatility continue to threaten growth. In September, the WTO estimated that global trade would rise by 3.9% this year, but it now sees a figure of 2.8%, the same rate as 2015 and the fifth year in a row it has been below 3%.

Wholesale inventories declined by 0.5% in February, marking the fifth drop in five months and offering more evidence that first-quarter growth will be weak. Wholesale inventories for January were also revised down sharply to show a 0.2% decline instead of a 0.3% increase. Wholesale sales, meanwhile, slid 0.2%. Companies have cut back on production to get inventories in line and avoid an excess buildup. While that’s good in the long run, it also means weaker growth now and suggests companies overestimated how well the economy was performing.

The Panama Papers scandal has claimed its first banking chief executive with the resignation of Michael Grahammer, CEO of Austrian lender Hypo Landesbank Vorarlberg. With new details of offshore accounts surfacing, more high profile and political figures are looking to come clean. U.K. Prime Minister David Cameron has admitted to benefiting from a fund of his late father, but said that it was not set up to avoid taxes, and he himself paid state dues on the shares he sold.

The US government has filed an appeal of a federal judge’s decision to rescind the Financial Stability Oversight Council’s determination that MetLife is a systemically important financial institution. Earlier, Treasury Secretary Jacob Lew blasted the ruling in a statement, saying it would leave MetLife will even less oversight than before the financial crisis.

General Motors has settled a lawsuit that would have been the third bellwether case to go to trial over its faulty ignition switch linked to nearly 400 injuries and multiple deaths. The first case that went to trial earlier this year was dismissed after GM uncovered evidence the plaintiffs committed fraud, while a second trial ended with the jury determining the ignition switch wasn’t to blame for a crash despite the part being defective. GM has now paid more than $2 billion to the Justice Department, shareholders and thousands of consumers.

Saying the deal could adversely affect the country’s national defense, the U.S. military has raised concerns with a federal rail regulator over the voting trust Canadian Pacific proposed as part of its takeover bid for Norfolk Southern.

Yahoo has extended the deadline to bid for its businesses by a week to April 18. Yahoo has launched an auction of its core Internet business, which includes search, mail and news sites, after abandoning its plan to spin-off its stake in Chinese e-commerce giant Alibaba. Verizon Communications is reportedly ready to make a bid for Yahoo’s Web business, and hopes to make a merger more successful by also making an offer for a stake in Yahoo Japan.

Adobe Systems is issuing an emergency update to its widely used Flash software for Internet browsers after researchers discovered a security flaw that was being exploited to deliver ransomware. The company says more than the 1 billion users of Adobe Flash on Windows, Mac, Chrome and Linux computers should update the product as quickly as possible. Ransomware schemes have boomed in recent months, with increasingly sophisticated techniques and tools used in such operations.

SpaceX just made history by landing its Falcon9 rocket back on a barge in the middle of the ocean. The spacecraft delivered supplies to the International Space Station, then the rocket landed on a barge in the Atlantic. They had tried this maneuver 4 times before without success. Building reusable rockets that are able to land back on Earth is critical to keeping future spaceflight costs down.

The US Postal Service announced Thursday that it will drop the price of postage stamps starting this weekend; the first time it has lowered the postage rate in 97 years. The cost of a stamp to mail a standard letter will decrease from 49 cents to 47 cents this Sunday. The price of sending a postcard will also drop by a penny, to 34 cents, while international mail will go down by a nickel, to $1.15 per letter instead of the current $1.20.

Bad news if you bought a boatload of “Forever” stamps. However, this might be a good time to sit down with paper and pen and write something, and then drop it in the mail. It tends to have a much greater impact than an email or text, both for the writer and the reader.

FINANCIAL REVIEW

Sprinting Up a Mountain

Sinclair Noe — November 14, 2014

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

DOW – 18 = 17634
SPX + 0.49 = 2039.82
NAS + 8 = 4688
10 YR YLD – .02 = 2.32%
OIL + 1.74 = 75.95
GOLD + 26.40 = 1189.30
SILV + .64 = 16.41

The recent rally in the S&P 500 has been really, really strong. Today marked the 41st record high close for the S&P. In mid-September, the index dropped, and that continued until October 16th. On October 17th we told you about a bullish reversal pattern, and since then the S&P 500 has gained about 160 points. The S&P 500 has traded above its 5 day moving average for 21 consecutive sessions; this is unusual; it means the rally has been extremely strong and nearly non-stop; there were a couple of days where the index paused, but never really went down. The past 21 days resulted in a 12% gain; that’s like a runner sprinting up a mountain. The market is now extremely overbought. Typically, when the market is overbought, you might anticipate a pullback. We haven’t seen it yet, but we can anticipate and wait for the market to show us.

There are plenty of reasons to think the stock market will continue higher. First reason is that it is in an uptrend right now; a trend in place is more likely to continue than it is to reverse. Another reason is that there is a seasonal tendency for stocks to do well heading into the end of the year. And a lot of institutional investors are looking forward to a positive year and bonuses that come with a profitable year. The stock market in 2014 has not been a smooth ride.

We started the yearly wobbly, with a 5% dip in late January; that scared off some weak hands. Stocks rallied into the summer, and the S&P 500 hit 2000, then we got another 5% pullback; again, scaring off some weak hands. Followed by another rally into September, and then a quick and sharp drop of about 9%, which really did scare many of the institutional investors. Of course this was about the time the Fed was finishing QE3, and many investors were on the short side of the bond market. This was also when the Eurozone started to wobble, with Euro stocks down and Euro bonds down. The result was a flight to safety in the form of US Treasuries at the exact time that many investors were short government bonds. So September was a double whammy.

Now, the institutional players have to make up for their mistakes. Those managers are lagging the S&P 500′s positive 2014 performance, and hedge funds sitting on losses all have to figure out how to make money by New Year’s. Their bonuses and jobs depend on it. The path of least resistance is for stocks to go up. The US economy is showing signs of strength, and there is a seasonal tendency, and the trend is up.

But there are a few concerns. The first problem patch could be exposed this weekend in Australia with the G-20 meeting. Russia has sent troops and equipment back into Ukraine; there might be fighting and the future of Ukraine is in the balance. Putin is flexing Russian military muscle by sending bombers on patrol in international airspace near the US; and Russian fighters and bombers have been moving into European airspace with increasing regularity. There are reports that a convoy of Russian warships had arrived earlier this week in international waters north of Brisbane Australia, the site of the G-20 meetings.

And the reversion to Cold War animosity is not one sided. The sanctions against Russia are hurting the Russian economy. The Saudis are dumping oil and that puts pressure on Russian oil production and that is the biggest driver of their economy.

That move is also risky for the US. Five years ago at the beginning of the US shale oil revolution, drillers started to load up on debt to fund their operations and acquire new acreage to open up for exploration. In 2010, energy and materials companies made up just 18% of the US high-yield index, which tracks sub-investment grade borrowers, but today they account for 29% of the measure after drilling firms spent the past five years borrowing heavily to underwrite the operations. Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20% to $60 per barrel, it could result in up to a 30% default rate among B and CCC rated high-yield US borrowers in the industry.

And at least part of the problems in Ukraine can be traced back to US involvement in overturning the old government in Kiev. The other effect it’s having is to drive the Russians and the Asians together. This past week, President Obama signed a non-binding pollution deal with China, but before that, Putin signed a $400 billion deal to deliver gas to China. Putin is shifting Russia’s export focus and economic alliances towards Asia, particularly China. This has been underway informally for a while but clearly became a higher priority after Europe, at US behest, imposed economic sanctions on Russia over Ukraine.

The G-20 meetings are notorious for inaction, but something is about to happen in Ukraine and it will probably be quite consequential, especially in Europe. Today, Europe’s stats agency reported the 18 country Eurozone economy grew 0.2% in the third quarter, narrowly averting a triple dip recession – very narrowly. The big drags were the Eurozone’s largest economies, as a slowdown in Germany, a weak recovery in France and a triple-dip recession in Italy weighed on the region. It’s no longer a story about the periphery; the core is now weakening.

Treasury Secretary Jack Lew delivered a speech this week critical of Europe’s handling of the economic downturn, saying: “Resolute action by national authorities and other European bodies is needed to reduce the risk that the region could fall into a deeper slump.”

If you think Secretary Lew’s comments harsh, you’ll want to read unedited transcripts just published by the Financial Times from former Secretary Timothy Geithner’s memoirs. Geithner claims Europe’s leaders did indeed attempt to smash Greece back into the Stone Age out of vindictive rage; conspired to withhold debt support for Italy unless the elected leader was forced out; and mismanaged the EMU crisis for three years with a level of stupidity that makes you want to weep. When Geithner comes off as the sanest guy in the room, you know it’s bad.

And while Euro leaders can’t seem to find the gas pedal for the economy, a Russian invasion in Ukraine would certainly slam the brakes on Eurozone growth. This indicates that Euro leaders at the G-20 might make a push to avoid confrontation, and step away from Russian sanctions.

Closer to home, next week President Obama is expected to announce a broad overhaul of the nation’s immigration enforcement system that will protect up to five million unauthorized immigrants from the threat of deportation and provide many of them with work permits. That action, in and of itself, would not have a profound effect on the stock market, but late yesterday, House Speaker John Boehner said that if Obama went forward on his own, House Republicans would “fight the president tooth and nail” and he refused to rule out a government shutdown, despite saying that was not his goal. Republicans believe their best option to block the president’s immigration actions is an upcoming spending bill, which must pass by Dec. 11 in order to fund the government through the next year.

Meanwhile, the House of Representatives today approved the Keystone XL pipeline, which probably won’t find support in the Senate, and even if it does, the measure faces a presidential veto.

In economic news: the University of Michigan/Thomson Reuters consumer-sentiment index increased to 89.4, the highest level since July 2007; from a final October reading of 86.9. The two major reasons why consumers feel better: lower gas prices and a slightly strong labor market. Consumer sentiment may provide clues to consumer spending, as we head into the holiday season.

Prices paid for imported goods fell 1.3% in October. This report goes back to lower oil prices. Excluding fuel, import prices dipped 0.2% last month. The price of U.S.-made goods exported to other nations, meanwhile, declined by 1% last month.

Retailers in the United States reported strong sales in October, up 0.3%. Sales have been higher but for a 1.5% drop in receipts at gasoline retailers. But it looks like consumers are spending whatever they might be saving at the gas pump.

Separately, the Commerce Department reported today that businesses in the United States added to their stockpiles at a faster rate in September. Business inventories rose 0.3 percent in September, after a 0.1 percent rise in August. When companies add goods to their stockpiles, it typically reflects optimism about future demand.

Next week’s economic calendar includes a couple of real estate reports on homebuilder’s expectations, plus housing starts; and on Thursday the National Association of Realtors reports on existing home sales. The Fed will report on October industrial production Monday. We’ll also look for the regional Philly and New York manufacturing surveys.

On Wednesday, we’ll see the minutes from the last Federal Reserve FOMC meeting, where they ended QE3. I don’t expect we’ll find anything we haven’t seen before, but you never know.