Financial Review

Count Your Pants and Shirts

Sinclair Noe — February 23, 2017

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DOW + 34 = 20,810
SPX + 0.99 = 2362
NAS – 25 = 5835
RUT – 9 = 1394
10 Y – .03 = 2.39%
OIL + .77 = 54.36
GOLD + 12.10 = 1250.30

The Dow Industrial Average hit another record high close, its 10^th record in a row, its longest run of record closes since 1987. Not counting record closes, the last time the Dow logged gains for 10 straight sessions was March 2013. The S&P 500 finished up a fraction of a point and just short of Tuesday’s closing record of 2,365. The benchmark index set an intraday record of 2,368.00 before retreating.

Treasury Secretary Steven Mnuchin said today that he has asked his staff to explore having the U.S. government issue debt maturities as long as 50 years or 100 years. In an interview on CNBC, Mnuchin said he was not ready to make a “formal announcement” of a 50-year or a 100-year bond.

Mnuchin repeated it was the Trump administration’s goal to have Congress complete work on a tax-reform package by August. Trump has promised a “phenomenal” tax plan by early March to cut business taxes. Paying for that “phenomenal” tax plan could require an equally phenomenal rate of economic growth that experts, including the non-partisan Congressional Budget Office, say may not be possible.

Mnuchin said the administration is aiming for a 3% or higher annual growth rate, but said it make take a couple of years, probably 2018, before we see an “engine of growth” from tax reform and regulatory relief.

Mnuchin says the Treasury has no plans now to label China a currency manipulator. Later in the day, Trump called China a “grand champion” in currency manipulation.  Mnuchin also agreed with the sentiment that the stock market is a report card for how the Trump administration is doing. “Absolutely,” he said, “It’s a mark-to-market business.”

And in the first month, the administration gets the grade of a solid A. Of course, it still has a long way to go to match the 17.4% annual gains sported by the Clinton Administration. And Mnuchin should be wise enough to realize the market is fickle.

Axios reported that President Trump‘s infrastructure plans may be pushed back until 2018. Axios, citing Republican sources, said that putting off any consideration of these plans would give lawmakers on Capitol Hill more breathing room to deal with a legislative calendar that already includes a Supreme Court nomination, tax reform and repealing Obamacare.

Several construction stocks did not fare well today. Shares of Fluor, Eagle Materials, Quanta Services and Vulcan Materials all dropped at least 1.5 percent. U.S. Steel’s stock dropped more than 7 percent.

The Justice Department has rescinded a memo issued by the Obama administration that phased out the use of private contractors to run federal prisons.

The president met today with company executives to discuss how to create jobs, which is nothing unusual, except that five of those companies are laying off thousands of workers as they shift production abroad. Those companies include General Electric, Caterpillar, 3M, United Technologies and Dana. The big idea from the execs was to cut the business tax rate.

The number of Americans filing for unemployment benefits rose slightly more than expected last week, but the four-week average of claims fell to its lowest level since 1973. Initial claims for state unemployment benefits increased 6,000 to a seasonally adjusted 244,000 for the week ended Feb. 18. The four-week moving average of claims, which smooths out week-to-week volatility, fell 4,000 to 241,000 last week.

The American Petroleum Institute reported an 884,000-barrel decline in U.S. crude supplies last week, a 893,000-barrel decline in gasoline stocks and a 4.2 million barrel decrease in distillate inventories.

Official inventory data from the U.S. Energy Information Administration shows a build of 600,000 barrels, that was less than expected. Last week, EIA’s report put crude stockpiles at a record high of 518.1 million barrels. This week’s figures were for a total inventory size of 518.7 million barrels, still above seasonal limits.

Oil producers, in and outside of OPEC, have largely kept their promise to reduce collective output by 1.8 million barrels a day starting in January to tackle a global supply glut. However, a steady increase in US crude production and inventories is stoking concerns that global supply remains bloated despite these cuts.

The United States is expected to become a net exporter of natural gas on an average annual basis by 2018, per a recently released Annual Energy Outlook update from the U.S. Energy Information Administration.

The transition to net exporter is driven by declining pipeline imports, growing pipeline exports, and increasing exports of liquefied natural gas (LNG). The United States is also projected to become a net exporter of total energy in the 2020s, in large part because of increasing natural gas exports.

Low energy prices during 2016 forced Exxon Mobil to lower its estimate of its proved oil and gas reserves. The company had to shave off nearly 15%, or 3.3 billion barrels of oil equivalent, of untapped crude. It comes a day after ConocoPhillips de-booked more than a billion barrels of its oil sands bitumen reserves, citing weak global energy prices.

Wind plant manufacturing is the fastest growing job sector in the U.S. economy — and this employment has been concentrated in the “Rust-Belt” states, pivotal in swinging the presidential election. Similarly, domestic solar companies are growing 12 times faster than the overall job creation rate in the U.S. economy.

In total, renewable energy sector employment in the United States grew 6 percent in 2016 to 769,000 jobs, while employment in gas, coal and oil exploration and extraction combined fell 18 percent, to 375,000 jobs.

European budget carrier Norwegian Air Shuttle said it would begin flying single-aisle planes nonstop from the U.S. to Europe starting in June. The initial flights will connect Edinburgh, Scotland to Stewart International Airport in New York, Green Airport in Providence, Rhode Island, and Bradley International Airport near Hartford, Connecticut.  The airline is promising fares as low as $65.

McDonald’s diners will soon be able to quench their thirst for as little as a dollar. Starting in April, soft drinks of any size will cost a buck, while McCafe specialty drinks will sell for $2. McDonald’s has been looking for ways to boost profits and sales, making its popular breakfast items available all day, and recently rolling out a smaller and jumbo-sized version of its iconic Big Mac.

Jack In The Box missed estimates by 7 cents with adjusted quarterly profit of $1.18 per share, and the restaurant chain’s revenue fell short of forecasts as well.

The Model 3 electric sedan remains on schedule and will reach production of about 5,000 units per week by the end of the year. Tesla reported a wider-than-expected loss of 69 cents per share, compared with the consensus estimate for a 43-cent loss. CEO Elon Musk also announced he will likely seek more capital from investors.

Carlos Ghosn, longtime CEO of Nissan who saved the automaker from near-collapse, will leave his current post to oversee Nissan’s alliances with Renault and Mitsubishi Motors.

Square lost 4 cents per share for its latest quarter, smaller than the 9 cents forecast by analysts, while the mobile payments company’s revenue came in slightly above estimates. Square saw a better than 34 percent jump in payment volume compared with a year earlier.

Nvidia shares closed down 9.3% after a round of bearish analyst comments prompted investors to take profits from the high-flying chip maker, which has more than tripled over the past 12 months. Instinet downgraded the stock to reduce from buy, while BMO Capital Markets cut its price target to $85 from $100.

Shares of HP Inc. rallied 8.6% after quarterly results topped Wall Street estimates.

Also, shares of First Solar led S&P 500 gainers, rising 11%.

Shares of L Brands sank 16% after the Victoria’s Secret parent late Wednesday issued weaker-than-forecast guidance for 2017. Might be feeling the pain from slowing mall traffic.

Hormel Foods shares lost 5.4% after the food company cut its earnings forecast for the year following a sharp decline in profit from its Jennie-O turkey brand.

Kohl’s Corp. shares, which had traded higher earlier after earnings beating forecasts, closed down 2.1%.

The Powerball lottery jackpot reached $435 million last night. A winning ticket was sold in Indiana. For the rest of us – back to work.

Financial Review

Goodbye Patience

Sinclair Noe — April 8, 2015

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DOW + 27 = 17,902
SPX + 5 = 2081
NAS + 40 = 4950
10 YR YLD un = 1.89%
OIL – 3.05 = 50.93
GOLD – 5.50 = 1203.20
SILV – .32 = 16.61

We start today with a big acquisition in the oil industry. Royal Dutch Shell agreed to buy BG Group for about $70 billion in cash and shares, the oil and gas industry’s biggest deal in at least a decade; since 2004 when Royal Dutch Shell was created. This is the biggest acquisition this year and the 10^th biggest M&A deal overall, and the fourth biggest deal overall in the oil industry. The merged company will boast a market value twice the size of BP, and even larger than Chevron. ExxonMobil is still the 800 pound gorilla with market cap north of $350 billion.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant buyback of $25 billion from 2017 to 2020. Shell investors reacted coolly to the deal. Shell’s B shares, the class of stock being used to finance the deal, fell about 7% percent in London. For BG it represents a 50% premium.

BG Group is the exploration part of the former state owned British Gas that was privatized by Margaret Thatcher in the 1980s. British Gas was split into BG and Centrica. The new company will be the largest producer of liquefied natural gas, or LNG, among international oil companies. Shell pioneered the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal. The deal will still need antitrust approvals from regulatory agencies in Australia, China, Brazil and the EU.

This is a very interesting deal for many reasons, not the least is the downturn in oil prices over the past year, which has been devastating for smaller or less strategically positioned companies in the oil industry. Case in point: Noble Energy just announced it is cutting 220 jobs across the U.S., with around 100 losses at the oil company’s Houston headquarters and another 100 or so at its Colorado operations. The cuts represent 10% of Noble’s 2,200 U.S. employees. The news comes after the firm said earlier this year that it was planning to slash spending by 40%.

The roughly 50% premium paid for BG Group would make sense with oil priced at $90 a barrel, which is not the current price. Of course we could see oil prices skyrocket; the situation in Yemen is a stupid mess and that is right at a chokepoint to the Red Sea; and that is just one of many potential hotspots. Absent a geopolitical flare-up, the price of oil is not likely to zoom in the face of excess supply and moderate demand.  Saudi Arabia is reporting it raised oil output to 10.3 million barrels a day in March, the highest in at least 12 years, and intends to keep producing 10 million barrels per day despite low crude prices. The Saudi oil minister says he believes oil prices will rise in the “near future”; maybe, but right now there is a glut.

America’s oil in storage just hit another record after rising by the most since March 2001. Stockpiles rose by almost 11 million barrels, or 2.3%. Analysts had expected an increase of 3.25 million barrels. The EIA report today showed the amount of oil the U.S. is cranking out also edged up slightly, to a rate of 9.4 million barrels a day. Investors have been closely watching the oil gather in storage tanks, which has been rising steadily since the oil-price crash started last year. U.S. crude production has been at the highest in decades even as drillers have made unprecedented reductions in the number of oil rigs out drilling new wells.

The last time we saw deals of this size was in 1999 when Exxon and Mobil merged at a cost of $83 billion and BP bought Amoco for $48 billion. Back in 1998, oil was priced closer to $12 a barrel, and the deal making marked a trough in prices. Shell CEO Ben van Beurden said the deal is “not a bet on the oil price.” You can believe that if you wish, but I doubt they would have made the deal if they thought oil was going to $30 a barrel for an extended period.

So oil prices are important but not the only thing. In the past 12 months, the oil majors have had to deal with the consequences of events in Ukraine and the Crimea as well as western government sanctions on Russia and the effects these sanctions have had on the profitability of their assets exposed to those sanctions. Shell was likely attracted by BG’s deepwater assets in Brazil and its LNG portfolio. BG Group is one of the world leaders in LNG and recently completed a $20 billion facility in Australia. The combination of Shell and BG will result in a portfolio that controls roughly 16% of the global LNG market. The LNG market is crucial for Europe; if Russia can’t or won’t meet Eurozone needs, this is an opportunity for Shell to seize market share. So, it looks like Shell is diversifying away from its core oil business, at a time when oil and gas exploration is becoming increasingly expensive in terms of profitability.

Earnings season is back. Alcoa unofficially kicks of quarterly earnings; a traditional thing; the aluminum company used to be one of the Dow 30 stocks; ticker symbol AA; they go first. Alcoa beat earnings estimates by a couple of cents per share but posted a slight missed on revenue projections. Overall, S&P 500 earnings for the first quarter are forecast to have dropped 2.8% from the year ago quarter, which would be the worst performance since the third quarter of 2009.

The Federal Reserve has released minutes from the FOMC policy meeting in March. That was the meeting where the Fed dropped the term ”patient” from the language surrounding policymakers’ approach to future interest rate hikes. At the time, Janet Yellen said that axing patient “does not mean we are going to be impatient.” Today’s minutes reveal that some policymakers are indeed impatient, ready to raise rates in June; others are very patient indeed, and a couple don’t like the idea of rate hikes at all. So, not much new in the minutes. As we suspected the Fed has not made up its collective mind about rate hikes even as they take a very small step closer to a hike. Uncertainty at the Fed is a recipe for volatility in the markets.

In other words, we could see markets moving in multiple directions, and some of the moves might even seem contrarian. While higher target rates from the Fed would likely slow economic activity by making borrowing costs higher, it would also signal that the economy is stronger and it would push the dollar higher. That would signal the world to bring their money to America – the safe haven play.

Switzerland today became the first country ever to issue 10-year debt that gives investors a yield under 0%. Several European countries inside and outside the Eurozone have sold government debt with up to five years of maturity at negative yields, which means investors effectively pay for the privilege of buying it. But no other country has previously stretched this out as long as 10 years. For Eurozone investors they have the option of paying Switzerland to park their cash, or coming to the US, letting the Treasury pay, plus arbitrage on a strengthening dollar.

So, it is possible that rates could move lower, even as the Fed moves closer to hiking rates. And some people argue that the Fed doesn’t really set interest rates, the bond market does. There is another old saying: “don’t fight the Fed.”

What does that mean for you? Well, if or when rates go up, investors will be able to buy newly issued bonds generating higher streams of income in the not so distant future. That means bonds go down in price, and bond funds go down.

It also means that personal debt becomes more expensive. Take a look at the makeup of your debt, too. Is your mortgage a floating rate loan? Do you have any other floating rate debt? If so, this might be the right time to lock it in place at a low rate. Mortgage rates are the lowest that many lenders have witnessed in their lifetimes; given the Fed’s clear signals, do you really want to delay acting on this? If you’ve been contemplating taking out a loan to make some home improvements, to buy a second home, or for some other purpose; and assuming that you’re in a financial position to handle the payments of course; this is probably a good time to think about the timing of your plans.

It might already be happening. The Federal Reserve reports consumer credit grew at a seasonally adjusted annual rate of 5.6%, for a gain of $15.5 billion in February. This is the fastest pace of growth since October. All of the increase came from non-revolving debt, like car and student loans, which grew at a 9.4% rate up – from a 5.8% rate in January. This is the fastest pace since February 2013. Revolving, or credit-card, debt declined at a 5% rate in February, after a 1.4% decline in the prior month. This is the biggest decline in credit card loans since April 2011. So, in a strange twist, the threat of higher rates is starting to cause increased credit activity; but that is likely temporary.

Over the longer term, higher rates mean less affordable homes and cars. Higher rates mean anything financed costs more. Higher rates mean a higher dollar and that means less profit for multinationals. The direction is clear, and most of us can see it. A CNBC All America Economic Survey shows 27% of Americans judge the economy as excellent or good, the highest level in eight years, up from 16% at this time last year. Looking forward, only 28% of Americans believe the economy will get better in the next year, well below the post-recession high of 36% in March 2012. Things are pretty good now but the road ahead is not so certain. Goodbye patience, hello uncertainty and volatility.

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

Financial Review with Sinclair Noe

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

The S&P 500 closed at another record high.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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