Financial Review

Stormy Weather

Sinclair Noe — March 13, 2017

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DOW – 21 = 20,881
SPX + 0.87 = 2372
NAS + 14 = 5875
RUT + 5 = 1370
10 Y + .03 = 2.61%
OIL – .07 = 48.42
GOLD – .80 = 12-04.70

The Dow Jones industrial average, S&P 500 and Nasdaq all turned in lackluster performance last week, with each posting declines of 0.2% to 0.5%. However, they’re still not far from all-time highs set in early March; the S&P is down about 1% from its record high.

Per Ritholtz Wealth Management, the average stock in the S&P was down just 10% from its 52-week high, and the median stock was off 6% from this high. If it sounds like the math doesn’t add up, consider that the S&P is a market-capitalization weighted index; meaning the biggest stocks count for more than the smaller stocks.

The Federal Reserve is expected to hike interest rates when they wrap up their policy meeting on Wednesday; there are also monetary decisions due from the Bank of Japan and the Bank of England on Thursday; German Chancellor Angela Merkel will meet President Trump; and The Netherlands is holding a closely-watched election.

Plus, the U.K. could formally trigger Brexit negotiations. Scotland’s First Minister Nicola Sturgeon on Monday confirmed plans for a second Scottish independence referendum.

Wednesday is decision day for the rate-setting Federal Open Market Committee (FOMC), and traders give it a 100% chance of raising the federal funds rate by a quarter point, to 0.75% to 1%. Friday’s jobs report gives policy makers a green light to hike.

An additional 235,000 jobs in February, a 4.7% unemployment rate, and wage growth of 2.8% over the past 12 months tick off one box for the Fed’s mandate; and the Fed is leery of wage-push inflation. Of course, the flip side of the argument is that there is still plenty of slack in the labor market, we are nowhere near full employment, and the Fed is overly sensitive to inflation.

The open question is whether the Fed will indicate they will continue with a couple more rate hikes this year, or maybe up guidance to 3 more hikes. It is a delicate balancing act for the Fed: raise rates too slowly and the inflation hawks will claim the Fed is falling behind the curve; raise rates too fast or too far and the Fed risks a shock to financial markets, a halt to hiring, and a possible recession.

It looks like the Fed’s era of easy money is coming to an end – they appear set to raise rates, above historic lows, back to more normal levels; probably in a very gradual, well-communicated manner. And the Fed has been very outspoken that they will raise rates; and the markets believe them. The difference this time is that there appears to be fiscal policy that can carry the economic torch. Time will tell if there is a smooth hand-off.

The Fed’s action will affect almost everyone, even if you don’t invest on Wall Street. Look for higher interest rates on credit cards, car loans, and mortgages – all of which could slow down consumers. For savers, don’t expect a quick uptick in returns on CD’s and bonds – while rates are going higher, there is usually a lag time; still we have seen the rate on the 10-year Treasury note hit 2.6%, breaking out of a very long-term bond bull trendline.

The Congressional Budget Office projects that 14 million people will lose coverage by 2018 under the Republican ObamaCare replacement bill. 24 million would lose coverage by 2026. The CBO score is way worse than most analysts had expected. Most thought 10-15 million could lose coverage, not 24 million.

The CBO estimates a disproportionate increase in people losing insurance coverage in the 50 to 64 age group with low to medium incomes. The CBO, along with the Joint Committee on Taxation, estimated that the bill would decrease the federal deficit by $337 billion over the next 10 years.

The report also estimated the impact on premiums in the individual market, saying that costs would increase in 2018 and 2019 before declining thereafter. The CBO and JCT did say that provisions of the AHCA would raise premiums for older Americans “substantially” while shrinking them for younger Americans.

The long-awaited analysis from the nonpartisan congressional scorekeeper is sure to shake up the debate over the measure, which is already facing sharp criticism from conservatives and many centrist Republicans. The GOP bill repeals ObamaCare’s subsidies to buy coverage, replacing them with smaller tax credits. The law would also cut Medicaid. Both moves were expected to lead to coverage losses.

The White House has already started complaining that the CBO analysis is flawed but remember last Friday’s jobs report; for years, Trump had complained the jobs numbers were phony, until last month came in good and then he admitted the numbers were real. And while the nonpartisan Congressional Budget Office economic estimates are not perfect, they are immensely better than any economic estimates from the White House.

Intel will purchase driverless technology firm Mobileye for more than $15 billion in cash. The deal values Mobileye at $63.54 a share, a 34% premium to its closing price Friday. Mobileye makes chip-based camera systems that power semi-automated driving features that are already being used in cars today and is working to put that technology in the center of self-driving cars of the future.

Mobileye has supply and tech-sharing agreements with several auto makers and other auto suppliers. Intel CEO Brian Krzanich said the deal “merges the intelligent eyes of the autonomous car with the intelligent brain that actually drives the car.” Self-driving vehicles are likely to be one of the most ubiquitous technologies over the next few years, with many manufacturers committing to launching autonomous ride-hailing services, and even consumer cars, by the end of the decade.

And Intel wants to be at the heart of these machines, whether with the vision systems used to see the road, or with the processors making sense of all the information cars will be receiving. When you consider that Intel missed the boat on smartphones, it seems to make sense that they would try to get an inside track on the next big thing in tech.

Lloyds is set to agree a £1.3-billion-pound contract with IBM to outsource many of its computer systems and shift more than 1,900 jobs to the IT services provider. The deal will see most of the transferred employees lose their jobs after four years. Lloyds hopes to cut almost £760-million-pounds of costs.

The federal board overseeing Puerto Rico’s finances is meeting today in New York, where it must decide on a plan for ending its chronic deficits. The island hopes to restructure more than $110 billion of debt and pension obligations, but it must first produce a credible fiscal plan. Last week, the board told Gov. Ricardo Rossello his proposal was unrealistic and asked him to make revisions.

South Korea’s impeached president finally left office. Park Geun-hye departed the Blue House on Sunday, her motorcade flanked by supporters as she headed to her home in the posh Gangnam district of Seoul. She could face prosecution and jail time for the corruption scandal that led to her ouster.

The striking union at BHP Billiton’s Escondida copper mine in Chile, the world’s largest, said it will not accept the company’s offer to return to the negotiating table, and called on BHP to clarify its negotiating positions. During the strike, which started on Feb. 9, Escondida’s 2,500-member Union has repeatedly said it has three non-negotiable demands the company must commit to before starting discussions.

Cameron and Tyler Winklevoss, the twins famous for butting heads with Mark Zuckerberg over Facebook, were denied permission Friday by the Securities and Exchange Commission to launch a bitcoin exchange-traded product (also known as an ETP). The SEC said it rejected the proposal because it was inconsistent with the agency’s Exchange Act rules, and the markets for bitcoin are unregulated.

Many tax liens and civil judgments soon will be removed from people’s credit reports, the latest in a series of moves to omit negative information from these financial scorecards. The development could help boost credit scores for millions of consumers.

The three major credit-reporting firms — Equifax, Experian and TransUnion — decided to remove tax-lien and civil-judgment data starting around July 1, if that data don’t include a complete list of a person’s name, address, as well as a social security number or date of birth. Many liens and most judgments don’t include all three or four.

New York City is preparing for what could be the season’s worst snowstorm. The National Weather Service issued a blizzard warning for New York City, forecasting 12 to 20 inches of snow and winds between 25 and 35 mph on Tuesday.

The nor’easter is expected to cripple much of the Northeast. Public schools in Philadelphia, Boston and New York City have already canceled classes for Tuesday. Flights within, into or out of the United States on Monday saw 2,613 delays and another 1,524 cancellations as of 5 p.m., ET. Another 4,779 flights originally scheduled for Tuesday were canceled.

American Airlines, United Airlines and Delta Air Lines issued travel alerts and began waiving re-booking fees for flights within affected regions. Amtrak said it would operate on a modified schedule in the Northeast on Tuesday. A flood watch is expected to go into effect Tuesday for coastal regions in New York.

Financial Review

Dead Cat Bounce

Sinclair Noe — June 28, 2016

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DOW + 269 = 17,409
SPX + 35 = 2036
NAS + 97 = 4691
10 Y un = 1.46%
OIL + 1.78 = 48.11
GOLD – 12.60 = 1312.50

Stocks bounced back across the globe after a record $3 trillion in market cap was wiped off the board in just two trading days and sterling fell to its lowest level in over 30 years. Hopes of a more coordinated central bank response to support the financial markets and firmer oil prices are helping stocks claw back some of their losses following the Brexit battering.

And after two days of brutal selling, traders are taking a breath and trying to figure out the best strategy moving forward. Even with the gains today, the Dow is down year to date, but the Dow did not take out the lows for the year, set back in February.

Same story with the S&P 500, which found some support yesterday at the 2000 level, after breaching major support around 2040 and then clawing its way above 200-day moving average resistance at 2021. And if you want to get clever, consider the Russell 2000 index of small cap stocks is also down year to date, did not take out the February lows, but did find some support at the May lows.

Now, you can easily understand that big, multi-national companies are affected by what happens in Europe, but why did the small caps take a hit? Do you buy the dips or sell the rallies?

Heads of government of the EU’s member countries are gathered for a two-day meeting of the European Council in Brussels. No country has ever left the bloc, so they are in uncharted territory as they try to figure out how to make Britain’s separation proceed as smoothly as possible. Pressure is also expected to be applied on the U.K. to trigger Article 50, which would actually start a 2 year exit process. The UK might opt for a much faster exit, or they might drag things out. Several Euro leaders have expressed the idea that the UK needs to explain what they are going to do because the uncertainty is not good.

German Chancellor Angela Merkel warned the U.K. to have no illusions about life outside the European Union. Merkel, in her toughest response yet to last week’s British vote, said that the U.K. can’t expect favored treatment once it leaves and that there will be no informal talks on a new relationship before the government in London files Article 50.

The Brits were hoping they could renegotiate trade treaties and just sort of cherry pick the best deal, while not paying into the EU or abiding by rules and regulations they don’t like. Yea, that’s not gonna happen. One of the leading campaigners for the exit side, Nigel Farage from the UK Independence Party, spoke before the European parliament; he was booed. EU Commission President Jean-Claude Juncker called Farage a liar. This is not going to be an amicable divorce.

The British government has abandoned plans to sell down its shareholdings in RBS and Lloyds in light of the Brexit referendum, leaving a multi-billion-pound hole in its finances. The Treasury had planned to cut its exposure to the domestic banks, raising £9-billion-pounds through stock sales, but the date has now been pushed back until at least 2017 given market volatility.

Moody’s will revise the outlook of “a number of big U.K. lenders” to negative from stable due to fallout from last week’s EU referendum. The plan comes just hours after rival Standard & Poor’s stripped the U.K. of its coveted triple-A rating and Fitch downgraded the sovereign debt.

The first bank casualties might be in Italy. Italy is preparing a €40-billion-euro rescue of its financial system as bank shares collapse on the Milan bourse. Italian officials are studying a direct state recapitalization of the banks, to be funded by a special bond issue. Unlike the Eurozone debt crisis in 2011-2012, there is no serious trouble yet in the sovereign debt markets. The ECB is effectively capping yields under quantitative easing. The Euro STOXX index of bank stocks has collapsed by half since last July. And Italian banks are the Achilles Heel of the Eurozone financial system. Non-performing loans have ratcheted up to 18% of total balance sheets.

The stock market sell-off did shake thing up; of course some stocks were hit harder than others.  Apple still has the largest market capitalization among US stocks, but here are some of the leadership changes. Verizon is now bigger than Walmart. Proctor and Gamble is bigger than JPMorgan. Coca-Cola and PepsiCo beat Chevron and Intel, respectively. And Home Depot is now bigger than Disney.

U.S. economic growth slowed in the first quarter but not as sharply as previously estimated. Gross domestic product was revised higher to show a 1.1 percent annual rate, rather than the 0.8 percent pace reported last month. Federal Reserve Chair Janet Yellen told lawmakers last week that data pointed to “a noticeable step-up” in GDP growth in the second quarter. The Atlanta Federal Reserve is currently estimating second-quarter GDP rising at a 2.6 percent rate. But uncertainty stoked by the Brexit vote poses a risk to growth for the rest of year.

U.S. house prices rose 1.1% in April. The S&P/Case-Shiller 20-City Index showed a stronger pace of growth in the three months ending in April. March’s reading was 0.9% higher. Compared to the same period a year ago, prices rose 5.4%, down from 5.5% in March. But there was a stark divide between cities, as usual. Super-hot metros like Portland, Seattle and Denver continue to see double-digit annual price gains, while home prices in older cities like New York and Washington rose only about 2% on an annual basis. Phoenix existing home prices rose 0.7% for April; up 5.5% for the past year.

U.S. consumer confidence moved higher in June. The Conference Board said its consumer confidence index rose to 98 from 92.4 in May. The present situations index rose to 118.3 from 113.2, while the expectations index rose to 84.5 from 78.5. However, the cutoff date was June 16, a week before the British referendum that has roiled financial markets.

Oil prices bounced about 2% today. Still, regular unleaded gasoline fell to $2.30 Monday (the nationwide average price), the cheapest price for this time of year since 2005, according to data from AAA. Consumers are reaping the benefits to the tune of $20 billion. That’s how much AAA estimates drivers have saved at the pump so far this year compared to the same period in 2015; with $5 billion of those savings were in the one-month period since Memorial Day alone.

And we are spending the savings at the pump. Americans spent 12.8 percent more on hotels and motels in the first quarter of 2016 than in the same period in 2014, while food and drink spending rose 16 percent, according to data from the U.S. Bureau of Economic Analysis. Consumers are also fueling their vices, including by spending more money on cigarettes. Not all of those gas savings are going up in smoke, however: Americans are also saving some of it for a rainy day. The average personal saving rate in the first four months of the year rose to 5.6 percent, up from 5.2 percent in the same period in 2015 and 5 percent in 2014.

Volkswagen’s price tag to settle lawsuits in the U.S. over its rigging of diesel emissions tests has jumped to more than $15 billion – $5 billion more than previously reported – with a settlement filed in a San Francisco court. VW’s deal includes $10 billion for buybacks of 475,000 polluting vehicles and nearly $5 billion for fines and funds to boost clean-emissions technology. If you own a VW affected by the emissions scandal you may be entitled to cash compensation plus a buyback of the vehicle, or you could wait for a modification to fix the problem. And if you leased an affected car you might also be entitled to cash compensation.

The U.S. Senate is set to launch a debate for establishing a federal oversight board that would be in charge of restructuring Puerto Rico’s debt where one out of every three dollars it earns in revenue is used to pay creditors. The measure is identical to the plan passed by the House earlier this month, as Congress tries to get something done by July 1, when $2 billion in debt payments come due.

A large “Four Points by Sheraton” sign has gone up outside the Havana hotel that this week becomes the first in Cuba to operate under an American brand since the 1959 revolution. The military-owned Gaviota 5th Avenue Hotel, close to the Caribbean seafront, is one of two hotels that Starwood Hotels & Resorts agreed to manage in a multi-million-dollar deal in March.

Airbnb sued San Francisco. The holiday-rental platform wants to block a law that would force it to remove listings from unregistered hosts or face hundreds of thousands of dollars in fines. It complained that the city is violating federal law by holding it accountable for unregistered apartments.

Biotech news roundup: Endo International has held discussions with Private Equity firms about potential asset sales to reduce its more than $8 billion debt pile. Pfizer is investing $350 million to build its first biotech center in China. Horizon Pharma has hired Bank of America to help it explore selling a significant equity stake that would bolster its balance sheet.

The EU is taking steps that could lead to a third antitrust complaint against Google, this time over its dominance in advertising.  Antitrust charges have been filed against Google for allegedly skewing its search results to favor its own shopping service, and more recently in April, over Google’s conduct with its Android mobile-operating system.