Financial Review

A Tight Range

Sinclair Noe — May 21, 2015

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DOW + 0.34 = 18,285
SPX + 4 = 2130.82
NAS + 19 = 5090
10 YR YLD – .07 = 2.18%
OIL + 1.71 = 60.69
GOLD – 3.00 = 1207.80
SILV + .05 = 17.23

The S&P 500 closed at a record high today.

We had a slew of economic data this morning. The leading economic index rose 0.7% in April, indicating the US economy is still expanding.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 274,000 for the week ended May 16. Despite last week’s increase, claims remained below 300,000, a threshold associated with a strengthening labor market, for an 11th straight week. The four-week average for jobless claims decreased to 266,250, a 15-year low.

The National Association of Realtors reports sales of existing homes fell 3.3% in April to a seasonally adjusted annual rate of 5.04 million. April’s sales pace was up 6.1% from a year earlier. The median sales price of used homes hit $219,400 in April, up 8.9% from the year-earlier period.

The jobless claims and existing home sales are pretty important because they are strong indicators for second quarter growth. We know the Fed is watching the labor market. It would be very difficult for the Fed to hike rates if the labor market starts showing signs of weakness. The housing data is important because this is how low interest rates provide stimulus to the broader economy. Housing is a long-term investment that is very sensitive to interest rates. It would be difficult for the Fed to hike rates if the housing market is showing signs of weakness. And so today’s economic data on jobs and housing would indicate a more accommodative monetary policy from the Fed.

The Philadelphia Fed’s manufacturing index dropped to a reading of 6.7 in May, down from 7.5 in April.

The flash reading of the Markit manufacturing purchasing managers index fell to 53.8 in May from 54.1 in April. New orders growth dropped to the slowest pace since January 2014. Export sales have declined for two straight months, adding to evidence that the strong dollar has been holding down the economy.

We know the markets are following the Fed and waiting for some direction, but for now the markets have shown very little as far as direction. The Dow Industrials have been trading in a range, a very tight range since the start of the year; and if this trend holds till the end of the quarter, it would mark the narrowest first-half trading range in the history of the Dow.

The Senate voted 62-38 on a procedural bill that sets up a vote, likely tomorrow, on the “fast-track” trade negotiating authority to complete the Trans-Pacific Partnership (TPP) trade deal. The TPP, which is near completion after more than five years of negotiations, would create a free trade zone covering 40 percent of the world economy. Trading partners have said they want to see fast-track enacted before finalizing the pact, a goal the administration has set for this year. Obama has campaigned aggressively for fast-track over objections from the left wing of the Democratic Party.

The bill must also pass the House of Representatives, where an even tougher fight is expected. Some conservatives oppose giving the White House more power, and many of Obama’s Democrats worry about the impact on jobs and the environment. Critics say the rules, currently part of the TPP, undermine governments’ ability to set domestic policy on issues such as health and the environment, although supporters argue they are essential to avoid discrimination against foreign investors.

An oil spill has caused California to declare a state of emergency. Houston-based Plains All American Pipeline has spilled as much as 105,000 gallons of crude oil on California’s coast. The spill has prompted California Gov. Jerry Brown to declare a state of emergency.

ISIS has captured the ancient Syrian city of Palmyra. The militant group seized the city in central Syria after a bloody battle with pro-government forces. The fall of Palmyra, which is home to 2,000-year-old Roman ruins, comes five days after ISIS captured Ramadi, a provincial capital in Iraq. Activists say that with the latest advance, the militant group controls more than half of Syria’s territory.

CVS Health Corp said it will buy pharmacy services provider Omnicare for $12.7 billion.  Omnicare delivers drugs and helps senior-living facilities manage residents’ medications. CVS is the nation’s second-largest pharmacy benefits manager, handling drug plans for health insurers and employers.  CVS said the deal will also help expand its presence in the rapidly growing specialty pharmacy business, which sells high-cost drugs to treat complex or rare conditions. Both CVS and Omnicare are big Part D players and there could be some scale benefits in negotiating with other payors.  According to the Centers for Disease Control and Prevention, the number of people aged between 55 and 64 having two or more chronic conditions that require medication grew 39 percent in the last decade.

Lumber Liquidators said Chief Executive Officer Robert Lynch unexpectedly resigned from his post. Company founder Thomas Sullivan is serving as CEO during the search for a permanent replacement. Lumber Liquidators is trying to win back customers after “60 Minutes” reported in March that it sold Chinese-produced laminate flooring with toxic levels of formaldehyde, a known carcinogen. While the company assured consumers its products are safe, sales have slid and the U.S. Consumer Product Safety Commission is probing the allegations. The surprise announcement today undermines all of the company’s denials; and although the resignation is not exact evidence, it raises the possibility that Lumber Liquidators knowingly poisoned customers with dangerous products. It also raises the possibility that regulators are close to taking action against the company.

What is going on in Hong Kong? With no immediate explanation, Goldin Financial and Goldin Properties, both controlled by billionaire Pan Sutong, plunged more than 60% in Hong Kong trading this morning. Before the rout, the two stocks surged more than 300% in 2015 for the biggest gains on the Hang Seng Composite Index. The tumble follows the mysterious 47% drop in 24 minutes by Hanergy Thin Film Power on Wednesday, which erased $19 billion in market value before trading was suspended.

Shopify has priced its IPO at $17, a mark above the e-commerce firm’s lifted range of $14 to $16. Shopify (Pending:SHOP) intends to list its shares on the Toronto and New York stock exchanges.

A U.S. bankruptcy judge has cleared the way for RadioShack to sell its trademark, as well as customer data and other intellectual property to a Standard General affiliate for about $26 million, rejecting a competing bidder’s claim that the auction process was unfair. RadioShack also resolved objections to the sale from several state attorneys general who were concerned the deal could threaten consumers’ privacy.

Radio Shack’s bankruptcy has left some creditors in the lurch. They owe thousand, in some cases, hundreds of thousands to a few hardware startups. For many hardware startups, or almost any kind of startup, it can be difficult to negotiate a strong contract for direct sales to large retailers, so many times the products are placed with the retailers in what is basically a consignment agreement. Radio Shack did pay one creditor, though; Apple received just north of $3.3 million. Obviously the Cupertino giant had a number of contractual clauses that required payment no matter what, a side-effect of having excellent lawyers. Other smaller players were paid portions of the money owed. Maybe they can convert to Shake Shacks.

Goldman Sachs has published its list of the stocks hedge funds like and a list of stocks they love to short. For a long time, Apple reigned “undisputed as the most popular hedge fund stock,” but a quick check of your Apple Watch will show you that times change. The most recent iteration of Goldman Sachs’ quarterly update on holdings of hedge funds shows that the drug company Actavis has taken over the top spot. Some 77 hedge funds reported having Actavis as one of their top 10 holdings. Apple is in second place, followed by Facebook, Valeant and Microsoft. The most shorted stocks by hedge funds are AT&T, Disney, IBM, Verizon, and Intel. You may recall that Apple replaced AT&T in the Dow Jones Industrial Average back in March, and since then, AT&T has gained about 6%, but for the funds it appears to be a case of guilt by lack of association.

The US Census has just released population stats for major cities. Ten US cities now have 1 million or more people; California and Texas each have three off those places. The big cities in Texas are Houston, San Antonio and Dallas. The big cities in California are Los Angeles, San Diego, and….San Jose, which just topped the one million population mark. Texas has been growing for a fairly simple reason – jobs, and many of those jobs are related to the oil industry. It remains to be seen whether the sharp decline in oil prices over the last year will jolt the growth train off the rails.

San Antonio had the fastest growth rate among US cities, up 7.7%. Phoenix has grown by 6% from 2010 through 2014. New York is the largest city in the country with 8.4 million; there are 3.9 million Angelinos; Phoenix comes in at the number 6 spot, and if current growth rates hold up, we should overtake Philadelphia for the number 5 spot sometime in late 2016.

Financial Review

The Sun Might Come Out in 2Q

Sinclair Noe — April 29, 2015

 

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DOW – 74 = 18,035
SPX – 7 = 2106
NAS – 31 = 5023
10 YR YLD + .06 = 2.04%
OIL + 1.47 = 58.53
GOLD – 7.20 = 1205.60
SILV – .07 = 16.64

Economic growth slowed in the first quarter.  Gross domestic product expanded by 0.2%, down from 2.2% growth in the fourth quarter. The Commerce Department reports consumer spending rose by 1.9%, but economic activity was constrained by bad weather in many areas, the West Coast port closures, a drop in exports (in part due to a stronger dollar), and a big decline in business spending. It is widely expected that the economy will rebound in the second quarter, much like what happened in 2014, when first quarter GDP contracted by 2.1% only to bounce back with a second quarter gain of 4.6%. Exports sank 7.2% in the first quarter, while imports edged up 1.8%. The plunge in oil prices, meanwhile, forced a resurgent U.S. energy industry to retrench. Overall, business investment on “structures” sank 23.1% in the first quarter, the biggest drop in four years. Companies did boost investment on equipment, but just barely so. Equipment spending rose a scant 0.1%.

For all of last year the economy grew at a 3% pace and that dropped down to just 0.2% in the first quarter. We can break it down to three major areas. Weather accounted for about a 1% drop; those winter storms closed roads, and stores, and offices. Some of that lost economic activity will be made up in the second and third quarters, but not all. The strong dollar also accounted for about a 1% drop in GDP. Although the dollar has weakened in the past couple of weeks, it is still fairly strong against major currencies and central banks from Europe to Japan to China are continuing to pump money into the markets and push the value of their currencies lower.  This means we probably won’t see an increase in US exports anytime soon. Oil prices moved to a four month high today, but they were lower in the first quarter and lower oil prices meant less money spent in the oil patch, but it didn’t translate into drivers spending the money they saved at the pump; that knocked about 0.6% from GDP.

But don’t worry, be happy. That’s the Federal Reserve’s new mantra. The Fed’s FOMC policy-setting committee wrapped up its third meeting of the year, and the impression from their statement is that the weak economic data from the first quarter is transitory, the sun will come out tomorrow, don’t worry. The Fed has said they would rely on economic data to determine when they might raise rates, and the first part of today’s statement listed a smorgasbord of weak data. There was no indication that the economy was about to “lift-off”, no sense of urgency to act. So, we do not expect a rate hike at the June FOMC meeting, and futures contracts only seem to give about a 60% chance of a rate hike by the end of the year. The Fed seems to think the economy will come roaring back after a long winter’s sleep. It could happen but it hasn’t happened yet.

Delivering the first-ever speech by a Japanese prime minister to a joint session of Congress, Shinzo Abe laid out his vision for deeper Japanese involvement in Asian security and global diplomacy. He made a pitch for the Trans-Pacific Partnership, a massive free trade deal that the United States, Japan and 10 other countries are now negotiating.

First-quarter earnings are on track to post a slight gain following many stronger-than-expected results. With reports in from 47% of S&P 500 companies as of Tuesday, Q1 earnings are now expected to have risen 0.02% from a year ago, beating a Thomson Reuters forecast for a 2.9% decline. Still, the raised outlook has been mainly attributed to one company – Apple. Without the tech giant, the S&P 500 forecast would show a profit decline of 1.6%.

Lumber Liquidators  said it’s been advised the Justice Department is seeking criminal charges against the company relating to the importation of certain products that possibly contain harmful chemicals, and the DOJ probe will likely cost the company about $10 million; the company also faces more than 100 pending class action lawsuits. Lumber Liquidators also reported a loss for the quarter and sales dropped more than 8% so far in April. This morning, the company announced its CFO will resign in June.

California governor Jerry Brown issued an executive order aimed at curbing greenhouse gas emissions, saying it was critical to address “an ever-growing threat” posed by global warming to the state’s economy and well-being. Under Brown’s order, by 2030, emission levels will have to be reduced by 40 percent compared with 1990. Under existing state law, emissions are supposed to be cut 80 percent from what they were in 1990 by 2050. In his State of the State address in January, the governor called for reducing gas consumption by cars and trucks by up to 50 percent over the next 15 years. California’s target reflects those set by other governments, including the European Union, ahead of the United Nations conference on climate change in Paris this year.

The Supreme Court has been hearing arguments and issuing rulings; there have been some high profile cases before the court; the issue of same sex marriage for example. And today, the justices heard a challenge of lethal injection as a violation of the ban on cruel and unusual punishment.

There is another case that hasn’t received much publicity but you might find it interesting. The Supreme Court agreed on Monday to spell out Congress’s authority to give someone a right to sue in federal court, even if that individual cannot show that a specific harm was done.  That is an issue under Article III of the Constitution and arose in the case of Spokeo v. Robins, which will be heard and decided in the Court’s next Term.

Under Article III, federal courts only have authority to decide a case or controversy that has something real at stake – a “live” issue, rather than a theoretical claim.  Normally, a case cannot satisfy that requirement unless the suing individual can show some actual or imminent personal injury, or harm.

At issue in the newly granted Spokeo case is whether an individual can sue based on a simple claim that a right created by federal law has been violated, without proof of an additional injury growing out of that violation.  This particular case tests a lawsuit by a Californian, Thomas Robins, who sued under the federal Fair Credit Reporting Act of 1970, claiming that an online search engine put out inaccurate personal information about him. The search engine, operated by Spokeo, gathers information about individuals from public sources, such as telephone books, social networks, marketing surveys, real estate listings, business websites, and other databases.  It makes the information available to those who search for it online, but cautions them that it does not verify the accuracy of the data.

Robins, who filed a class-action lawsuit, claimed that Spokeo had provided flawed information about him, including that he had more education than he actually did, that he is married although he remains single, and that he was financially better off than he actually was.   He said he was unemployed and looking for work, and contended that the inaccurate information would make it more difficult for him to get a job and to get credit and insurance.

A federal judge dismissed his lawsuit, concluding that Robins had not offered sufficient evidence that he was harmed by the information available through Spokeo.  The U.S. Court of Appeals for the Ninth Circuit overturned that result, clearing the way for the lawsuit to go forward.  It concluded that Congress had created a right to sue under the Act, and that was sufficient to show an injury if a violation of the Act was claimed. The Supreme Court asked the U.S. Solicitor General for the federal government’s views on the case, and the government urged the Court not to grant review.  While not embracing the Ninth Circuit’s view of the Article III “standing” issue, the Solicitor General argued that the Ninth Circuit’s ruling could actually be understood as going beyond that to find a genuine claim of injury. The Justices granted review, despite the government’s suggestion.

Litigation makes strange bedfellows. Google, eBay, Yahoo, and Facebook all filed briefs in the Spokeo case, because of course, they all post information about individuals through their sites, and some of that information might not always be accurate; such is the nature of the internet, or at least that was what the tech companies tried to argue. The companies complain that they process so much data about so many people that the decision opens them up to liability from too many people if they violate the law – as if their control of so much personal data in the first place is not part of the problem.

The brief is fascinating since it details the large number of lawsuits the companies are already facing that they hope a favorable Supreme Court decision could just make go away. Google, Facebook, Hulu, and several other tech companies are facing various and assorted suits, and their defense seems to be that it would be difficult for them not to break the law. The arguments also lay bare the fact that even though there have been laws written to respect our privacy or to protect consumers, the laws are almost never enforced, and they only are considered after grievous harm has taken place; which may serve as a form of compensation but doesn’t seem to qualify as protection.

So, this case is a pretty big deal. If the Supremes overturn the Ninth Circuit, laws meant to protect user privacy, as well as consumer and financial protection laws will become unenforceable. If the Supremes rule with the Ninth Circuit it could change the business model and content of the entire internet.