Financial Review

A Go Figure Bounce

Sinclair Noe — February 24, 2016

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DOW + 53 = 16,484
SPX + 8 = 1929
NAS + 39 = 4542
10 Y – .01 = 1.74%
OIL + .36 = 32.23
GOLD + 3.00 = 1229.40

Stock markets closed down in Asia and European shares dropped the most in two weeks. Investors continue to use oil prices as a gauge of the global economy. At an event in Houston on Tuesday, Saudi oil minister ruled out production cuts anytime soon, sending crude sharply lower despite talk of a mid-March oil producer meeting. New API figures showing a further build in U.S. stockpiles are also weighing on oil. Oil’s retreat, together with slowing growth in China, has dragged down global stocks about 8% since the start of the year.

Miners fell again, with Glencore and BHP Billiton losing more than 8% on the day. Statoil and Royal Dutch Shell were leading energy-related companies lower. Iran said the plan to freeze oil production was “ridiculous.”  Every member of the Stoxx 600 Banks Index declined.

For most of the session today, Wall Street was down. The Dow Industrial average started the morning with a 250-point drop, and was down about 150 points for most of the session, until the final hour of trade when suddenly and without much reason, stocks turned higher, oil turned higher, treasuries turned lower, and gold tanked. I wish I could offer some clear reason for the turnaround, but I haven’t really seen anything to explain the move. About 3 weeks ago we saw a turnaround that erased a 1.5% loss in the S&P; over the following week the index lost 3%. Go figure.

How low could the pound go? The British pound is worth less than $1.40 for the first time since 2007. While currencies move for a variety of different reasons, most speculate the drop this week is to do with uncertainty over the Brexit referendum in June. The pound fell hard on Monday after London Mayor Boris Johnson decided to support the UK leaving the European Union. Britons get to vote on whether the UK should stay in or leave the European Union in the EU referendum on June 23.

The dollar index is at 97.5, and trading in a range between 95.5 and 100. If the dollar can just hold steady at these levels. A stable dollar would be a boost to multi-nationals, commodity traders across the board, and almost everybody except American tourists. The strength of the dollar might well be determined by the direction of the Fed.

It is “still too early” to assess the implications of recent volatility in financial markets for the U.S. economy, so says Fed Vice Chairman Stanley Fischer. With regards to the FOMC’s upcoming policy meeting in March, Fischer said he couldn’t predict what officials are going to do “because, as I’ve emphasized in the past, we simply do not know.” Still, Fischer thinks there is a chance the recent sell-off on Wall Street may not damage the economy.

Meanwhile, Richmond Fed President Jeffrey Lacker said there is more room for the Federal Reserve to raise interest rates because the current level remains below the economy’s so-called natural real rate of interest. And Kansas City Fed President Esther George says it’s too soon to say whether the stock market selloff had “fundamentally” altered the outlook, and a rate hike should “absolutely” be on the table for mid-March. She even suggests that the Fed could surprise markets with a hike.

Investors currently view the probability of a single rate rise in 2016 at around 45 percent, according to trading in federal funds futures contracts. The FOMC next meets on March 15-16, and the best bet is that the Fed will hit the pause button.

For evidence, we look to the Fed minutes from the January FOMC meeting: “Almost all participants cited a number of recent events as indicative of tighter financial conditions in the United States; these events included declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility. Some participants also pointed to significantly tighter financing conditions for speculative-grade firms and small businesses, and to reports of tighter standards at banks.”

Purchases of new homes dropped more than forecast in January. Sales declined 9.2 percent to a 494,000 annualized pace after a 544,000 rate in December that was the strongest in 10 months. The supply of homes increased to 5.8 months from 5.1 months in December. There were 238,000 new houses on the market at the end of January, the most since October 2009. The median sales price of a new house declined 4.5 percent from January 2015 to $278,800.

Markit Economics’ monthly flash services purchasing manager’s index, a preliminary reading on the sector, fell into contraction for the first time in over two years. The tentative February index was reported Wednesday at 49.8. That’s below 50, the border between expansion and contraction. The services sector, which covers about two-thirds of the economy, is essentially having its worst month since the recession. The only exception is when the government shutdown disrupted business activity in October 2013.

The US is exporting liquefied natural gas. The first shipload is pulling out of port in Louisiana right about now. The United States expects to transition from a net importer of gas to a net exporter by 2017 as the nation’s shale gas production continues to grow. For now, prices remain low, around $2.61 per million British thermal units in 2015, the lowest annual average since 1999; and there is a glut. The first shipment is headed to Petrobras in Brazil.

Sugar futures on the Intercontinental Exchange staged their biggest daily gain in nearly 23 years, jumping 8.9% to settle at $0.139 a pound, after forecasts suggested supply may fall short of demand due to bad weather conditions. This year’s supply loss will be the first deficit in five years as harvests are hit by the El Nino weather phenomenon and heavy rain in Brazil, the world’s largest producer.

Brazilian police have charged the chief executive of Samarco – a joint venture between BHP Billiton and Vale – and six others with criminal homicide following the collapse of the miner’s dam last November that killed at least 19 people. The report concluded that the accident was caused by excess water in the dam, lack of proper monitoring, faulty equipment and failure in the drainage system. The police report also said that Samarco’s emergency plan to warn nearby villagers was insufficient.

New York State’s comptroller and four Exxon Mobil shareholders have asked the SEC to force the company to include a climate change resolution in its annual shareholder proxy. The move, the first since the Paris climate accord, ratchets up the tension between the oil producer and investors concerned that climate change or legislation designed to curb it will harm the business’s ability to operate profitably. It also comes as Exxon fights an inquiry by NY’s attorney general into whether it misled the public and shareholders about climate change risks.

Sharp’s board has begun a two-day meeting to decide if it should accept a $5.9 billion takeover by Taiwan’s Foxconn Technology. That figure is more than double the offer by the Innovation Network Corp of Japan, which was previously considered the more likely suitor for Sharp due to its government backing.

Viacom has launched a process to explore a strategic minority investment in Paramount Pictures, after being ranked last among Hollywood “majors” at the box office for four straight years. The news comes as the company faces pressure to consider spinning off assets from its core TV business.

Target posted a fourth-quarter profit of $1.4 billion, helped by a gain on the sale of its pharmacy and clinic businesses and lower overhead expenses.

Lowe’s said profit dropped in its latest quarter following its decision to exit an Australian joint venture, though adjusted earnings rose and the company offered upbeat guidance for the year. Last month, the home-improvement retailer said it would sell its 33.3% stake in an unprofitable Australian home-improvement store venture to Woolworths.

Chesapeake Energy reported its fourth-quarter loss widened and it unveiled further capex cuts and asset sales. The company said it had a net loss of $2.23 billion.

Airbus Group posted a 15% rise in profit for 2015 and reported sales grew 6%. Airbus and Boeing have enjoyed a prolonged period of high aircraft order bookings as airlines renew aging fleets and add planes to deliver growth. Investors have increasingly become concerned, though, the boom period may be nearing an end. Despite those worries, Airbus said it would lift production next year of the A330 wide body to seven planes a month from six.

The pharmaceutical group GlaxoSmithKline has been fined $3 billion after admitting bribing doctors and encouraging the prescription of unsuitable antidepressants to children. Glaxo is also expected to admit failing to report safety problems with the diabetes drug Avandia in a district court in Boston on Thursday.

The company encouraged sales reps in the US to misrepresent three drugs to doctors and lavished hospitality and kickbacks on those who agreed to write extra prescriptions, including trips to resorts in Bermuda, Jamaica and California. The company admitted corporate misconduct over the antidepressants Paxil and Wellbutrin and asthma drug Advair. GSK also paid for articles on its drugs to appear in medical journals and supposedly “independent” doctors were hired by the company to promote the treatments.

German luxury automaker Audi has topped the annual ranking of new vehicles by Consumer Reports despite the brand’s emissions-cheating scandal. In November, Audi admitted using separate software that allowed its diesel U.S. SUVs and larger cars to emit excess emissions.

Tesla’s Model S electric car was named Consumer Reports’ best overall car in 2014 and 2015, but this year the magazine opted not to name any best overall vehicle.

Financial Review

See Opportunities

Sinclair Noe — December 1, 2015

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DOW + 168 = 17,888
SPX + 22 = 2102
NAS + 47 = 5156
10 YR YLD – .07 = 2.15%
OIL un 41.65
GOLD + 4.30 = 1069.80
SILV + .10 = 14.27

More than 180 nations are gathered in Paris to discuss a far-reaching agreement to reduce global carbon emissions. The emerging deal would require wealthy countries, including the U.S., to cut their own pollution while helping poorer countries shift from dependency on fossil fuels and mitigate the effects of climate change.

President Obama held a news conference today in Paris at the U.N. global climate summit; Obama said the world needs an enduring framework for addressing climate change and that he would seek an agreement that would boost economies as well as help the planet’s environment.

President Obama said the U.S. will meet commitments to help finance developing nations’ efforts to reduce carbon pollution, challenging congressional Republicans who have fought most of his environmental policies.

Some people look at the call for reducing carbon emissions and only see expenses, while others see opportunities. The number of annual patents for green energy has increased fivefold since 2002 and this year is on track to break another record after eight consecutive increases. Most patents in 2015 have been for solar technologies, 586 granted in the first half of the year; followed by fuel cells, electric vehicles, and wind power.

In Paris, countries and companies are pledging billions to fund even more research and development of new clean energy technologies. For the first time, more than half the world’s annual investment in clean energy is coming from emerging markets instead of from wealthier nations. The world recently passed a turning point and is adding more capacity for clean energy each year than for coal, natural gas, and oil combined.

For that trend to continue, rapidly developing economies are critical. Wind and solar are already competitive in price with grid electricity in some countries, and battery prices for large-scale electricity storage continue to fall.

As talks on climate change entered their second day in Paris, the Indian capital of New Delhi was buried under a thick smog, with visibility reduced to about 200 yards.

The Cyber Monday sales estimates are trickling in, and they’re looking good. Adobe Digital Index estimated that sales were up 12% year-on-year to $2.98 billion. It was enough to blow up the inter-webs. The websites of Target, PayPal, Walmart, and Victoria’s Secret, among a few others, experienced periodic outages or slow checkout times. Target had its biggest online-shopping day ever on Cyber Monday. Amazon said the holiday weekend was the best ever for its own devices.  Adobe says each of the first 18 days of December will tally $1 billion in sales.

If you were shopping over the holiday weekend, there is a good chance that you did not buy something with Apple Pay. According to Infoscout, nearly half as many eligible purchases were made using Apple Pay this Black Friday than last year, when the service was barely a month old. After the novelty wore off, well…

Vehicle sales maintained a strong sales pace in November: On a seasonally adjusted annualized basis, sales reached 18.2 million units for the third consecutive month. Ford pickups remain the top selling trucks and the Toyota Camry is the top selling passenger car. Fiat Chrysler said its U.S. auto sales rose 3 percent year-over-year in November. While Ford (+0.3%) and GM (+1.5%) missed estimates.

Hyundai, Toyota and Nissan all came in with better than expected sales. Volkswagen’s US sales in November fell almost 25%. Also today, Standard and Poor’s cut Volkswagen’s credit rating a notch, from A- to BBB+, on “a tarnished reputation and brand image, reduced business prospects, a more challenging competitive position, substantial costs, and weaker leverage metrics.”

The ISM manufacturing index fell to 48.6% last month from 50.1% in October; a reading below 50 indicates contraction. In a separate report, the private research firm Markit said its final PMI manufacturing index finished at a 25-month low of 52.8% in November.

Construction spending jumped a seasonally adjusted 1.0% in October, and was 13.0% higher for the year. During the first 10 months of this year construction spending amounted to $888 billion. For October, residential construction was 1.0% higher, while nonresidential construction rose 0.6%.

FOMC voting member Charles Evans said today that he is nervous about the December rate hike decision. His feeling is that the Fed needs to target 2% inflation, adding that the Fed Funds rate may be under 1% by the end of 2016. Fed funds futures now show that traders are assuming a 70% probability of a December rate hike, down from 76% yesterday. Keep in mind, FOMC Chair Janet Yellen will be speaking twice tomorrow.

Negotiators from both chambers of Congress reached agreement today on a 5 year highway plan. The highway measure also would revive the US Export-Import Bank, whose charter expired June 30. Lawmakers have until Friday to enact a highway plan or pass another temporary extension of transportation funding, and House Speaker Paul Ryan said his chamber will vote on the bill this week.

The legislation would provide $281 billion over six years for roads, bridges and mass transit. The measure would be financed in part by a one-time use of Federal Reserve surplus funds and by a reduction in the 6 percent dividend that national banks receive from the Fed.

Puerto Rico paid $354 million today on their Government Development Bank debt, avoiding default for now. A missed payment would have been the first default on the commonwealth’s direct debt. Over the past decade, Puerto Rico’s government has laid off 30,000 employees, closed nearly 200 schools, raised taxes and reformed pension funds. They still face $72 billion in debt, with the next payment of $1 billion due on January 1^st, and there is no indication they can pay. Governor Padilla is hoping to negotiate with creditors.

Morgan Stanley is planning to cut up to a quarter of its fixed income jobs over the next two weeks, resulting in the loss of hundreds of jobs. The cuts reflect a slowdown in client activity, pressure from investors to lift returns and new capital rules that penalize big banks for holding vast inventories of debt securities. In October, Morgan Stanley reported a 42% Y/Y drop in bond trading revenue in what CEO James Gorman called the bank’s worst quarter for fixed income since he took over in 2010.

Drug-benefit manager Express Scripts Holding said it is making arrangements with a drug compounder for patients to receive a lower-priced alternative to the expensive anti-parasitic pill Daraprim, whose price jumped more than 50-fold earlier this year. Turing Pharmaceuticals bought the rights to Daraprim and then jacked up the price from $13.50 a pill to $750 a pill. Express Scripts said it has arranged for patients to get the drug for $1 a capsule from San Diego-based drug compounder Imprimis Pharmaceuticals.

Meanwhile, Martin Shkreli, the CEO of Turing, is also the new CEO of a company called KaloBios Pharmaceuticals. KaloBios, which was at one point of time trading below a penny and was planning to wind down its operations after unsuccessfully finding a strategic alternative of staying afloat in the business, hit a 52-week high on Nov 23. The upsurge was due to the purchase of 70% of KaloBios’ shares by an investor group led by Shkreli.

After gaining control of the company, Shkreli assumed the position of the CEO and Chairman of the company’s board of directors. And then he stopped lending the company’s shares to people looking to short it. The shorts were squeezed and squeezed hard. The price jumped from about 90 cents to just over $45 in a matter of days.

Markit Economics said that its Purchasing Managers Index for the euro area rose to 52.8 in November from 52.3 the previous month. All euro area countries, with the exception of Greece, are seeing expansion in their manufacturing sectors. There was also good news on the employment front with Germany’s unemployment rate falling to a record low of 6.3 percent while in Italy unemployment dropped more than expected to reach 11.5 percent. However, it is unlikely that this improving data will do anything to hold back the European Central Bank’s easing plans on Thursday.

The Bank of England singled out two of Britain’s largest lenders for failing to meet certain capital thresholds in the latest round of stress tests examining the banking sector’s ability to withstand future global financial shocks. Despite the shortfalls, the central bank said that the two lenders, Standard Chartered and the Royal Bank of Scotland, passed the exercise, and that neither would be required to raise additional capital for now, but the tests will get tougher. So they say.

Brazil just dropped its latest batch of GDP numbers, and they point to a deepening recession. The country’s economy shrank 1.7% in the third quarter versus the second, on top of a 2.1% contraction the previous quarter and a 0.8% dip the quarter before that. That’s the first three-quarter streak of negative GDP growth since 1999, and it’s a far worse one at that.

Financial Review

Déjà vu All Over Again

Sinclair Noe — September 23, 2015

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DOW – 50 = 16,279
SPX – 3 = 1938
NAS – 3 = 4752
10 YR YLD + .02 = 2.14%
OIL – 1.67 = 44.69
GOLD + 5.70 = 1131.40
SILV + .03 = 14.89

Pope Francis visited the White House this morning. Speaking from the South Lawn before a crowd of about 15,000, the Pope said “climate change is a problem which can no longer be left to a future generation. When it comes to the care of our common home, we are living at a critical moment of history”; this was also a reference to his encyclical published in May, “Laudato Si – On Care for Our Common Home”, which addressed climate change. Francis has been a frequent critic of the damage caused to the world’s poor and the environment by capitalism’s excesses.

He also urged more attention be paid to the millions in poverty now overlooked by society, quoting Martin Luther King that “we have defaulted on a promissory note and now it is time to honor it.” Pope Francis said he will encourage Congress to guide the U.S. in fidelity to its founding principles including religious liberty. He referred briefly to the issue of immigration, and called on the U.S. to build a “truly tolerant and inclusive” society. Francis described himself as the son of an immigrant Italian family in Argentina. “I am happy to be a guest in this country, which was largely built by such families,” he said. Francis said that his teachings on economic fairness and climate change are “all in the social doctrine of the Church.” Tomorrow Pope Francis will address a joint session of Congress.

 Chinese president Xi Jingping arrived in Seattle yesterday, on his way to an official State visit in Washington DC tomorrow. Xi toured a Boeing aircraft plant and apparently liked what he saw. Boeing has signed deals to sell 300 aircraft to three Chinese firms and set up an aircraft plant in China. The aircraft deals, potentially worth $38 billion in total, are collectively the largest order the aerospace firm has received from Chinese companies.

Activity in China’s factory sector fell to the lowest level in over six years. The preliminary China manufacturing purchasing managers’ index dropped to 47.0 in September, down from 47.3 in August. The decline was led by a weak read for new orders and new export orders. Several investment firms lowered their estimates on China growth after factoring in the new manufacturing data.

Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers’ Index for September was 53. That was the same as August, which was its lowest since October 2013. A strong dollar, flagging demand in many export markets and reduced capital spending by energy and other companies were all dragging on U.S. manufacturing. The survey is indicating the weakest manufacturing growth for almost two years, meaning the sector will have acted as a drag on the economy in the third quarter.

The Markit Eurozone Manufacturing PMI fell to 53.9 in September, down from 54.3 in August, but roughly in line with activity over the last eight months. Service sector growth outpaced manufacturing by a small margin. European Central bank President Mario Draghi said it’s too soon to say whether risks to the economic outlook warrant a step-up in the European Central Bank’s stimulus, saying: “Should some of the downwards risks weaken the inflation outlook over the medium term more fundamentally than we project at present, we would not hesitate to act.”

Bond guru Bill Gross, formerly with Pimco and now with Janus Capital, has long called for the Federal Reserve to raise interest rates. Now Groww is urging the Fed to “get off zero and get off quick” as zero-bound levels are harming the real economy and destroying insurance company balance sheets and pension funds. In his October Investment Outlook report, Gross wrote that the Fed, which did not raise its benchmark interest rates at last week’s high-profile policy meeting, should acknowledge the destructive nature of zero percent interest rates over the intermediate and longer term.

Gross writes: “Zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society.” Adding, “These assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8 percent over the long term.” But with corporate bonds now at 2-3 percent, Gross said it was obvious that to pay for future health, retirement and insurance related benefits, stocks must appreciate by 10 percent a year to meet the targeted assumption. “That, of course, is a stretch of some accountant’s or actuary’s imagination.”

At a time when fears are high about market liquidity comes a significant shift in the primary players in the corporate bond market. Households, hedge funds and nonprofits, historically considered to be long-term holders of fixed-income instruments, ditched corporate debt in the second quarter, selling $122 billion after reducing their holdings by just $24 billion over the previous three months.

Conversely, purchases by foreigners more than doubled, from $80 billion to $172.2 billion. Foreigners now own more than a quarter of the $8.1 trillion corporate bond market, with a 25.9 percent stake that is just shy of the 26.5 percent portion owned by mutual and exchange-traded funds. Households, a category that for statistical purposes also includes hedge funds, now own just 4 percent of the group. So, the fastest growth in ownership of corporate bonds is foreign investors and mutual funds/ETFs, otherwise considered short-term traders, not long-term investors.

A hallmark of the $18 trillion mutual-fund industry is that it promises easy entry and exit for investors. U.S. regulators now want new protections to ensure that pledge can be met due to concerns that firms have loaded up on hard-to-sell assets. The five-member Securities and Exchange Commission voted unanimously to pass a measure Tuesday that funds would have to maintain a minimum cushion of cash or cash-like investments that can be sold within three days. Funds also could charge investors who pull their money on days of elevated withdrawals.

The executive committee of Volkswagen’s supervisory board met today in Germany, with the automaker facing an unprecedented scandal. The company has now admitted that over 11 million diesel vehicles globally have software with programming aimed at defeating emissions control testing. One of their first moves was to hire Kirkland & Ellis – that’s the legal firm that represented BP in the Deepwater Horizon oil spill disaster. Next step, CEO Martin Winterkorn resigned. He had been CEO for the past 10 years. If he knew about the emissions fraud scheme, that’s bad. And it is almost as bad to imagine that he didn’t know what was going on.

Shares of Volkswagen managed to bounce about 2% but are still down about 37% for the week. In Germany, one in six jobs are dependent upon the automobile industry in some way. Economists are trying to estimate the broad impact of the Volkswagen scandal on German GDP.

If you’re wondering why the Volkswagen story is attracting so much attention, you are wise to be skeptical. The recent General Motors problem involving defective ignition switches resulted in more than 120 deaths, and about a $900 million dollar fine for GM. VW would probably take that deal in a New York minute. Then there is the problem with Takata airbags exploding with such force that they spray shrapnel through the passenger compartment.

You may even recall a story about emissions controls from 1998 involving Caterpillar, Cummings, Detroit Diesel, Volvo, Renault, and Navistar. They created their own defeat device – one setting for the emissions tests and another, dirtier setting for regular driving. That deal involved 1.3 million engines. The fines amounted to a little over $80 million, plus a pledge to spend more than $800 million to develop cleaner diesel engines, with no admission of guilt. So, it has happened in the past; which means it isn’t a stretch to imagine that other car companies are trying to game emissions tests. Like Yogi Berra once said, “It’s déjà vu all over again.”

The American Petroleum Institute indicated U.S. crude stockpiles fell 3.7 miillion barrels last week. Stocks at the Cushing, Oklahoma delivery location were down almost 500,000 barrels.

Patriot Coal disclosed that Blackhawk Mining won a bankruptcy auction for the majority of its assets. The terms of Blackhawk’s bid were not disclosed, but it did not include cash; instead, the company offered Patriot’s creditors new debt and a stake in the entity that would own the auctioned assets. The sale is subject to approval by the U.S. bankruptcy court in Richmond, VA.

The Brazilian real hit an all-time low against the U.S. dollar today. Brazil has been hit hard by the steep plunge in commodities prices and the economic slowdown in China. The real has tumbled almost 35 percent against the dollar year to date. Earlier this month, S&P cut Brazil’s credit rating to below investment grade. Brazil’s Treasury bought back fixed-rate notes but failed to sell new notes at two auctions earlier in the week.

A federal judge has ruled that Warner/Chappel does not have a valid copyright to the song “Happy Birthday To You.” The music to Happy Birthday To You was written in the late 19th Century by two sisters who called their version Good Morning To All. That song later evolved into the version popular today and was copyrighted by the sisters’ publisher.

The publisher and the rights to the song were eventually purchased by Warner/Chappell for $25 million in the 1980s. Warner/Chappell earns about $2 million a year from the song. A group of artists who challenged Warner/Chappell’s ownership said over the summer that they had proof that the song belonged in the public domain. They said a songbook from 1922 includes the song, predating its 1935 copyright. Yesterday, the judge agreed. You are free to sing to your heart’s content.

Financial Review

May Day

Sinclair Noe — May 1, 2015

 

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DOW + 183 = 18,024
SPX + 22 = 2108
NAS + 63 = 5005
10 YR YLD + .07 = 2.11%
OIL – .29 = 59.34
GOLD – 5.00 = 1177.40
SILV – .03 = 16.15
 
For the week, the Dow dropped 0.3%, the S&P 500 fell 0.4% and the Nasdaq was down 1.7%. May kicks off what has been the worst six months for stocks historically which has brought rise to the old saying “sell in May and go away.” Sometimes it works but no guarantees.

The Detroit 3 automakers reported solid April sales as new models and cheap loans lured even more buyers into what’s already a brisk-moving new-vehicle market. Fiat Chrysler reported sales jumped 6% in April, GM gained 5.9% and Ford rose 5%. Still, their stocks were mixed. Ford and GM were higher, Fiat Chrysler was down.

Merchants displeased with the high fees American Express charges them are permitted to steer customers toward less expensive cards without fearing retaliation from the credit card company. A Judge in Brooklyn federal court has ruled that American Express is not allowed to stop stores from offering discounts, rebates or other incentives for using lower-fee cards – an activity known as steering.

 Construction spending fell in March to a six-month low as outlays on private residential construction spending declined sharply. Construction spending slipped 0.6 percent to an annual rate of $966 billion, the lowest level since September. The Institute for Supply Management (ISM) said its index of national factory activity was 51.5 in April, matching the March reading, which had been the lowest since May 2013. A reading above 50 indicates expansion. Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers’ Index fell to 54.1 in April from 55.7 in March. The Thomson Reuters/University of Michigan’s consumer sentiment index for April came in at 95.9, up from the previous month’s reading of 93.0 and the second highest level since 2007. Typically the Labor Department reports monthly non-farm payrolls on the first Friday of the month, but they will deliver the April Jobs Report next Friday.

Today is May Day, also known as International Workers’ Day. May Day has historically been a day when demonstrators rooted deeply in the labor movement call for workers’ rights. But in recent years, immigration reform and civil rights issues have been adopted. There are protests and rallies schedule today across the country, including New York, Chicago, Denver, Seattle, San Francisco, Los Angeles, and many other cities. This year, marches are planned in support of “Black Lives Matter,” a growing movement in the wake of a series of deaths of black men during police encounters. This afternoon, the city prosecutor in Baltimore announced that six police officers will face criminal charges in the death of Freddie Gray.

All major European markets except London, were closed today in observance of May Day, but currency trading never stops and the euro was up to a two-month high, for its best week since October 2011. The Dollar Index moved higher as gains against the yen and sterling offset weakness against the euro. In April, the euro was up by 1.7% on a trade-weighted basis, but is still down about 6.6% year-to-date. Crude oil prices were lower after logging their best monthly gains in six years in April.

The big news this past week was really a non-event. The Federal Reserve FOMC wrapped up a two-day meeting on Wednesday, and their statement on monetary policy didn’t have any real surprises, but that just lead to speculation about when the Fed might hike interest rates.

Warren Buffett and shareholders in his Berkshire Hathaway are gathering this weekend for the company’s latest annual meeting, but before “Woodstock for Capitalists” Buffett said he believes the Federal Reserve won’t be in any hurry to increase interest rates—in part because of the softer U.S. economy at the start of the year, but more so due to what’s going on in European bond markets, where many countries have negative interest rates. Recent calculations by Goldman Sachs showed that more than $2.1 trillion of outstanding euro zone sovereign debt now has a negative yield. So, the disparity between the Federal Reserve and other central bankers is a valid argument for the Fed waiting to increase rates.

Still, the Fed has maintained a near Zero Interest Rate Policy for about 7 years and there is an expectation that they will raise their target funds rate simply to begin to “normalize rates.”  Historically, U.S. short-term interest rates have never been this low for this long, and some people believe the Federal Reserve will start to slowly raise their target rate simply to return to normal or at least bring it closer to the mean. That makes sense, but the Fed addressed this idea in the last line of their statement, which read: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

And that sounds like they are willing to make sure the recovery takes hold, even if the economy overheats just a bit, before they will raise rates. Historically, the Fed has followed its dual mandate of maximum employment and price stability, and raised rates only when economic conditions forced them too.  In the past, once they began the process of raising rates from a stable, relatively low value, they have continued to do so at a steady clip. So, the next place to look is the Fed Funds Futures rates, which tells us where people are putting their money with regard to a rate hike.  The futures market shows the Fed keeping rates at the zero to quarter percent range at least through September, then about a 60% chance of a small increase in December, followed by small increases, probably one-eighth of one percent per month, until rates are around .75% in September of 2016. The economy has been slowly improving and should be able to handle small, incremental, well-telegraphed increases.  The difference between 0.25%, or 0.50% rates, or even 0.75%, is minimal; and that is still historically low; business and the economy shouldn’t be materially harmed by such a move. Wall Street will scream bloody murder and flop about, but again it probably won’t do any material harm.

Equity markets love free money, and again this week we saw $4.5 billion pulled from US equity funds, the 10^th outflow in the last 11 weeks. The money isn’t going under the mattress; international funds have seen big inflows this year. Last week about  $400 million moved to European funds, where the ECB has been very accommodative as of late; that doesn’t represent a big flow of funds, but last week was the lowest level in the past 15 weeks.

Tesla Motors has unveiled Tesla Energy – a suite of batteries designed for households, businesses, and utilities – as it shifts into calling itself an energy innovation company in addition to being an automaker.  Tesla will build the stationary energy storage systems using the same basic batteries it will produce for its vehicles at its gigafactory in Nevada. Tesla’s home battery, named Powerwall, is a rechargeable lithium-ion model that mounts on the wall and comes in 7 kilowatt-hour or 10 kilowatt-hour versions. Deliveries will begin in late summer at prices starting from $3,000 for the smaller model and $3,500 for the larger unit. The larger battery would keep an average-sized home running for a day.

In the near term, the market for home energy storage will depend on how states regulate homeowners’ ability to buy and sell electricity. Net metering, currently available in 43 states, allows residential customers to sell excess generation back to their utility company at retail rates. As long as net metering continues, consumers will have little need to buy an energy storage system because they can sell the excess solar power they generate rather than store it. But the policies are being challenged by utility companies that say it undermines their ability to recoup grid infrastructure costs, and some utilities have started charging for being connected to the grid, even if a customer is feeding more power back to the grid than they are consuming. So, thanks to the utilities being a bit greedy, they have opened the door for Tesla technology that will allow them to go completely off grid. Or alternatively, battery storage would allow such people to maximize the value of the electricity they sell back to the utility.

The major upshot of more and cheaper batteries and much more widespread energy storage could, in the long term, be a true energy revolution as well as a much greener planet. And while most people have focused on batteries for residential use, the bigger market is at the utility scale. It means one that can rely less on fossil fuels and more on renewable energy sources like wind and, especially, solar, which vary based on the time of day or the weather. Battery energy storage means utilities can manage peak loads and improve grid reliability.

Another reason why this energy storage idea is so important for Tesla is that a green household could capture solar energy during the day, store it, and then use the battery to charge an electric vehicle overnight. Elon Musk is also chairman of SolarCity, and energy storage is an enabling technology for solar. It allows customers to meet more scenarios economically. Clever.

More than seven years after the global financial collapse, regulators and investors are still working through a mile-high pile of lawsuits and other civil actions, and it seems like the fines keep on coming. Since the crisis, banks and other institutions have paid more than $150 billion in fines, settlements and other penalties, according to a tally by the Financial Times. That compares with the roughly $700 billion in profits generated by U.S. banks between 2007 and 2014. So where have all the payments gone? The biggest have landed in the Justice Department, which has amassed some $50 billion. Other heavy collectors include the FHFA, Fannie Mae, HUD and the SEC. Among the banks paying the biggest amounts, BofA tops the list – with nearly $58 billion, followed by JPMorgan ($31 billion), Citigroup ($12 billion) and Wells Fargo ($9 billion).

Financial Review

Chips and Salsa

Sinclair Noe — April 23, 2015

 

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

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DOW + 20 = 18,058
SPX + 4 = 2112
NAS + 20 = 5056
10 YR YLD – .02 = 1.95%
OIL + 1.32 = 57.48
GOLD – 1.00 = 1193.40
SILV + .02 = 15.85

Record highs on Wall Street today. On March 10, 2000 the Nasdaq Composite Index reached an intraday high of 5,132 and closed at 5,048. It only took a little over 15 years to get back to those levels. The Nasdaq is now up 6.8% for 2015. The Nasdaq Composite now trades at 30 times earnings, versus a multiple of 190 in March 2000; not exactly a value play, but not dot-com frothiness. The S&P 500 hit a new intraday high but could not take out the 2117 record close from early March.

The number of people who applied for regular state unemployment-insurance benefits ticked up 1,000 to 295,000 in the week that ended April 18. Also, the government said continuing claims, which show the number of people already receiving weekly unemployment checks, rose 50,000 to 2.33 million in the week that ended April 11.

Sales of new single-family homes dropped 11.4% to 481,000 in March, hitting the slowest pace since November.  Sales of new single-family homes increased about 19% over the past year. However, sales still remain almost 40% below a long-term pace set over 20 years.

Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers’ Index fell to 54.2 in April from the final March read of 55.7. A reading above 50 indicates growth in the sector. And as the manufacturing sector in the US expands, it is contracting in China.

China’s factory activity declined at its fastest pace in a year, according to HSBC/Markit’s Purchasing Managers Index. China said it will open up bank card processing to foreign firms, sending shares of Visa and MasterCard higher. Morgan Stanley thinks the firms could begin operations in China in late 2016 or early 2017. China said Thursday it will scrap export duties on rare earths and some metal products, including molybdenum, tungsten and some aluminum products, effective May 1. Beijing is attempting to boost exports, which fell 15% year-over-year in March.

Tensions continue to escalate in the Middle East. Earlier in the week, Saudi Arabia announced a cease fire in Yemen; that lasted about one day and then the Saudis resumed their airstrikes. The Saudi escalation of its Yemen campaign is producing exactly the kind of geopolitical tensions that push oil prices higher. Toss in US aircraft carriers and a few destroyers in close proximity to Iranian Navy boats that look like they are trying to deliver arms to the Houti rebels in Yemen, and it makes for a volatile mix. Oil prices are near the highs for the year.

The world is still a crazy place. Reuters reports the Russian Defense Ministry claims US troops are now in the conflict zone of eastern Ukraine to train Ukrainian combat troops. And the Taliban has announced that it will launch its annual spring offensive in Afghanistan later in the week; like it’s a supermarket opening or something.

Meanwhile, five years ago to the day, Greece officially submitted a bailout request…Today, Tsipras chats with Merkel. The Greek and German leaders will meet in Brussels in an attempt to reach a deal on Greece’s debt. The longer these negotiations have dragged out, the closer the opposing sides get to some sort of resolution; they haven’t worked it out yet, but they are closer, maybe.

U.S. and British regulators fined Deutsche Bank $2.5 billion and its British subsidiary pleaded guilty to criminal wire fraud for its role in a scam to manipulate the London Interbank Offered Rate (Libor) and its Euribor cousin – together benchmarks for hundreds of trillions of dollars of financial products and loans worldwide.

Brazil’s state-controlled oil giant, Petrobras, reported its long-delayed quarterly and annual results, which have been stalled by a corruption investigation. The overall loss was $7.2 billion in 2014; Petrobras is writing off $15 billion in overvalued assets and $2 billion for bribery related costs. Federal prosecutors have accused the former executives of illegally “diverting” billions from the company’s accounts for their personal use or to pay off officials. More than 80 people have been charged with bribery and money laundering during the criminal investigation, dubbed “Operation Car Wash.”

Dozens of senior officials and politicians are still under investigation. Brazilian President Dilma Rousseff was chairwoman of Petrobras during many of the years when the alleged corruption took place. She denies any knowledge of the corruption. Her popularity has sunk to record lows because of the scandal and Brazi’s poor economic performance. Dozens of other companies including construction and transportation firms are implicated in the scandal, and over 750 projects are now under investigation. And there is a class action suit, of course.

The Comcast-Time Warner merger is in jeopardy. The FCC has called for a hearing on the Comcast-Time Warner merger. According to The Wall Street Journal, the hearing is a sign the FCC feels the $45 billion deal is not in the best interest of the public. The Department of Justice has also recently spoken out against the deal. And today, Bloomberg reported that Comcast will drop the deal.

Today is one of the busiest sessions for earnings reports, so let’s dig in:
After the close, Google reported weaker-than-expected first-quarter profits, hurt by slowing growth and the rising U.S. dollar. (note – this is becoming a common theme.) Google reported revenue of $17.2 billion, up 12% from $15.4 billion in the year-ago period. Profit of $3.6 billion, up from $3.4 billion. On a side note; today marks the tenth anniversary of the first YouTube video. YouTube’s co-founder, Jawed Karim, posted the video of his visit to the zoo. Google now owns YouTube.

Microsoft revenue rose 6.5% from a year earlier to  $21.7 billion, thanks to the inclusion of sales from Nokia’s mobile-phone business, which Microsoft didn’t own a year ago. Microsoft reported net income of $4.9 billion, or 61 cents a share – in line with estimates. That was down from net income of $5.6 billion, or 68 cents a share, a year earlier.

Amazon posted a sales jump of 15% to $22.7 billion, compared with $19.7 billion a year earlier. And they still managed to lose $57 million.

Starbucks reported same store sales were up 7% in the Americas. Earnings and revenue jumped 18%; profits matched estimates.

General Motors came up short on both the top and bottom line; the problems came from Russia, Europe and South America. Despite ongoing legal problems with deadly ignition switches, GM reported strong sales in North America. The big seller is the Tahoe, a big SUV; no rebates, no incentives, 18 MPG. How quickly we forget $100 a barrel oil.

Caterpillar earnings and revenue came in well above estimates thanks to cost cutting and improved sales in North America. CAT raised its earnings per share outlook for the year.

PepsiCo posted net income was flat at $1.2 billion. Revenue fell 3.2% to $12.2 billion. Earnings per share were 83 cents, missing estimates of 79 cents. PepsiCo says currency exchange rates cut its profit by 11 percentage points this year.

3M revenue and earnings missed estimates with sales down 3% from a year earlier. They blamed a stronger dollar.

Procter & Gamble posted quarterly earnings in line with expectations. But revenue came up short for the fifth straight quarter.  P& G blames the strong dollar and warns foreign exchange rates will continue to be a drag on both sales and profit this year.

Southwest Airlines said its first-quarter profit nearly tripled but forecast a decline in unit revenue for April.

Freeport-McMoRan reported a first-quarter loss of $2.5 billion as it recorded one-time charges of $2.4 billion, mainly for the reduction of the carrying value of its oil and gas properties.

A common theme in earnings reports is a strong dollar hurting sales and profits of US companies. Procter & Gamble, the world’s largest consumer-products maker gets the majority of its sales outside North America, leaving the company vulnerable to a dollar that has gained against a number of currencies. 3M, the maker of Post-it notes and Scotch tape earns almost two-thirds of its revenue outside the U.S. General Motors’ struggled with overseas sales. Freeport-McMoRan grappled with lower commodity prices, directly tied to a strong dollar.

You might think that a strong dollar is about to destroy corporate America, and yet the stock market is hanging out in record high territory. Even though we know that companies use a stronger dollar as a scapegoat, it really doesn’t tell us much about their earnings. It is extremely difficult for an individual investor to know if a company was really hurt or just a little hurt by currency exchanges. You don’t know how much a company actually buys in the local currency; for example, if McDonald’s buys its beef and makes its bread in the same country where they sell hamburgers, then it shouldn’t be a big hit to profits. For others, it might be a very big deal indeed. More often than not, it just muddies the earnings news.

Of the 169 Standard & Poor’s 500 companies that have reported so far, 71 percent beat earnings estimates, according to data from Thomson Reuters; and most estimates had been ratcheted lower. But they did so with help from share buybacks, cost-cutting and other measures, instead of strong sales growth. Despite those beats, analysts are now trimming their profit and sales expectations for the second quarter. Revenue in the first quarter has disappointed – just 44 percent of the early reporters topped analysts’ forecasts – and sales are expected to have dropped 3.3 percent from a year ago. Of the early reporting companies for the first quarter, 59 have beaten earnings estimates but missed on sales, with the trend seen in a wide range of sectors.

Second-quarter S&P 500 earnings could slide 1.6 percent from a year ago. That is down from an April 1 forecast for a decline of 0.5 percent. Sales are forecast to fall 3.9 percent in the second quarter, compared with an April 1 estimate for a 2.8 percent decline. Third- and fourth-quarter estimates are also down since the reporting season began. There could still be negative surprises ahead, and most S&P 500 energy companies have yet to post results, and it’s a safe bet that there will be some ugly numbers in the oil patch.  Stay tuned.

FINANCIAL REVIEW

Friday Wrap

Sinclair Noe — January 23, 2015

Podcast: Play in new window | Download (Duration: 20:25 — 9.3MB)

DOW – 141 = 17,672
SPX – 11 = 2051
NAS + 7 = 4757
10 YR YLD – .08 = 1.82%
OIL – .95 = 45.36
GOLD – 8.00 = 1295.10
SILV – .02 = 18.40

For the week, the Dow rose 0.9 percent, the S&P gained 1.6 percent and the Nasdaq added 2.7 percent.

The ECB announced plans yesterday to expand asset purchases by €60B per month until at least September 2016. ECB President Mario Draghi says the new stimulus plan “should strengthen demand, increase capacity utilization and support money and credit growth.” Well, it will make somebody rich, but the benefits to the broader Euro economy are still very much up in the air. Bonds in the region rallied, with the yields on 10-year notes of Germany, Italy, Spain and France falling to all-time lows. Stocks in the region on track for their best week since 2011 but the euro currency has dropped below $1.12.

Greece’s leftist Syriza party leads the opinion polls heading into an election on Sunday. The ECB’s debt-purchasing program will not include Greece, at least not until July, and only then if a continuing review of the country’s bailout program is successfully completed. The basic bond buying plan wasn’t kind to Greece, even with the exclusion built in. The way, the ECB put together their QE scheme, rather than purchase government bonds from the most troubled economies, the ECB will buy bonds from each country in proportion to the amount of capital they hold at the central bank. The upshot is that it will be buying a lot of German debt, with its already low interest rates, and may simply convince banks to look for alternative investments in Germany rather than, say, Italy or Greece.

It’s not clear how much good bond-buying can do for Europe at this point. The idea seems to be to stimulate the Euro economy and lift it out of disinflation, but Draghi himself rejects the idea that ECB QE will result in inflation, in what must be the quote of the day he said: “There must be a statute of limitations for those who say there will be inflation.”

The United States Federal Reserve and the Bank of England both resorted to quantitative easing, or QE, back in 2009 (the Fed just finished its third and final round in November). And while the policy is often credited as one reason the US recovery has been far stronger than Europe’s, nobody knows for sure exactly how much good it did. On the one hand, our economy managed to continue expanding despite cuts to state spending and sequestration. On the other hand the recovery was really slow, and by many accounts incomplete; far better for Wall Street than Main Street.

The leading economic index rose 0.5% in December pointing to steady growth for 2015. The coincident index, which measures current conditions, edged up 0.2% in December. The lagging index increased 0.3%. The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks and valleys.

Existing home sales rose 2.4% to 5.04 million units in December. The National Association of Realtors also revised November’s sales pace to 4.92 million. The median sales price of used homes hit $209,500 in December, up 6.0% from the year-earlier period. December’s inventory was 1.85 million existing homes for sale, a 4.4-month supply at the current sales pace. For all of 2014, existing-home sales slipped to 4.93 million units, down 3.1% from 2013, and the first annual decline in 4 years. Meanwhile, the median price reached $208,500 in 2014, the highest since 2007 and up 5.8% from the prior year.

The US economy grew at a below-trend rate in December. The Chicago Fed’s national activity index slipped to negative 0.05 from positive 0.92 in November. The three-month average stayed in positive territory but slowed to 0.39 from 0.54 in November. The index is a weighted average of 85 different economic indicators.

The flash reading of the Markit manufacturing purchasing managers’ index edged lower in January to a 53.7 from 53.9 in December, to mark the lowest reading in 12 months. While the rate of output growth moved up slightly, new business growth fell to a one-year low.

Arizona’s unemployment rate for December was 6.7%, that’s down from 6.8% in both October and November and 6.9% in September. The national unemployment rate decreased two-tenths of a percentage point to 5.6% in December. Six of the 11 major sectors in Arizona added jobs and five reported losses over the month. Arizona added 7,000 nonfarm jobs in December. Losses were primarily in state and local education, which shed 3,900 jobs but was typical in December as schools prepared for winter break. Trade, transportation and utilities added 7,600 jobs last month while professional and business services added 1,100 jobs.

Despite testing the nation’s booming energy sector, a collapse in oil prices is leaving more money in consumers’ pockets with one of gasoline’s swiftest price declines on record. Gas prices appear headed below a nationwide average of $2 a gallon in the coming days, with average pump prices at $2.04 a gallon nationwide, down more than 40% since last June. Pump prices have declined for 16 straight weeks, breaking the last record set in 2008.

The Saudi royal court announced the death of King Abdullah, who died at about the age of 90 late last night, after nearly 2 decades in power. Abdullah’s half-brother, Crown Prince Salman, has been declared king. King Salman promised in a nationally televised speech to continue the policies of his predecessors. However, Salman is 79 years old and in poor health, suffering from Alzheimer’s. He has already named his heirs. So, expect changes in the near future.

Meanwhile, a political earthquake was underway in Saudi Arabia’s backyard, Yemen. President Hadi, his prime minister and government resigned after days of virtual house arrest by Houthi militia. Hadi’s resignation leaves two forces in control of the country both of them armed to the teeth: an Iranian backed militia which gets its training from Hezbollah, and al Qaeda, posing as the defender of Sunni muslims. The US embassy in Yemen has been reduced to a bare bones staff. For now, there is a power vacuum in Yemen.

It’s earnings reporting season and with 18% of S&P 500 companies having reported, 72% have topped earnings expectations, while 54%have beaten revenue forecasts.

GE reported a 9% increase in industrial profit; that’s the business unit that sells power-generating turbines and jet engines. Fourth-quarter net income rose 61% to $5.15 billion, or 51 cents per share, from a year earlier, when results suffered from GE’s move to resolve financial obligations to Japan’s Shinsei Bank. Excluding pension-related costs, earnings of 56 cents per share were 1 cent ahead of the analysts’ average estimate. Revenue rose 4 percent to $42 billion.

McDonald’s posts smaller-than-expected drop in comparable sales and announced its lowest capital spending budget in more than five years, saying it expected to open fewer restaurants this year. Sales at US restaurants open at least 13 months fell 1.7% in the fourth quarter. McDonald’s quarterly net income fell to $1.1 billion, or $1.13 per share, from $1.40 billion, or $1.40 per share, a year earlier. Revenue fell 7.3% to $6.57 billion.

UPS had a bad Christmas in 2013 when a crush of late online orders caused it to miss thousands of deliveries. They hired 95,000 workers in 2014, or 73% more than the previous year, and spent $500 million on network improvements including software to aid drivers and building temporary sorting facilities. The good news is that customer service improved; the bad news is UPS didn’t make as much money. Preliminary earnings per share will be $4.75 in 2014, compared with previous forecasts of $4.90 to $5.00. Fourth quarter earnings per share will be $1.25. That compares with analysts’ estimates of $1.47. Going forward, UPS will reduce operating costs and implement new pricing strategies during peak season. UPS today dropped 10%.

Expedia is buying Travelocity for $280 million, increasing its share of the North American airfare and hospitality market. Travelocity Europe, meanwhile, will go to a Swiss company called Bravofly for $120 million. In other travel news, SkyMall filed for bankruptcy, sad news for those looking to buy a wine glass holder necklace or a toilet roll iPod docking station or a Siamese Slanket; you’ll have to find your tchochtkes elsewhere.

Sony will delay the official submission of its third-quarter results due to the massive cyber-attack on Sony Pictures, and has asked financial regulators to extend the filing of its report to March 31 from Feb. 16.

The first batch of GlaxoSmithKline’s experimental Ebola vaccine has been shipped to West Africa and is expected to arrive in Liberia later today. While it is currently being tested in five small Phase I safety trials in Britain, the US, Switzerland and Mali, Glaxo’s vaccine will be used in the first large-scale trials in the coming weeks. The World Health Organization said on Thursday that the Ebola outbreak in West Africa appears to be waning but still is a big problem.

You remember the famous opening lines from Dicken’s Tale of Two Cities: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

That was first published in 1859; and it stands up well today.

The time is now 11:57. It is now three minutes to midnight, according to the Bulletin of Atomic Scientists. The group behind the symbolic “Doomsday Clock” announced at a news conference that the countdown to the End of it All is now just 3 minutes away; that’s 2 minutes closer than last year. It is the closest the clock has been to Doomsday since 1984.

In 1947, the specter of nuclear holocaust prompted the Bulletin of the Atomic Scientists to come up with a “Doomsday Clock.” Over the years the clock has been adjusted annually between 11:43 and 11:58. And now, the scientists that set the time on the Doomsday Clock say that “unchecked climate change, global nuclear weapons modernizations, and outsized nuclear weapons arsenals pose extraordinary and undeniable threats to the continued existence of humanity.”

They might be right. Just last week, the National Oceanic and Atmospheric Administration announced that 2014 was the hottest year ever. The Atomic Scientists say: World leaders have failed to act with the speed or on the scale required to protect citizens from catastrophe,” and “Stunning governmental failures have imperiled civilization on a global scale.” Yesterday the US Senate voted to acknowledge that climate change is real, bringing it up to speed with every major world scientific body. The vote was 98 to 1 to proclaim: “To express the sense of the Senate that climate change is real and not a hoax.” But the Senate declined to acknowledge that human activity plays any role, which means that they refuse to do anything about it. Maybe we should vote on whether the Senate is a hoax.

It isn’t only climate change that has us 3 minutes shy of Armageddon. It’s the combination of climate change and some discouraging recent developments on the nuclear-proliferation front. The real point of the Doomsday Clock is to remind us that we have the power to wind it back, or hammer a nail in the clock face just before the 12:00.

Bill Gates is the richest man in the world, and you know the story of Microsoft. Forty years ago, Bill Gates and Microsoft co-founder Paul Allen made a bet, just a friendly wager between friends, that personal computers would transform the way people worked and played around the world.

About 15 years ago, Gates realized that not everyone needs a new, fast computer. In Africa, for example people needed a malaria vaccine and mosquito nets, just to stay alive. Another bet was made. They predicted they could dramatically reduce inequality “by backing innovative work in health and education.” Since forming the Bill & Melinda Gates Foundation—and especially since leaving Microsoft in 2008 to dedicate himself full-time to the foundation’s work—Gates and his wife Melinda have emerged as two of history’s most powerful philanthropists. The Gates Foundation publishes an annual letter, summarizing the foundation’s progress and laying out its priorities for the coming year.

The Gateses think things might get better. The lives of people in poor countries will improve faster in the next 15 years than at any other time in history. And their lives will improve more than anyone else’s. In 1990, one in ten children around the world died before they turned 5. That’s down to one in twenty. They expect the rate of infant mortality to halve by 2030, from one child in 20 dying before turning five to one in 40.

Africa will be able to feed itself. Africa imports $50 billion of food on an annual basis. By improving yields and introducing innovations in farming, they hope to achieve food security for the continent by 2030.

With the Gates Foundation’s help, a devastating disease called guinea worm has been nearly eradicated. They also forecast the eradication of polio and perhaps three other deadly diseases. Improvements in agriculture will mean that Africa will be able to feed itself. Financial security will improve as the 2 billion people who do not have a bank account start storing money and making payments using mobile phones. The Gates letter also points out that an increase in digital schooling will help pull those in poor countries up the economic ladder, as hundreds of millions of people will be able to access online education in the coming years.

Bill and Melinda Gates conclude their annual letter by urging people to sign up to the “Global Citizen” initiative. They write: “The more global citizens there are, and the more active and effective they are, the more progress the world will make. We hope you will show your support by signing up, because we believe that people can and must work together more to make the world a more equitable place. In fact, we’re betting on it.”

FINANCIAL REVIEW

Mangled Expectations

Sinclair Noe — November 3, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Financial Review
DOW – 24 = 17,366
SPX – 0.24 = 2017
NAS + 8 = 4638
10 YR YLD + .01 = 2.35%
OIL – 2.03 = 78.39
GOLD – 7.60 = 1166.30
SILV – .03 = 16.25

No milk and cookies today, however the Dow and S&P hit intraday record highs.

Construction spending fell 0.4% in September to a seasonally adjusted annual rate of $950 billion. Spending fell 0.6% for nonresidential projects and dropped 1.3% for public construction projects, but rose 0.4% for residential projects.

The National Association of Realtors reports first-time buyers’ share of home sales has hit a 27 year low of just 33%; normally it would be closer to 40%.

The final reading of Markit’s manufacturing purchasing managers’ index was 55.9 in October, down from the flash reading of 56.2 and well below September’s 57.9.

The Institute for Supply Management said its manufacturing index jumped to 59% from 56.6% in the prior month; new orders, production, and the employment gauge all moved higher.

Last week the Federal Reserve officially ended the Quantitative Easing plan, which has been around in various forms for about 5 years. The dollar reached multi-year highs against both the yen and euro; last week the Bank of Japan announced a surprise stimulus plan, called QQE2; on that news the stock markets hit a new high on Friday and global markets rallied.

This week the European Central Bank will meet, and if history is any guide, the ECB won’t do anything extra, although we must throw in the caveat that any action or inaction will be data dependent. For many, the ECB meeting on Thursday will be the main money event, despite the fact that it is not likely to be one of action or suspense. Eurozone inflation picked up a tiny bit to 0.4%, so policymakers have a reason to hold back.

The question is: what happens next? And the answer is nobody knows. Earnings reporting season rolls on with what I guess is good news, but the reality is that earnings reports are now an exercise in obfuscation and mangled expectations. One thing we are seeing is that most earnings per share growth is not organic, but the result of buybacks and other financial engineering feats.

Fund managers have been playing catch up with the S&P 500 index after trailing the rally. The good news is they are sitting on about $4.7 billion in fresh cash. Declines in small caps and technology companies have left fewer equities beating the index than any time since 1999. The average stock measured by the Value Line Arithmetic index is up 4.4% this year, half as much as the S&P 500. About half of the stocks in the Nasdaq Composite Index have fallen at least 20 percent from their 52-week highs, while more than 40 percent of the Russell 2000 are stuck in bear markets. The S&P 500 is a market value weighted index; each stock’s weight is proportionate to its market value; therefore, if you have a few of the mega caps performing well, it skews the results. The S&P 500 is masking what’s going on underneath the surface.

The only way you’re going to pick up performance is by being fully invested. And yesterday’s winner’s aren’t necessarily today’s performers, and vice versa. Consumer discretionary stocks led the S&P 500 with a 322% gain from the bear market’s bottom through 2013, but for 2014, the results have been just under 2%. The S&P 500 Energy Index, which beat all but one industry during the first six months of 2014, dropped as much as 20% from its June high as money flowed out of commodity shares amid a collapse in oil prices. The group is now the worst performer, losing 1.6% this year.

Utilities, those boring, old dividend paying, non-growth companies that have gone nowhere forever, have gained 20% this year as investors seek safe-haven stocks. The only group that has posted better returns is health care, which jumped 21%. The selloff we saw in October got a lot people too defensively positioned. In the next two months, we’re will likely see people add a lot more risk.

And while we’re on health care, a new study from the McKinsey Center for US Health System Reform shows competition and choice will expand as we head into 2015. According to the McKinsey study, “In the 41 states releasing exchange participation carrier data, the number of health insurers increased by 26% between 2014 and 2015. In the 19 states with complete fillings, the number of products grew 66%. While 65 percent of existing policies will see an increase in premium costs for 2015, the medium increase will be just 4%. When was the last time we saw insurance premiums experience an annual increase of less than 5 percent?

Last week’s report on third quarter GDP was decent; thanks in part to increased military spending, which is no way to grow an economy. Fourth quarter GDP is expected to be a little less, but it could turn out just fine. According to Gallup, Americans’ daily self-reports of spending averaged $89 in October, versus $87 in September. Spending last month is similar to what it was in October 2013 ($88), but it remains well above the lower levels Gallup measured from 2009 through early 2012. Although consumer spending was generally stable in October, it remains higher than the levels found during the depths of the recession and its immediate aftermath.

Today the automakers reported their strongest October sales in a decade. October auto sales increased 6.1 percent to 1.28 million vehicles; on a seasonally adjusted annualized basis, that works out to 16.46 million vehicles. Ford, Chrysler, and Nissan topped sales estimates, while Toyota matched. GM and Honda missed estimates, and that might have something to do with 1,722 claims for injuries and deaths associated with faulty ignition switches at GM, and also exploding airbags at Honda.

And there are other factors at work in the economy; mainly oil, light sweet crude, also known as West Texas Intermediate dropped under $80 a barrel after Saudi Arabia reduced the cost to US customers. Saudi Arabian Oil Co. cut prices for all grades to the US. OPEC output rose to a 14-month high in October, and the Saudis are looking to make sure they maintain market share, and the best way to do that is to cut prices, especially when they are supposed to be part of a coalition against terrorists in the Iraq, Syria region. Demand for imports in the US has fallen as the shale boom moved the country closer to energy independence.

The $80 per barrel level was an important technical level of support, and now it is broken. Cheap oil is a big boom for the economy, but not necessarily the best thing for the environment. The UN yesterday issued its fourth and final installment in the IPCC’s climate assessment and the synopsis is that climate change is happening, it’s almost entirely man’s fault, and limiting its impacts will require reducing greenhouse gas emissions to zero this century.

According to the DHL Global Connectedness Index, we are more connected now than any time since 2007. Globalization plods along, at a slow, yet relentless pace. For the past couple of decades, globalization has been largely driven by trade, investment, and other interactions between developed countries and developing ones. Now the action is among the developing countries and formerly developing countries. Still, the overwhelming majority of commerce, investment, and other interactions still occur within, not between, nations. The report finds South-to-South trade is now growing faster than South-to-North or North-to-South; while North-to-North trade “has basically stagnated.”

This coming Friday we’ll get a better read on the economy with the monthly jobs report. It is anticipated that the economy added 225,000 net new jobs in October. The economy has gained an average of 227,000 jobs per month this year, up from a 194,000 average last year. The unemployment rate fell to 5.9% at the end of September, down from 7.2% a year earlier.

Today, the US Treasury said it plans to issue $232 billion in net marketable debt in the fourth quarter of this year; that’s the lowest level since 2007. Next quarter, the Treasury plans to borrow $209 billion. Budget deficits have been falling since 2009, and the 2014 deficit was 2.8 percent of gross domestic product, according to the Congressional Budget Office. That is down from 9.8 percent of GDP in 2009.

Investors submitted bids for $5.54 trillion of government debt at auctions this year, or 3 times the amount sold. The bid-to-cover ratio is higher than the 2.87 last year. Even with the end of unprecedented bond purchases from the Federal Reserve, demand for US Treasuries looks as strong as ever. The willingness of foreign central banks, insurers and pensions to pick up the slack as the Fed tapered out of QE, suggests there’s plenty of buyers to keep US borrowing costs low.

Bill Gross, the former bond king from Pimco, and now the chief bottle washer at Janus Capital says deflation is a “growing possibility” as governments worldwide are struggling to create inflation and stimulate growth. Gross is still publishing his investment outlook newsletter, where he says central banks around the world have made “a damn fine attempt” at fueling inflation, yet their efforts have pushed up financial assets, rather than prices in the real economy.

Gross writes: “The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side –-from the dreaded government side –- where deficits are anathema and balanced budgets are increasingly in vogue. Until then, the possibility of deflation is a challenge to wealth creation.”

And he adds: “Stopping the printing press sounds like a great solution to the depreciation of our purchasing power but today’s printing is simply something that the global finance based economy cannot live without.”