Financial Review

Rarely the First

Sinclair Noe — January 9, 2017

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

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DOW – 76 = 19,887
SPX – 8 = 2268
NAS + 10 = 5531 (record close)
RUT – 9 = 1357
10 Y – .04 = 2.38%
OIL – 2.16 = 52.71
GOLD + 9.20 = 1182.40

Oil prices were sharply lower this morning, as Iran upped exports and U.S. drillers increased activity again, moves undermining efforts by international producers to curb global oversupply.

Treasuries rose with gold today as the risk-on trade wobbled. Treasury yields sit lower than where they were before the Federal Reserve raised interest rates last month, while the dollar remained near a 14-year high.

The Dow, S&P 500, and Nasdaq all hit intraday highs on Friday – the Dow came within a fraction of a point of 20,000. Earnings for the S&P 500 are expected to increase by 6.1 percent in Q4, with the S&P financial sector see having the biggest gains, up 15.7 percent, per estimates from Thomson Reuters. Fourth quarter earnings season ramps up Friday, when JPMorgan Chase, Bank of America, and Wells Fargo report. Financial stocks have gained more than 30 percent since Election Day.

This is a busy week for Federal Reserve policymakers. Today, Atlanta Fed President Dennis Lockhart said the recovery from the economic crisis is “largely done,” and officials should now turn to addressing longer-term issues like how to boost productivity, raise investment, and try to counter trends that are holding down potential growth.

Lockhart said, the economy is near full employment, inflation is close to the Fed’s two percent goal, and the United States appears locked in for steady growth of around 2 percent annually. Lockhart did not address rate hikes directly, though he said he expected any future increases to come at a “gradual” pace.

Boston Fed President Eric Rosengren at a speech in Boston this morning said, “economic circumstances have evolved and now imply the need for a different stance of monetary policy,” Including “somewhat more regular” increases in short-term interest rates.

Rosengren said that what happens with fiscal policy will play a role in the exact timing of rate hikes. The commentary from Fed policymakers has taken a decidedly hawkish tone, and after a yearlong delay between rate hikes, I’m starting to get the feeling they will be more aggressive this year.

The British pound was tumbling to two-month lows this morning after U.K. Prime Minister Theresa May said in her first interview of the year that she was not interested in keeping “bits of membership” of the European Union in the execution of Brexit. The one priority that May has marked out – limits on EU migration – implies that British companies will face new barriers in selling goods and services to hundreds of millions of consumers in Europe.

The prime minister’s position runs counter to rules that require all members of Europe’s single trading market to allow free movement of people across their borders. UK Foreign Secretary Boris Johnson was in Washington today to meet with some of Donald Trump’s top advisers as Britain looks to build ties with the incoming administration ahead of the country’s withdrawal from the European Union.

Nine confirmation hearings begin on Capitol Hill this week, starting tomorrow with lawmakers questioning Attorney General-designate Sen. Jeff Sessions and Homeland Security Secretary-designate retired Gen. John Kelly. The lineup also includes five hearings on Wednesday, including: Rex Tillerson, the nominee for secretary of state; Betsy DeVos, for education secretary; CIA director designate Mike Pompeo; commerce pick Wilbur Ross; and Labor nominee Andrew Puzder; the same day the Senate is expected to vote on a step toward repealing much of the Affordable Care Act, and Wednesday marks Trump’s first news conference since the election.

State-run Chinese tabloid Global Times warned President-elect Donald Trump that China would “take revenge” if he reneged on the one-China policy, only hours after Taiwan’s president made a controversial stopover in Houston.

McDonald’s unloads its business in China. The fast-food giant sold 20-year rights to most of its business in Hong Kong and China to Citic and Carlyle Group for up to $2.1 billion. About one-third of McDonald’s 2,400 restaurants in mainland China and Hong Kong are franchised; this deal will franchise the rest of them. The new partnership plans to add 1,500 in the two areas over the next five years.

Yum China, spun off by its U.S. parent last year, is relaunching the Taco Bell brand in the country, after a near-decade-long absence, opening the first store in Shanghai today.

Fiat Chrysler will invest $1 billion in 2 manufacturing plants in the Midwest, which will add 2,000 new jobs in the U.S. and expand its sports utility and truck lineup. Fiat Chrysler will retool factories in Ohio and Michigan to build new Jeep sport utility vehicles, including a pickup truck, and potentially move production of a Ram heavy-duty pickup truck to Michigan from Mexico. The announcement comes days after Ford decided to scrap a plan to build a facility in Mexico, instead opting to invest in a plant in Michigan.

General Motors CEO Mary Barra says GM  has no plans to change where the automaker produces small cars because of Trump’s Twitter threat of a border tax.

Self-driving cars are a big theme at the North American International Auto Show, which kicked off yesterday in Detroit. Alphabet’s Waymo revealed that it has built all of its sensor hardware in-house and was ready to offer its autonomous-drive technology in “millions” of vehicles at a competitive price. A package of LIDAR sensors and radar, which used to run approximately $75,000 a few years ago, has fallen by more than 90%.

The FBI has arrested Volkswagen’s regulatory compliance executive, Oliver Schmidt, who faces conspiracy charges linked to Dieselgate. The arrest comes as VW nears a deal to pay the Department of Justice more than $3 billion to settle the emissions scandal’s criminal investigation, on top of the nearly $18 billion the automaker will pay to resolve civil claims.

Japan’s Takeda Pharmaceutical will buy cancer drug maker Ariad Pharmaceuticals in a deal valued at $5.2 billion, to beef up its oncology pipeline. Takeda has agreed to pay $24 in cash for each Ariad share, a premium of about 75 percent to its Friday close.

United Health Group is buying Surgical Care Affiliates, an outpatient surgery chain for $2.3 billion. The deal is expected to close in the first half of this year. Surgical Care Affiliates operates 205 surgical facilities, including specialized hospitals, in partnership with surgeons in 30 states.

Candy maker Mars said it will buy VCA, which makes Whiskas and Pedigree pet food and is also the largest operator of pet hospitals in the country. Price tag $7.7 billion.  Mars became the No. 1 pet food maker in 2014, after buying Procter & Gamble’s pet foods business, known for brands such as Iams and Natura, for $2.9 billion.

HMD Global, the Finnish company that owns the rights to use Nokia’s brand on mobile phones, launched the first new smartphone carrying the iconic handset name since 2014 when Nokia chose to sell its entire handset unit to Microsoft. The new device, Nokia 6, runs on Google’s Android platform and is manufactured by Foxconn. It will be sold exclusively in China for about $246.

IBM is the patent winner, again; that’s a 24-year streak and counting. In 2016, IBM filed 8,088 patents (22 per day; 2,700 related to artificial intelligence, cognitive and cloud computing) granted across its more than 8,500 inventors in 47 states and territories, and 47 countries. Samsung filed the second most patents, a mere 5,518.

Ten years ago, today, Steve Jobs introduced a new device called the iPhone. Jobs took to the Macworld stage and announced that “we’re going to make some history together today.” There were skeptics, including Microsoft CEO Steve Ballmer, who in 2007 said there was “no chance” the iPhone would get “any significant market share.”

Since then Apple has sold more than one billion iPhones, passing its billionth last July. The iPhone has grown to dominate the U.S. smartphone market. Its mobile operating system, iOS, is ranked second globally, behind Alphabet’s Android. And Apple’s market cap has climbed to over $628 billion. Current Apple CEO Tim Cook says the “best is yet to come.”

That remains to be seen. A lot can happen in a very short period of time. Apps, touch screens, voice recognition, fingerprint scanners, selfies; that’s all within the past 10 years. What will the next 10 years bring? Many people say AI is the next wave – computers we can talk to; and right now, Apple does not have a leadership position.

Amazon.com has a hit with the voice-based assistant Alexa. Alphabet’s Google is close behind. Partners with both companies spent several days at the CES tech show in Las Vegas last week introducing a deluge of devices powered by these competing technologies. Apple is working on its own device but it doesn’t have one yet. That doesn’t mean Apple is out of the game though. The history of Apple is rarely about being first—think of the iPod—but becoming dominant through superior design and execution.

Tonight, the Alabama Crimson Tide will take on the Clemson Tigers for the national college football championship – and the winner is: Nike. Last year Nike’s stock was the biggest Dow dog – down 20% – and one of only three in the index to fall in 2016. (Coca-Cola and Disney were the other laggards.)

So far in 2017, Nike is up about 5% and tonight’s championship game is basically a 3-hour ad for Nike. Both Alabama and Clemson have multi-year agreements in place with Nike. The Crimson Tide has an eight-year, $30 million deal that runs out in 2018. Clemson’s agreement with Nike, also for eight years, is worth $23 million and lasts until 2022.

Financial Review

Mars Looks Pretty Good

Sinclair Noe — September 27, 2016

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

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DOW + 133 = 18,228
SPX + 13 = 2159
NAS + 48 = 5305
10 Y – .03 = 1.56%
OIL – 1.00 = 44.93
GOLD – 10.90 = 1328.00

A CNN poll showed that 62 percent of voters who watched last night’s presidential candidate’s debate felt that Democratic nominee, Hillary Clinton, won. In markets, the Mexican peso seems to agree, with the currency rallying as much as 2 percent after the head-to-head concluded, any other correlations to the markets are hypothetical.

Last night’s debate was all over the place. That’s not a commentary on the candidates, rather on the broadcast itself. Unlike the primaries, the networks do not take turns running the general election debates. Instead, the non-partisan, non-profit Commission on Presidential Debates runs the show and hands out sets of keys to whoever wants them.

That means in addition to every major network, other platforms like Facebook, Twitter, and Yahoo were able to broadcast their own streams. The early estimates are that 81 million people watched the debate on one of the 12 TV networks and about 2.5 million watched live streaming. Although about 90% of the people probably tuned in just to see if the roof would collapse.

Top social media platforms steered hundreds of thousands of users to voter registration websites over the weekend in an effort several states said set new records for registration activity. Facebook, Instagram, Snapchat and other social media networks began reminding users over the age of 18 to register to vote. Users on Facebook were directed to a federal website that would then direct them to sites in their home states.

Today is National Voter Registration Day; it is not the last day you can register to vote, just a day to encourage everyone to register. In Arizona, you have until October 8 to register by mail, or October 10 to register online.

Before we get to the actual election, the government might shut down. The federal budget runs through Friday. We need a new budget to keep running; that is not going to happen. Typically, the politicians come up with a continuing resolution, an extension on the deadline for a budget; that might not happen either. The stopgap funding bill under consideration would keep the federal government running through Dec. 9, as well as provide funds to combat the Zika virus. It also includes disaster-relief aid for flooding in Louisiana and other states.

Senate Democrats are demanding federal aid for residents of Flint, Michigan to deal with their poisonous water problem. Senate majority leader Mitch McConnell is talking about removing aid to flood victims in Louisiana in exchange for aid to Flint.

That deal may or may not fly. But then there is another rider on the stop gap budget, the inclusion of a poison pill policy rider to keep political money from big corporations a secret. The rider would block the Securities and Exchange Commission (SEC) from working on a rule to require publicly traded companies to disclose their political spending. This rider is one of the main sticking points standing in the way of a deal to keep the government open. The deadline for a budget deal is Friday.

Iran is unwilling to freeze its oil production at current levels. The nation’s oil minister also said the country doesn’t intend to strike an agreement with other crude producers in Algiers this week. Iran will increase output from 3.6 million barrels per day to 4 million.

OPEC’s decision to hold informal talks this week has fanned speculation that it might be about to deviate from a two-year-old policy of pumping without limits, which succeeded in hurting rival suppliers but also sent prices into free-fall. Energy Ministers are now calling the gathering a “consultative meeting,” saying “it wasn’t time for decision-making.” A formal OPEC meeting will take place in Vienna on Nov. 30, when a supply agreement may be reached.

The World Trade Organization has cut its forecast for global trade growth this year by more than a third. The new figure of 1.7%, down from its April estimate of 2.8%, would be the slowest pace of trade and output growth since the 2009 financial crisis. It is also the first time in 15 years that international commerce has been left trailing behind the world economy.

The downturn reflects the slowdown in countries such as China and Brazil and lower levels of imports into the US. Trade has grown 1.5 times faster than gross domestic product over the long term – but the WTO say it will only grow 80% as fast this year. That would be the first reversal of globalization since 2001 and only the second time this has happened since 1982.

Global bonds moved higher as renewed concerns over Europe’s banks spur demand for safe assets. Germany’s 10-year yield fell to the lowest since July and Finland’s dropped below zero for the first time. Spain’s 10-year yield dropped to a record low. The outlook may be different for Treasuries, as Blackrock, the world’s biggest money manager, warned of the risks of holding Treasuries as the Federal Reserve moves towards raising rates.

Single-family home prices rose slightly less than expected on an annual basis in July, and the year-over-year gain was smaller than in the prior month. The S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5 percent in July on a year-over-year basis, down from 5.1% in June. In Phoenix, existing home prices were up 0.8% from June to July, and up 5.2% over the past 12 months.

A key measure of consumers’ attitudes increased in September, to its highest level since the recession. The Consumer Confidence Index hit 104.1 in September, up from August’s revised reading of 101.8. The survey measures confidence toward business conditions, short-term outlook, personal finances and jobs.

A federal appeals court has ruled that American Express could stop merchants that accept its cards from encouraging customers to use rival payment cards that charge the stores lower transaction fees. The decision reversed a lower court’s 2015 ruling that such restrictions violated federal antitrust law. The decision is a major victory for American Express, which wants to ensure that its customers, who pay higher-than-average membership fees, do not encounter any barriers to use.

The ruling means that American Express can continue to enforce provisions in its contracts with merchants that prohibit them from steering customers toward other forms of payment. Credit card costs are largely invisible to consumers, but retailers pay a fee each time a credit or debit card is used. Amex charges higher so-called swipe fees, or interchange fees, than Visa or MasterCard, and some consumer advocates argue that those costs can get unfairly passed on to shoppers in the form of higher prices.

Samsung Electronics has recovered more than 60% of all recalled Galaxy Note 7 smartphones sold in South Korea and the US. Samsung announced on Sept. 2 a global recall of at least 2.5 million Note 7s in 10 markets due to faulty batteries causing some phones to catch fire.

Caesars and its creditors have agreed on a restructuring to get the casino’s operating unit out of bankruptcy. Creditors will receive about 70% of the fully diluted equity in the new structure, while second lien noteholders and unsecured creditors will get paid $0.66 on the dollar.

Walt Disney is working with a financial adviser to evaluate a possible bid for Twitter. Twitter has started a process to evaluate a potential sale. Salesforce.com is also considering a bid and is working with Bank of America on the process. No deal yet, just speculation.

Last year, the Environmental Protection Agency finalized a far-reaching rule that would, for the first time ever, regulate carbon dioxide emissions from America’s existing coal- and gas-fired power plants, which are a major source of pollution. The Clean Power Plan set specific emissions targets for each state and gives them plenty of flexibility in deciding on how to meet the goals. If all goes as intended, the plan would reduce power plant emissions roughly 30 percent below 2005 levels by 2030.

Various oil and coal companies, along with 27 states led by West Virginia, have sued to overturn the Clean Power Plan. Many of these states could meet the plan’s targets fairly easily, but they are opposed to any expansion of EPA powers. In response, the Supreme Court halted implementation of the Clean Power Plan until the court challenges were finished.

Today the litigants presented oral arguments to the DC Circuit Court. A ruling is expected in either late 2016 or early 2017. Whatever the outcome, the next stop for this case is the Supreme Court, which has been split 4-4 between conservatives and liberals ever since Justice Antonin Scalia’s death this year. If there’s a 4-4 SCOTUS split on this case, then whatever the DC Circuit Court rules will stand.

SpaceX has successfully tested a new rocket engine it plans to use to take people to Mars within the next 10 years. CEO Elon Musk tweeted about the successful first firing of the Raptor engine and included photos. Musk said he expects SpaceX to make an unmanned mission to Mars by 2018, using existing technology. He plans to use the Raptor engine for a manned Mars mission by 2025.

SpaceX has yet to carry humans into outer space, but it has won a contract from NASA to carry U.S. astronauts to the International Space Station as soon as next year. Today Musk laid out his plans for Mars colonization. The idea is reusable rockets, somehow making fuel on Mars, refueling stations in space, spaceships carrying about 100 passengers per flight to Mars to inhabit a city of 1 million. All this within the next 10 years.

Financial Review

Canoe Trips on Mars

Sinclair Noe — September 28, 2015

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

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DOW – 312 = 16,001
SPX – 49 = 1881
NAS – 142 = 4543
10 YR YLD – .07 = 2.09%
OIL – .03 = 44.40
GOLD – 14.20 = 1133.10
SILV – .53 = 14.70

Well, this was just ugly. All three major indices traded in correction territory today or more than 10 percent below their 52-week highs. For the Nasdaq Composite, the 50 day moving average crossed the 200 day moving average, forming a pattern that goes by the catchy name “death cross”. The Nasdaq Biotechnology ETF closed down 6.3%, following a 5% drop on Friday.

Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low, wiping out more than $5 billion in market valuation. The fall followed publication of a note by analysts at investment bank Investec which raised doubts about Glencore’s valuation if spot metal prices do not improve. The note pointed to high debt levels and a need for deeper restructuring. The analysts wrote: “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.” Glencore, a Swiss based company, has said it will suspend dividends, sell assets and raise cash with a $2.5 billion share placement, among other measures, to cut its $30 billion debt pile and protect its credit rating.

The 15-month commodities free-fall is starting to resemble a full-blown crisis. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.

Alcoa the world’s largest aluminum producer, says it will split into two separate publicly-listed companies, with the separation expected to be completed in the second half of 2016. The company says the split will create an “upstream company”, focused on bauxite, alumina and aluminum, and a “value-add company”, focused on innovation in “high performance multi-material products and solutions in attractive growth markets”.

Royal Dutch Shell has abandoned its Arctic search for oil after failing to find enough crude. Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion to shut down exploration in the region. The unsuccessful campaign is Shell’s second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and ran aground. Environmental groups and shareholders have also pressured Shell to drop Arctic drilling.

The IMF warns world GDP at 3.3% this year isn’t realistic anymore, and a forecast of 3.8% for next year is not either. IMF Director Christine Lagarde pointed to slowing growth in emerging economies, in particular China. Lagarde says “There is no reason (for the Federal Reserve) to rush” to tighten policy, noting both the Japanese central bank and the ECB in recent years both hiked and then were forced to quickly retreat.

The Federal Reserve will probably raise interest rates later this year and tighten policy gradually thereafter, so says William Dudley, New York Fed President, echoing statements from Fed Chair Janet Yellen last week. Dudley, who cautioned in late August that the uncertain global outlook made the case for a rate increase in September less compelling, said his expectation on the timing of liftoff was “not calendar guidance. It depends on the data.” San Francisco Fed President John Williams, also speaking today, made a similar argument.

As world growth falters, the US consumer rolls along. Most of the change over the past quarter related to China. The Chinese currency was devalued, and many Chinese economic indicators continued to slow. China has showed lower growth rates and missed growth forecasts for several years. The news this morning shows Chinese industrial profits fell 8.8% in August year-over-year. It’s not new news. Still, the devaluation brought some already well-known weaknesses to the forefront. And as we have long been expecting, a slowing China generally has helped the U.S. economy as the small decrease in exports has been more than offset by lower commodity prices, which puts more money in consumer pockets.

Purchases of new cars and trucks and strong back-to-school sales drove consumer spending higher in August, a sign the economy continues to expand at a moderate pace. In August, consumer spending rose a seasonally adjusted 0.4% to match the revised gain in July. Personal incomes rose 0.3% last month. Incomes have also risen steadily since the early spring, largely reflecting strong job creation that’s tugged the unemployment rate down to a post-recession low of 5.1%. Since spending grew faster than income, the amount of money individuals save fell a tick to 4.6% from 4.7%. Inflation as gauged by the PCE price index, was unchanged in August. The PCE index is up just 0.3% in the past 12 months.

This week’s big economic report comes on Friday, when the Labor Department publishes the September employment report. The consensus estimate calls for 190,000 new jobs in September. The unemployment rate is likely to remain at 5.1%.

A gauge of pending home sales fell 1.4% in August to the lowest level in five months. The index from the National Association of Realtors declined to a seasonally adjusted 109.4 in August from 110.9 in the prior month. Pending sales have leveled off since mid-summer, with buyers being bounded by rising prices and few available and affordable properties within their budget.

The federal government is funded only through Wednesday but House Speaker John Boehner says there won’t be a government shutdown. Speaking on CBS’ “Face the Nation,” Boehner confirmed plans to pass a short-term funding bill. Boehner, who announced Friday he is resigning from Congress at the end of October, also said he will set up a committee to investigate Planned Parenthood.

President Obama addressed the United Nations General Assembly this morning, saying the US is was willing to cooperate with Russia, as well as Iran, to try to end the Syrian civil war but the two big powers clashed over whether to work with Syrian President Bashar al-Assad, whom Obama called a tyrant. Russian President Vladimir Putin, in contrast, told the gathering of world leaders that there was no alternative to cooperating with Assad’s military in an effort to defeat ISIS. Later, Obama and Putin met privately.

In opening the General Assembly, Secretary General Ban Ki-moon struck a sober theme, asserting that: “Inequality is growing, trust is fading, and impatience with leadership can be seen and felt far and wide.” Mr. Ban called explicitly for an “end to bombings” in Yemen, and named the five countries that, as he said, “hold the key” to peace in Syria: Russia, the United States, Saudi Arabia, Iran, and Turkey.

Pro-independence parties won a majority 72 seats (out of 135) in Catalonia’s regional parliament, but took down only 48% of the vote. Blocked by the national government from holding a referendum on independence, the separatists attempted to turn these elections into just that. While they won a majority of seats, the failure to gain more than 50% of the vote means had this been a referendum, it would have been a loss.

Apple said it sold more than 13 million iPhone 6s and 6s Pluses during their first weekend on the market. The company beat its previous record of 10 million in sales for the previous generation of iPhones in its first weekend in 2014. This year’s results benefited from the inclusion of the Chinese market, where regulatory problems delayed the gadget’s debut last year.

Whole Foods Market said it would cut about 1,500 jobs, or about 1.6 percent of its workforce, over the next eight weeks. The cuts are aimed at reducing costs as the company invests in technology upgrades. Whole Foods said in May that it would launch a new chain of smaller, more value-focused shops next year.

Scientists say there is water on Mars. In a paper published in the journal Nature Geoscience, scientists report definitive signs of liquid water on the surface of present-day Mars, a finding that will fuel speculation that life, if it ever arose there, could persist to now, or possibly in the future. In the research, Dr. Alfred McEwen, a professor of planetary geology at the University of Arizona and the principal investigator of images from a high-resolution camera on NASA’s Mars Reconnaissance Orbiter, along with other scientists discovered in photographs from the Mars Reconnaissance Orbiter dark streaks descending along slopes of craters, canyons and mountains. The streaks lengthened during summer, faded as temperatures cooled, then reappeared the next year.

The researchers were able to identify the telltale sign of a hydrated salt at four locations. In addition, the signs of the salt disappeared when the streaks faded. In other words, small rivers of liquid water; briny water, but water nonetheless. The salts lower the freezing temperature, and the water remains liquid. The average temperature of Mars is about minus 70 degrees Fahrenheit, but summer days near the Equator can reach an almost balmy 70.

Many mysteries remain. For one, scientists do not know where the water is coming from. One theory is that the salts act like a sponge to soak up moisture from the environment. The other possibility is underground aquifers, frozen solid during winter, melting during summer and seeping to the surface.

Financial Review

Strange Days

Sinclair Noe — April 13, 2015      

 

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

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DOW – 80 = 17,977
SPX – 9 = 2092
NAS – 7 = 4988
10 YR YLD – .02 = 1.94%
OIL + .27 = 51.91
GOLD – 9.30 = 1199.00
SILV – .23 = 16.36

A down day as we head into earnings reporting season. S&P 500 earnings per share has come down 8% over the last three months to $around $117.50 from $119.50, according to analysts at Merrill Lynch. Analysts are projecting EPS to fall 4% to 6%, excluding the impact of stock buybacks. Earnings are taking a hit on two fronts: lower oil prices and a stronger dollar. The energy sector takes the lion’s share of the blame for the earnings decline. Excluding energy companies, first-quarter earnings growth would actually be slightly positive. The dollar’s rise over the past year will also have a significant impact as expectations for companies with sizable foreign sales have been revised down 13% year to date while those with sales concentrated in the US witnessed an upward revision.

The Energy sector is the biggest drag on the growth picture this quarter, with the sector’s earnings on track to be down -63.6% on -40.6% lower revenues. Excluding the drag from the Energy sector, total earnings for the S&P 500 index would be up +4.7% on +0.6% higher revenues, according to Zach’s Research. The best performing sector should be Finance, where earnings are expected to be up +9.1% from the same period last year. Excluding Finance, the earnings growth picture for the S&P 500 becomes even weaker, with first quarter earnings expected to decline -6.4%. We have a busier reporting schedule this week, with 32 S&P members reporting results, including several of the big banks.

If estimates for the first quarter were to stay where they are right now, this would mark the first year-over-year decline in earnings since the third quarter of 2012. And negative earnings growth isn’t just expected for the first quarter. Current estimates project a decline in Q2 earnings as well. Two consecutive quarters of negative growth is known as an “earnings recession”, which is something the market hasn’t seen in quite a while.

The euro fell back towards $1.05 today, hitting its weakest in four weeks as the dollar’s resurgence continued on bets the US Federal Reserve will raise interest rates from their historic lows in the coming months. The dollar had dropped 4% after a much-worse-than-expected US payrolls report earlier in the month threw into doubt a 2015 rate rise, but it has since rallied on upbeat comments from Fed officials and better US data. In addition, the dollar is still the global reserve currency and that means there is about $9 trillion in dollar denominated debt around the world. The $9 trillion owed by borrowers outside the U.S. has surged from $6 trillion at the end of 2008, when the Fed cut its benchmark interest rate to near zero, making it cheaper to issue in the currency. Some of that will need to be repaid even if the remainder will be rolled over. And debt that will eventually be refinanced needs servicing in the meantime. To repay the debt, whether corporate of sovereign, requires accumulating dollars; and that is above and beyond growth or interest rate differentials.

As the U.S. job market improves, the risk is receding that an unexpected setback could derail the recovery once the Federal Reserve raises interest rates, San Francisco Fed President John Williams told Reuters in an interview late on Friday. “So even if the economy got some bad shocks, really you are probably just talking about flattening that path out a bit, or maybe raising rates more slowly,” said Williams, who this year is one of 10 voting members of the Fed’s policy panel. In fact, Williams says the Fed now needs to weigh the risks of waiting too long before a rate lift-off. To get that message across Williams has begun giving away T-shirts, printed at his own expense, showing an arrow busting upwards out of a computer and declaring: “Monetary policy — It’s data dependent.” (I have to get me one of those t-shirts.)

In the last two weeks, three Fed governors have laid out the argument that it is the longer rate path, not the date of lift-off that matters. Williams also said that regardless of the timing of the first hike, rates should stay below neutral to help the economy grow at a faster-than-normal pace. Such accommodative policy is necessary to further reduce unemployment, which at 5.5 percent is still too high in his view, and push up inflation, which remains well below the Fed’s 2-percent target. The San Francisco Fed chief expects the U.S. economy to reach full employment in six to twelve months, and forecasts a tighter labor market will start lifting wages and inflation more broadly.

Greece is at risk on running out of cash as soon as this month, unless the leftist government and its international lenders, known as the Troika, agree on a reform plan. At the meeting in Brussels last week, eurozone officials gave Athens six working days to submit a revised list of overhauls. Despite a denial by Greece’s finance ministry, tensions between Greece and its creditors took another turn for the worse over the weekend, following a report that eurozone officials were “shocked” at Greece’s failure to outline detailed structural reforms. If eurozone finance ministers at the Eurogroup meeting on April 24 find the proposals adequate, they can unlock the next tranche of bailout money. That would help Greece meet its debt obligations this spring and avoid a default. Also this week, Greece has to repay €2.4 billion euros ($2.5 billion) in Treasury bills. Last week, the government met its deadline to pay back a loan of roughly €460 million euros to the International Monetary Fund. Once again, negotiations are turning ugly, with one German newspaper quoting Eurozone officials that are allegedly so annoyed that they said Greece acted like a “taxi driver” and just kept asking for cash instead of outlining reform plans. It continues to look like the Greek debt problem might not be worked out.

China’s exports surprisingly tumbled in March while import shipments fell at their sharpest rate since the global financial crisis, setting a poor precursor to the country’s closely-watched first quarter GDP figure due on Wednesday. Chinese exports plunged 15% and imports fell 12.7% last month in dollar terms as weak demand and the impact of the lunar new year weighed heavily on Chinese factories. The soft trade figures sent Chinese shares higher, with the Shanghai Composite closing up 2.2%, as investors bet on more stimulus from Beijing.

Nearly 90% of Americans now have health insurance. The Gallup-Healthways Well-Being Index shows the number is up from closer to 80% as recently as 2013. The new survey included the end of the 2015 period to sign up for health insurance through the public exchanges.

Almost one million people pre-ordered the Apple watch on Friday. They bought an average of 1.3 watches and paid about $503 for each one. How does that stack up in Apple history? Back in 2007, it took the company 74 days to sell its one millionth iPhone, and it took two years to get to that milestone with the iPod. Among those who bought an Apple Watch, 72% had bought an Apple product in the last two years. And 21% preordered an iPhone 6 or iPhone 6 Plus just months ago.

These are strange days indeed. Case in point; organizers have just announced a sail boat race from New York to Victoria, British Columbia; the 7,700 mile race will go from the northeastern part of North America to the northwestern part. The boats will not head south from New York, they will head north to Greenland, then cut across the north of Canada, circle the northern edge of Alaska and then down to Victoria. Impossible you say? Once upon a time; now, not so much. The route used to be unnavigable because of pack ice, which may well still be problematic for the race participants, but there is less ice as of late. Arctic sea ice hit its peak for the year in February—amounting to the lowest coverage on satellite record. Race organizer Robert Molnar told CBC News: “We shouldn’t be able to do it, but because of climate change, we can.”

Space X is the private space exploration company founded by Elon Musk. They had to scrub a scheduled launch of a rocket today due to inclement weather. They will try to launch tomorrow, weather permitting. The tow-stage Falcon 9 rocket is unmanned; it is scheduled to deliver cargo to the International Space Station, which is manned.  The top part of the rocket will deliver the cargo, break away and then burn up as it floats back into Earth’s atmosphere. That will be the easy part. After the launch, SpaceX will try to guide the bottom stage of the rocket upright onto a platform, or what it calls an autonomous spaceport drone ship, in the Atlantic Ocean off Florida. Normally the bottom part would just fall into the ocean and be lost. Recovering the rocket intact would be a big cost savings. Space X says the odds of a successful landing on the platform are about 50-50. And if they don’t land it this time, they’ll just keep trying.

NASA has a little rover, called Curiosity, roaming around Mars, and it has made a pretty amazing discovery. Water. Salt water actually, and lots of it, just beneath the surface of the red planet. The Mars Curiosity rover found frozen water and water vapor in the Martian atmosphere several years ago. Now, scientists have detected the presence of a chemical substance in the Martian soil that absorbs water vapor from the atmosphere to form a brine that keeps being a liquid even when temperatures on the planet fall below the freezing point of water. This might provide future explorers with a source of water, or it might prove more trouble than not. The liquid brine is expected to be highly corrosive. Still, water is considered the source of life as we know it, and now we know Mars has it.

Tuesday, April 08, 2014 - When Stuff Aligns

Financial Review with Sinclair Noe

DOW + 10 = 16,256
SPX + 6 = 1851
NAS + 33 = 4112
10 YR YLD - .01 = 2.68%
OIL - .28 = 102.28
GOLD + 11.10 = 1309.00
SILV + .20 = 20.16

Every now and then the planets align. Tonight is one of those times; Mars, the Sun, and Earth will be aligned in opposition. And Mars is closer than normal, although still about 92 million miles away. I have no idea what this means in the cosmic scheme of things, but when the sun sets in the West, Mars will rise in the East; and it will be overhead around midnight. You should be able to spot it easily as it will look light a bright star with a red or burnt orange color. If you can’t watch tonight, you can look to the skies for the next week.  On April 14, there will also be a total lunar eclipse causing the full Moon to turn as red as the Red Planet itself.

Investor sentiment remains upbeat ahead of earnings and despite the smack-down in prices Friday and Monday. On Friday, the CBOE Volatility Index, or VIX, dropped down to a multi-month low of 12.6 and even after a few days of triple digit declines the VIX has only edged back into the mid-14 range. And although Alcoa is the official start of earnings season, a few companies have already reported, including Oracle, Nike, and Fed Ex; without inspiration. The floodgates on profit reports don’t open until April 15. A few retailers and banking names are due out with results this week.

Now we’ll see if the stars align for earnings season, which kicked off this afternoon with Alcoa. The aluminum producer was a long-time member of the Dow Industrial Average until last September, and with the ticker symbol AA, they held the alphabetical honor of the first blue chip company to report earnings each season. Today, after the close of trade, Alcoa reported profit of 9 cents per share on revenue of $5.45 billion. Wall Street analysts’ consensus estimates called for 5 cents per share. Alcoa was up in after-hours trading.

Now, let’s dig down. The earnings excluded restructuring costs and other one-time items, also known as the cost of doing business; including those costs, Alcoa posted a net loss of 16 cents per share compared with earnings of 14 cents per share for the same quarter last year. Sales fell to $5.45 billion from $5.83 billion a year earlier, trailing the $5.55 billion average estimate. So, revenue down and below estimates; earnings were actually losses but with a clever accounting team they show as profit and they beat estimates; stock price goes up. Now you know the Wall Street earnings game.

Wall Street doesn’t care about results in a vacuum. It cares about results vs. expectations. And Wall Street has set the bar so low for earnings that it should be easy to fly above forecasts, even when a company trips over the bar. That should set up plenty of opportunities for earnings reports to beat estimates, and trade higher even as the broader market suffers a year-over-year drop in profits. Ironically, while the S&P 500 is just shy of all-time highs, the number of S&P constituents that have lowered their quarterly EPS outlook is also at an all-time high.

As we have seen every quarter over the last several years, analysts have slashed their initially-too-optimistic forecasts ahead of earnings season. But estimates have come down more dramatically than usual for 1Q due to weather, concurrent with increasingly negative management guidance. It’s a game that Wall Street plays on investors, and so far, very early in the reporting season, it is playing out as 52% of the 21 early reporters have exceeded on both earnings and sales higher than last quarter’s 42% hit rate, and the best result from the early reporters since 1Q12.

That doesn’t mean the earnings reports are good, nor will they be good; S&P earnings are forecast to fall 1.2%. Of course earnings probably won’t fall 1.2% because enough companies will beat expectations by a wide enough margin to pull year-over-year profit growth into the black. Let the games begin.

Tomorrow the Federal Reserve will release the minutes of the March FOMC meeting. We already know the Fed is on track with tapering away from QE, and should be done with asset purchases sometime around October or December, and then they will look at the possibility of raising interest rate targets from the zero range, probably next year, give or take. And this week, several Fed policy makers are giving speeches to try and rein in Wall Street from getting ahead of the Fed.

Narayana Kocherlakota, president of the Minneapolis Federal Reserve said today that the US economy is wasting “lots of resources” by letting inflation stay too low and unemployment stay too high. Kocherlakota was the lone dissenting voter at last month’s FOMC meeting; he believes the Fed should do more to stimulate the economy and they should avoid specific targets for raising rates.

Kocherlakota believes the current unemployment rate of 6.7 percent probably overstates the health of the labor market, because it does not count those who have given up looking for work or those who are working part time but who would rather work full time. He says: "There is still significant underutilization of our country's most important resource, its people."

One idea is to cut the interest rate paid on excess reserves that banks keep on deposit at the Fed. This is more of a symbolic move than a big money game changer, mainly because the Fed pays only about 25 basis points on excess reserves. Still, reserves have grown over the past few years, possibly to as much as $2.6 trillion.

How did reserves get so big? The simple answer is QE. When the Fed buys private sector assets from investors, it not only creates new deposits, it creates new reserves. This is because a new deposit in a bank creates a liability which must be balanced by an equivalent asset. When banks create deposits by lending, the equivalent asset is a loan. When the Fed creates deposits by buying assets, the equivalent asset is an increase in reserves, also newly created. So it does not matter how much lending banks do, if the Fed is creating new deposit/reserve pairs by buying assets from private sector investors then deposits will always exceed loans by the amount of those new reserves. While the Fed continues to buy assets from private sector investors, excess reserves will continue to increase and the gap between loans and deposits will continue to widen.

Cutting interest rates on excess reserves might encourage some bank lending to compensate for the loss of earnings on the reserve-deposit spread; that would be logical but it also involves the actual work of lending and bankers are loathe to work and frequently illogical. So, the bankers could almost be counted on to do the wrong things; such as cutting deposit rates to from ridiculously low levels to stupidly low levels; increasing fees; or increasing interest rates on loans, which is not exactly an inducement for households and businesses to borrow. And so, as long as the Fed continues buying Treasuries and mortgage backed securities as part of Quantitative Easing, they will continue to grow excess reserves.

But what is the point if it just parks reserves with banks and doesn’t get the money circulating through the economy? The real question is how to get money moving through the economy. And this has been the major downfall of QE in the Fed’s ability to stimulate the economy and live up to its mandate of maximum employment.

Of course, the money parked in excess reserves is just part of the problem with sluggish money velocity. We also need to consider the nearly $2 trillion corporations have parked off shore, sitting there doing nothing. Congress cowers before the multinationals. There is nothing we as individuals can do. But last Friday, the legislature in the state of Maine passed legislation to end some of the games.

Companies can dodge taxes by shifting income to low-tax jurisdictions. Not only do they send the money to tax havens off shore, but they also set up companies to hide income in low tax states, such as Nevada and Delaware. Twenty-three states and the District of Columbia countered stateside tax avoidance by “combined reporting.”

Combined reporting requires companies to report their income in all states; then the combined income is taxed in proportion to the business’s activity in their state. That way, if large amounts of income that were produced by business activity in, say Maine, but were reported for tax purposes as belonging to Delaware, it would be included in the total income pie that Maine would proportionately tax.

But if combined reporting stops at “the Water’s Edge,” it only includes income reported within the United States. To get at offshore tax havens, the states can require worldwide combined reporting, or Water’s Edge plus a list of known tax havens. So the Maine legislature has passed a bill to close the “Water’s Edge” loophole, and require multinationals to pay up, no matter where they park their cash. The Maine legislators estimate they could collect an additional $5 million a year. The governor has 10 days to sign or veto, or the bill automatically becomes law. It’s is, admittedly a small step, but if the stars and the planets can align, maybe the states could also align.