Financial Review

Close But No Cookies

Sinclair Noe — July 25, 2017

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DOW + 100 = 21,613
SPX + 7 = 2477 (record)
NAS + 1 = 6412 (record)
RUT + 12 = 1450 (record)
10 Y + .07 = 2.33%
OIL + .61 = 48.50
GOLD – 5.40 = 1250.60
BITCOIN – 1.70% = 2547.12 USD
ETHEREUM – 2.57% = 201.76

The S&P 500 index, the Nasdaq Composite and the Russell 2000 all closed at record highs. The Dow is close but no cookies.

It is earnings season and there were plenty of good earnings and a few bad. 3M marked its sharpest-ever drop on a dollar-basis, off $11.43, or down 5.4%, cutting about 80 points from the price-weighted Dow. 3M’s share slide came after disappointing earnings.

The Post-it Notes-and-Scotch tape maker’s share decline, however, was more than offset by a tandem of firm rallies in McDonald’s and Caterpillar which reported second-quarter results that outstripped Street estimates. A drop in Google parent, Alphabet, weighed on the Nasdaq Composite, but the Nasdaq still managed to eke out a record high.

Before we dig into earnings news, there was a lot going on today. The Senate voted on healthcare legislation, in a way. Senate Republicans narrowly agreed to open debate on a bill to end Obamacare, but efforts to repeal or repeal and replace the law still face significant hurdles. Senator John McCain, who was diagnosed this month with brain cancer and has been recovering from surgery at home in Arizona, made a dramatic return to the Capitol to cast a crucial vote in favor of proceeding.

McCain received a standing ovation as he entered the chamber. The Senate vote was deadlocked at 50-50 and Vice President Mike Pence cast the deciding vote. Despite the successful procedural vote, there is no obvious path for any of the GOP’s various proposals to pass out of the Senate in the coming days.

Republicans who voted yes to begin debate warned that they still planned to oppose final passage if the amended legislation was not to their liking. The Senate will now move to an amendment process, but if none of the ensuing proposals can get 50 Republican votes, the party will be stuck again. The Better Care Reconciliation Act has already drawn public opposition from at least four Republicans.

In a speech on the Senate floor, McCain criticized both the underlying proposal and the secretive, partisan process Majority leader Mitch McConnell used to write it. McCain said he would not vote for the bill as it is today. He said the proposal must include changes demanded by Arizona’s governor, Doug Ducey, to win his vote.

The Senate’s next step is to vote on a full repeal of Obamacare – which will probably fail without a proposed bill to replace it. Then it will try an amended version of the Better Care Reconciliation Act, the latest Senate proposal; this will also likely fail since it hasn’t yet been scored by the Congressional Budget Office and thus needs 60 votes to pass rather than just 51.

Then we might be looking at a skinny repeal – a more limited repeal that only gets rid of Obamacare’s insurance mandates and some of its taxes, without eliminating Obamacare’s expansion of Medicaid. However, eliminating the mandates would result in much, much higher premiums for everybody who doesn’t opt out.

Today’s vote means there will be various amendments offered and there will be votes on the amendments, until the Senate can agree on something that seems to be a complete piece of legislation and then there will be a vote on that, maybe by the end of the week, if there is enough support. That means the next few days are going to be a whirlwind.

President Trump says they’ll come up with something really, really wonderful. At this point I’m just hoping I can get coverage for confusion.

The Conference Board said its consumer confidence index rose to 121.1 this month from 117.3 in June. The confidence index is now at its second highest level in 16 years. A big reason is the creation of millions of jobs since 2010 that’s driven the unemployment rate down to as low as 4.3%. That’s the lowest level since the turn of the century.

The difference between those who say jobs are “plentiful” (34.1%) and those who say jobs are “hard to get” (18%) was 16.1 points. Based on that measure, the last time the labor market was just as good was in August 2001.

A “present” situation index that tracks how consumers view the economy now rose to 147.8. That’s the highest level since mid-2001. A future expectations index that tracks how consumers think the economy will perform six months from now increased to 103.3.

Sales of existing homes continued to show solid growth. The S&P/Case-Shiller 20-city index rose 5.7% in the three-month period ending in May compared to a year ago, down from 5.8% in the prior period. The broader national index rose 5.6% for the year in May, the same as in April. Phoenix was right in line – posting 0.6% growth in resale home prices in May, and 5.7% in the 12 months through May.

Meanwhile, oil prices continue to rally. Saudi Arabia said at a meeting in Russia that it would cut August exports to 6.6 million barrels a day—a million barrels less than a year earlier. Separately, Nigeria, which isn’t part of the production-cut agreement led by the Organization of the Petroleum Exporting Countries, also promised to limit its daily production to 1.8 million barrels.

Oil traders have taken these developments as bullish for prices, though many do point out that the Saudis normally lower exports at this time of year because of stronger domestic demand for oil, and Nigeria’s output would still have to rise from its current level of just over 1.6 million barrels a day before the West African nation would cap its output.

Meanwhile, Halliburton forecast a flat rig count in the US; that implies a potential slowdown in oil production. Anadarko Petroleum, cut its investment guidance by $300 million for the full year after posting a larger than expected second quarter loss.

Copper is back to its highest levels in 2 years, as base metals extended a rally in the past month brought on, in part, by economists having become more upbeat about China’s economy;  coupled with the fact that a very strong housing market is creating strong demand for the physical copper. Freeport-McMoRan shares jumped 14.7 percent.

It wasn’t a very good day in the bond market, where the benchmark 10-year Treasury note fell the most in a month. A couple of possible reasons: bond investors expect only modest economic growth and inflation that is stuck well below the Fed’s 2 percent target, and bond traders don’t expect the Fed to increase rates anytime soon – as in maybe December, maybe next year – certainly not tomorrow.

The Federal Open Market Committee, the FOMC, started its 2-day meeting today; tomorrow they will issue a statement that they are standing pat on rates for now. Anything else from the Fed would be a major shock. The Fed’s policy is one of “normalizing” interest rates with a real emphasis that it continues to err on the side of market ease – that is, it does not want to make a mistake of disrupting markets and causing a correction.

That is, it wants to see the stock market continue to rise, the policy it has been following for most of the current economic recovery. The Fed will likely indicate that it is getting closer to trimming its $4.5 trillion balance sheet and selling off Treasuries and mortgage backed securities, but the big unwinding won’t really start to kick in until sometime in 2018, so for now the rally continues.

In earnings news: the markets looked past a 3% drop in Alphabet, which reported after the close yesterday. Alphabet was hit with a $2.7 billion dollar fine from the Euro Union, but looking past that, the parent of Google is still reporting impressive revenue and profit growth.

3M disappointed on earnings and it was punished. That seems to be the theme. Misses are punished. Slightly better than expected earnings get no love, but there is still plenty of good to great earnings news to lift the market to new highs.

With more than one-fourth of the S&P 500 having reported results, earnings are now expected to have climbed 9.1 percent in the second quarter, up from a projection of an 8-percent rise at the start of the month.

McDonald’s posted its biggest jump in global sales at established restaurants in five years, helped by stronger traffic worldwide. McDonald’s has also focused on value for U.S. customers with discounts on soft drinks and offering custom burgers.

And it seems to be working. Global same-restaurant sales climbed 6.6 percent in the second quarter, and sales at U.S. restaurants open at least 13 months rose 3.9 percent. Net income rose to $1.40 billion, beating estimates. Revenue was down slightly but still beat estimates. McDonald’s shares were up 4% and hit an all-time high and were the top gainer on the Dow Jones Industrial Average today.

Caterpillar shares jumped almost 6%, hitting a 5-year high. Earnings and revenue beat estimates and Cat raised its guidance.

AT&T’s quarterly profit topped estimates. Shares rose 2.5 percent. AT&T is locked in battle Verizon and Sprint and T-Mobile for customers in a market where most people already have cell phones. AT&T, which is in the process of buying Time Warner for $85 billion, has sought to compete by bundling mobile service with entertainment.

AT&T lost 89,000 U.S. phone subscribers who pay a monthly bill – that was better than expected.

Financial Review

Oh Canada

Sinclair Noe — April 25, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 232 = 20,996
SPX + 14 = 2388
NAS + 41 = 6,025
RUT + 13 = 1411
10 Y + .05 = 2.33%
OIL + .13 = 49.36
GOLD – 12.00 = 1265.00

This has been a very strong start to the week. The Dow Industrial Average has added about 460 points in the past two sessions and traded above 21,000. The S&P 500 has gained about 40 points. Both the Dow and the S&P are now back above their 50-day moving averages.

The Nasdaq Composite broke through 6,000 for a record high. To put this in perspective, the Nasdaq broke above the 5,000 milestone on March 9, 2000 – 17 years ago. Simple math tells you that the Nasdaq has returned just over 1% per year, on average, for the past 17 years. Of course, there was nothing average about the past 17 years.

The week started with somewhat positive news about the French elections, which translated to a risk-on trade for global markets; combined with easing geopolitical tensions; plus, the hope for some sort of tax cut measure to be announced tomorrow.

The threat of a US government shutdown this weekend appeared to recede after President Trump backed away from a demand that Congress include funding for his planned border wall with Mexico in a spending bill. However, even if the fight over wall funding is over, Republicans and Democrats still have some difficult issues to resolve as they face a Friday night deadline.

The big driver in the 2-day rally has been earnings, coming in much stronger than estimates. With half of the Dow 30 Industrial companies reporting earnings, with 11 beating earnings expectations, according to FactSet. That 73% beat rate is above the 5-year average of 68% for S&P 500 companies.

I know that is a little of an apples-to-oranges comparison, but still, it has been a good earnings reporting season so far.  The shares of the Dow companies that have revealed results have gained a combined total of $21.80 in price since the reports were released through Tuesday afternoon, with 10 winners rising a combined $36.33 and five losers falling $14.46.

The combined price gains are adding about 149 points to the Dow, which is a price-weighted index. That would represent about 36% of the Dow’s 417-point gain since earnings season started. The stocks of the five Dow companies that reported results today were adding about 125 points to the Dow’s price. Caterpillar and McDonald’s combined to add 100 points to the Dow today.

McDonald’s reported first-quarter earnings and sales that topped analysts’ most bullish estimates amid declining visits to restaurants industry-wide. McDonald’s cut prices and offered a smaller Big mac and a bigger Big Mac, plus they are doing well with all-day breakfast – that helped lift sales in the US by 1.7%. Global sales at stores open for at least one year — so-called comparable store sales — rose by 4%. Earnings and revenue beat estimates.

Caterpillar announced higher-than-expected earnings and revenue. In a press release, noted strong cost cutting measures, while downplaying guidance, writing: “While Caterpillar had strong first-quarter performance and is seeing signs of recovery in several of the industries it serves, geopolitical and market uncertainty along with volatility in commodity prices continue to present risks for the rest of the year.”

Coca-Cola reported a smaller-than-expected quarterly profit due to higher costs related to refranchising its North America bottling operations. Global soda sales fell 1 percent in the first quarter. Coke missed earnings estimates but beat revenue estimates.

AT&T’s quarterly revenue missed estimates on lower equipment sales, as customers held onto their phones longer and did not buy new replacement phones. AT&T lost 61,000 wireless subscribers who pay a monthly bill. Earnings also missed estimates. AT&T, which is in the process of acquiring Time Warner, also said it would no longer give a full-year revenue forecast due to the unpredictability of wireless handset sales.

3M, which makes Scotch tape and Post-it notes, raised its 2017 profit forecast and reported better-than-expected quarterly results, helped by growth across its major businesses. 3M beat earnings and revenue estimates.

Chipotle Mexican Grill reports same store sales rose almost 18 percent in the first quarter.  Sales by that measure had previously declined for five straight quarters following an E. coli outbreak and other food-poisoning incidents that began in 2015. Chipotle is still grappling with higher labor costs and a tight market for restaurant employees.

The chain raised menu prices at about 440 of its 2,200 locations earlier this month to cope with escalating expenses. Still, they managed to beat revenue and earnings estimates. Chipotle opened 57 new restaurants during the quarter, and it reiterated plans to add as many as 210 this year.

Panera Bread plans to hire 10,000 new employees by the end of the year as they expand their delivery services. Some 75 percent of the new hires will be delivery drivers, while the remaining 25 percent will be in-cafe jobs. Panera has already rolled out delivery to 15 percent of its system, including 20 percent of its company-owned locations.

By the end of 2017, it hopes to expand delivery to 35 percent to 40 percent of system-wide locations. The delivery option is expected to add about $250,000 in revenue per restaurant. Panera is in the process of being acquired by privately held JAB Holding in a deal valued at about $7.5 billion.

Earnings season kicked off with the big banks and today Wells Fargo and Citigroup held their annual shareholders’ meetings. It did not go well. Wells’ meeting ran nearly three hours, was repeatedly interrupted by angry shareholders seeking answers about how and why thousands of bank employees could open 2.1 million fake accounts in customers’ names without their permission.

Several shareholders were physically escorted out of the meeting. Proxy adviser Institutional Shareholder Services (ISS) argued the Wells Fargo directors failed in their oversight duties. All directors were re-elected but several, including Chairman Stephen Sanger, barely had a majority of votes. Hardly a show of confidence, and an indicator that we could see a shakeup in the board soon.

Citigroup is one of four lead banks in a group of 17 which have provided project financing for the Dakota Access Pipeline. The pipeline crosses land of the Standing Rock Sioux whose members are concerned about possible ground water contamination if the pipeline breaks.

Citigroup’s shareholder meeting was disrupted by protesters, prompting a rare apology from Chairman Mike O’Neill, who said, “We wish we could have a do-over on this.” CEO Mike Corbat said Citigroup had not given enough early consideration to the concerns of the indigenous people.

The Trump administration announced a 20% tariff on lumber imported from Canada, to be applied retroactively. The trade agreement that governed imports of Canadian lumber expired at the end of 2016, and prices have been on the rise since then. The National Association of Home Builders said higher input costs had already added almost $3,600 to the price of a new home, and the tariff will add $1236 to the price of the average single family home.

The NAHB also says the proposed tariff could cost as many as 8,241 jobs and over $350 million in taxes and other revenues for U.S. governments in 2017 alone. The US lumber industry alleges Canadian wood is heavily subsidized and imports are harming U.S. mills and workers. Canada is the world’s largest softwood lumber exporter, and the U.S. is its biggest market.

Canadian lumber companies called the tariff unfair and Canadian prime minister Justin Trudeau vowed to fight back. International tribunals have considered the issue of whether Canada provides unfair subsidies to lumber exports and ruled that it does not. Log costs are lower in some parts of the US than in some regions of Canada.

The US does not produce enough lumber to meet domestic demand. Homebuilders such as Lennar, Pulte, and DRHorton all dropped today. May lumber futures dropped $10.00 at $385.10, go figure.

Meanwhile, on the southern border, Mexico and the US have been fighting for years over dolphin safe tuna. Mexico says its fisherman play by the rules. The US government disagrees. Today, the World Trade Organization ruled in Mexico’s favor, allowing it to impose trade sanctions worth $163 million a year against the US. The WTO says that’s how much money Mexico has lost from the US unfairly penalizing Mexican tuna.

A US judge has blocked President Trump’s executive order that sought to withhold federal funds from sanctuary cities. The ruling said Trump’s order targeted broad categories of federal funding for sanctuary governments and that plaintiffs challenging the order were likely to succeed in proving it unconstitutional.

The Conference Board said its consumer confidence index fell to 120.3 this month from 124.9 in March, which was the highest reading since December 2000. The index in April was the second highest reading since 2000. Consumers’ assessment of labor market conditions was slightly less favorable than in March. That measure closely correlates to the unemployment rate in the Labor Department’s employment report.

House prices continued to show no signs of slowing, hitting their highest in nearly three years. The S&P/Case-Shiller 20-city index rose 5.9% in the three-month period ending in February compared to the same period a year ago, an acceleration from its 5.7% yearly increase in January. This is the highest rate since July 2014. The 20-city index was up 0.4% for the month, or a 0.7% gain when seasonally adjusted. Phoenix saw a 0.4% gain in the last month, and 5.3% over the past year.

The Commerce Department said new home sales jumped 5.8 percent to a seasonally adjusted annual rate of 621,00 units last month, the highest level since July 2016. New home sales were up 15.6 percent compared to March 2016. They have now increased for three straight months.

Financial Review

Year of the Rooster

Sinclair Noe — January 23, 2017

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

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Financial Review by Sinclair Noe for 01-23-2017
DOW – 27 = 19,799
SPX – 6 = 2265
NAS – 2 = 5552
RUT – 4 = 1347
10 Y – .06 = 2.40%
OIL – .35 = 52.87
GOLD + 7.40 = 1217.40

President Trump is expected to sign an executive order as early as today – intended to renegotiate NAFTA, the free trade agreement between the United States, Canada and Mexico. Trump also signed an executive order pulling out of the Trans-Pacific Partnership (TPP).

In one of first Trump administration orders, the Department of Housing & Urban Development suspended reduction of FHA annual mortgage insurance premium rates. That was a quarter of a percent cut in the mortgage insurance premium for FHA loan holders, announced last week by the U.S. Department of Housing and Urban Development and set to go into effect next Friday, January 27. The reduction was estimated to save the average FHA borrower $500 this year.

The new White House rolled out several policy promises on its new website. The position page on jobs and the economy reads: “To get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 percent annual economic growth.”

So, now we have a baseline, even if it is improbable.

A group including former White House ethics attorneys filed a lawsuit today accusing President Donald Trump of allowing his businesses to accept payments from foreign governments, in violation of the U.S. Constitution. The lawsuit, brought by the Citizens for Responsibility and Ethics in Washington, alleges that the Constitution’s emoluments clause forbids payments to Trump’s businesses. It will seek a court order forbidding Trump from accepting such payments.

President Trump held meetings this morning with business and labor leaders, seeking to work quickly on his campaign promise to boost the American manufacturing sector and deliver more jobs. Trump repeated a campaign promise to cut regulations by at least 75%. He also said there would be advantages to companies to make their products in the US, suggesting there will be a substantial border tax on foreign goods entering the US. This afternoon he meets with labor leaders and U.S. workers.

Foxconn Technology Group is considering building a display-panel manufacturing facility in the United States in a joint venture with Apple that could create up to 50,000 jobs. Terry Gou, Taiwan-based Foxconn’s chairman and CEO, said the facility could cost $7 billion and create between 30,000 and 50,000 new jobs, and could include the production of TV screens in addition to smartphone displays. The U.S. has no TV-display factories, even though it is the world’s second-largest TV market.

Supermarket operator Kroger says it will fill 10,000 permanent positions in its supermarket divisions. Kroger, which had about 431,000 full- and part-time employees as the New Year, also said its total active workforce grew by more than 12,000 in 2016.

On the eve of a summit last month between technology executives and then President-elect Donald Trump, IBM Chief Executive Officer Ginni Rometty publicly pledged to hire about 25,000 U.S. workers and spend $1 billion on training over the next four years.

In late November, IBM
completed at least its third round of firings in 2016, according to former and current employees. They don’t know how many people have lost their jobs but say it’s probably in the thousands, with many of the positions shipped to Asia and Eastern Europe.

Rometty’s hiring pledge prompted current and former IBM workers to vent on message boards and Facebook groups. IBM’s re-organization inevitably meant some workers would lose their jobs. Automation wiped out some positions, and at the same time, IBM has sent thousands of jobs offshore.

This will be another busy week for earnings reports; later in the week we’ll hear from Alphabet and Microsoft. Intel is also set to report, along with telecom and media giants Verizon, AT&T, and Comcast. 3M, Caterpillar, Boeing, and Ford will give us a snapshot of the manufacturing and industrial sectors.

We’ll also see earnings from pharmaceutical companies like Johnson & Johnson and Biogen and oil giant Chevron. The major data release in the week is the advanced reading of fourth-quarter GDP. There is also some housing data, durable goods orders, and a look at consumer sentiment.

Yahoo reported earnings after the closing bell that beat estimates but the earnings are secondary. Verizon has agreed to pay $4.8 billion for Yahoo, and the factor that could change that price is not financial results but hacks – and who knew what and when. Yahoo said today the closing would be delayed until the second quarter, or as soon as practicable.

The SEC is investigating whether two massive data breaches at Yahoo should have been reported sooner to investors. Yahoo faces questions about exactly when it knew about a 2014 cyber-attack it announced in September that exposed the email credentials of half a billion accounts. In December, Yahoo said it had uncovered yet another massive cyber-attack, saying data from more than 1 billion user accounts was compromised in August 2013. Securities industry rules require companies to disclose cyber breaches to investors.

McDonald’s posted better-than-expected global same-store sales in the latest quarter, but its results in the U.S. declined as enthusiasm for its all-day breakfast options leveled off. For the quarter that ended in December, the burger chain’s global comparable sales increased 2.7%, well estimates. In the U.S., comparable sales fell 1.3%; the company blamed a challenging comparison to the prior-year launch of its all-day breakfast service.

Halliburton reported mixed fourth quarter fiscal 2016 earnings results. Despite a miss on the top line, which continue to suffer from weak demand, Halliburton’s overall results point to improvements in North America — its largest revenue region.

OPEC’s production fell by about 221,000 barrels a day to just over 33 million a day in December, per secondary sources data in the group’s monthly report published Jan. 18. The declines still leave output about 1.8 million barrels a day higher than the average of 31.3 million the group is targeting in the first half of the year, underscoring a need to press on with cuts. Saudi Arabia’s Minister of Energy said the first two weeks of January saw “very strong” compliance and most producers are already exceeding their pledged cuts.

The mega-merger between health insurers Aetna and Humana has been blocked by a federal judge. The deal, in which Aetna proposed to buy Humana for $37 billion, has been ruled anti-competitive. Aetna now owes Humana a $1 billion break-up fee, according to Bloomberg. Last summer, Aetna threatened to pull out of the Affordable Care Act exchanges, after the Department of Justice brought a lawsuit to block the merger.

Reuters last week reported that another healthcare tie-up, the Anthem-Cigna mega-merger, would be blocked by a federal judge.  Former Attorney General Loretta Lynch argued in July when the suit was brought that both the Anthem-Cigna and Aetna-Humana mergers would hurt consumer choice and increase prices.

The City of Everett Washington has file suit against Purdue Pharma, alleging the drug manufacturer turned a blind eye to criminal trafficking of its OxyContin painkillers to “reap large and obscene profits” and demanding it foot the bill for widespread opioid addiction in the community.

In a first-of-its-kind lawsuit, city lawyers accused Purdue of gross negligence, creating a public nuisance and other misconduct and said the company should pay costs of handling the opioid crisis — a figure that the mayor said could run tens of millions of dollars — as well as punitive damages.

A computer problem forced United Airlines to ground all domestic flights for about an hour on Sunday evening, causing a cascade of delays and annoying customers throughout the United States. The “ground halt” was lifted after about one hour.

Cyber-attacks against banks have increased in numbers and sophistication in recent years, with criminals finding new ways to target banks. Last February $81 million was taken from the Bangladesh central bank when hackers broke into its system and gained access to the SWIFT international transactions network. The European Union is considering testing banks’ defenses against cyber-attacks, with an EU wide stress test.

Its lead may have narrowed over the past year, but South Korea still reigns supreme on Bloomberg’s Innovation Index, which ranks the world’s economies using metrics such as R&D spending and the concentration of high-tech public companies.

Hong Kong is the most expensive city in the world to live in. That’s according to the 13th Annual Demographia International Housing Affordability Survey, which says that Hong Kong’s housing market is the least affordable in the world.

All around the world, Chinese people are cleaning their houses, shopping for new clothes, and following several traditions leading up to and during the New Year to help usher in good luck and fortune. Roughly a sixth of the world will observe Chinese New Year. Starting January 28, celebrations to welcome in the year of the rooster will continue through February 2. This week also marks the world’s largest annual mass migration as millions of Chinese people travel back to their family homes for reunions ahead of the New Year celebrations.

Today also marks the start of tax filing season. Your taxes aren’t due until April 18^th this year, but you can start filing as of today.

And for those of you still trying to cling to your New Year Resolutions, be warned – today marks the start of Girl Scout Cookie season and it also marks the 100th anniversary of Girl Scout cookie sales. I could tell you to just say no, but that wouldn’t work.

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

Easy to Spot Winners

Sinclair Noe — October 22, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 320 = 17,489
SPX + 33 = 2052
NAS + 79 = 4920
10 YR YLD un = 2.03%
OIL + .18 = 45.38
GOLD – .80 = 1166.90
SILV + .16 = 15.94

European Central Bank policymakers are meeting today in Malta. ECB President Mario Draghi announced no change to interest rates or asset purchases, but he warned that emerging markets are hurting Eurozone growth prospects, and he hinted the central bank may lower the deposit rate further or expand its quantitative easing at its December meeting. Markets just love an accommodative central bank.

The European Economics Commission says “Greece has done a certain number of reforms, and we are going to give them money, €3 billion-euro in all,” and in the course of November, December, the commission will deal with the issue of the recapitalization of Greek banks and Greek debt.”

Chinese stocks recovered today as the People’s Bank of China added liquidity to the market. After the close on Wednesday, the PBOC injected $16.6 billion into 11 financial institutions via medium-term lending facilities. Meanwhile, the government’s anti-corruption campaign continues with a crackdown on golf, considered a lavish extravagance. Or in my case, cruel punishment.

New applications for U.S. unemployment benefits inched up by 3,000 to 259,000 in the week ended Oct. 17. This is the first gain after two straight large declines. Claims had fallen by 20,000 in the prior two weeks.

Existing home sales rose 4.7% to a seasonally adjusted annual rate of 5.55 million, the second-highest monthly level since Feb. 2007 and an 8.8% rise from the same month of 2014. The National Association of Realtors attributed the improvement in the housing market to low mortgage rates, an improving jobs environment and a slight thawing in credit availability. There were 2.21 million available homes for sale, down 3% from August. The number of listed properties in August was the second-lowest for that month since 2002.

The White House is making a push to solve the debt crisis in Puerto Rico, pressing Congress to amend bankruptcy code, instate a financial control board and extend tax credits as the commonwealth struggles with $72 billion in debt. On Wednesday, the Government Development Bank, the island’s de facto fiscal authority, ended talks with a group of its bondholders and their advisers after failing to reach a deal on restructuring the debt.

The U.S. Treasury said it will postpone the two-year note auction previously scheduled for Tuesday, as an impasse over the debt limit constrains the nation’s borrowing and inflicts the first ceiling-related auction delay in a decade. The Treasury sent an e-mail saying: “Due to debt ceiling constraints, there is a risk that Treasury would not be able to settle the two-year note” on Nov. 2. The five-year note auction on Oct. 28 and the seven-year note auction on Oct. 29 will proceed as planned.

The yield on the two-year Treasury note slid after the announcement, as it means less supply than had been expected in this sector. Treasury Secretary Jacob Lew said he is concerned that “last-minute brinkmanship” in Congress could lead to a legislative “accident” in which lawmakers would fail to raise the debt ceiling before a Nov. 3 deadline. With $12.9 trillion in marketable securities, the U.S. is considered the world’s most reliable debt issuer. The last time an auction was delayed due to the borrowing limit was in November 2004.

And part of the reason why this is noteworthy is because the Treasury markets are supposed to be boring, incredibly boring and completely predictable, regular, and consistent. This consistency has allowed the government, and by extension the US dollar, to become the safe harbor for investors. Predictability translates into decreased borrowing costs for the US, roughly $27 billion in savings over the past 17 years, simply attributed to the predictable, consistent bond market schedule.

Remember the debt ceiling fight of 2011 was behind the credit rating downgrade that stripped the US of AAA rating. And now we are preparing for another fight over the debt ceiling, and the clock is ticking, and the most boring part of the markets just got important.

The median stock in the US has been flat for 2015. That is actually a big improvement from about one month ago when the median stock was down 8%, so we’ve seen a nice rally, but at the current pace we are on track for the worst performance since 2008. And it doesn’t look like stocks are going to rally on earnings news; third quarter reports are coming in and we are on track for a two consecutive quarters of declining earnings, or an earnings recession.

The bad news is that when we have an earnings recession we tend to get a real recession. This is a statistic not lost on the Fed. Historically there has been a very high correlation between changes in the Fed Funds rate and the profit cycle. The Fed traditionally begins a tightening cycle when profits are moving higher and begins easing when profits decelerated. The notion that the Fed would raise rates in a profits recession, well, it has never happened before.

United Auto Workers members have ratified a new 4-year labor contract with Fiat-Chrysler. UAW members sacrificed gains in a 2011 contract and two years earlier made concessions to allow the former Chrysler to go through bankruptcy. The new contract, effective as of next Monday, provides a clearer path to top pay for so-called “second-tier” workers in a two-tier wage system established in 2007, which pays newer workers less than those hired before 2007. The new contract allows newer workers to earn wages more in line with veteran employees. Next up, negotiations with Ford and GM.

A swift plunge in the stock price of Valeant Pharmaceuticals cost some of Wall Street’s top names billions of dollars on Wednesday but Pershing Square’s Bill Ackman took the meltdown as a buying opportunity. Ackman bought 2.1 million additional shares as the company plummeted as much as 40% on a report from Citron Research that alleged it fraudulently inflated revenues. The report goes so far as to call Valeant the “pharmaceutical Enron.” Today, the stock dropped 10% more.

Let’s take a look at earnings reports:
McDonald’s reported quarterly earnings and revenue that topped estimates. Global sales at established restaurants were up a much better-than-expected 4 percent in the third quarter, ending six straight quarters of flat or falling results. McDonald’s share hit an all-time high on the report.

American Express posted quarterly earnings and revenue that missed analysts’ expectations on Wednesday, citing continued headwinds from a stronger U.S. dollar and a rise in marketing spending.

3M, the maker of Scotch tape and Post-it notes, reported disappointing net sales for the third quarter and said it would cut about 1,500 jobs next year, hurt by a strong dollar and a global economic slowdown.

Caterpillar delivered quarterly earnings and revenue that fell short of expectations on Thursday. The company also lower its earnings outlook for this year and sharply increased its estimates on restructuring costs for 2015.

Southwest Airlines posted an 83% jump in third-quarter profit, boosted by lower fuel prices and cost controls.

Daimler, the owner of Mercedes-Benz, reported a net income of $2.7 billion, a 13% drop compared with a year earlier, but Mercedes car sales rose by 18% in the period.

Hyundai reported a 23% fall in net profit to $1.1 billion on falling China sales, missing estimates.

Freeport-McMoRan will further cut copper and molybdenum output as it posted a bigger-than-expected quarterly loss. The Phoenix-based company said it remains confident in the longer-term outlook for copper, but will halve operating rates at its Sierrita mine in Arizona as prices continue to drop. Freeport reported an adjusted loss of $156 million, or 15 cents a share, lagging analysts’ expectation for an 8 cent loss.

Three big earnings reports came out after the closing bell: Microsoft, Amazon, and Google parent Alphabet.

Microsoft reported a profit of $4.6 billion, or 57 cents a share, up from $4.5 billion, or 54 cents a share, a year earlier. Profit beat estimates, despite a decline in earnings. For the first time, Microsoft broke out financial results based on three operating division, including its mobile and cloud business.

Amazon posted a profit, always a bit surprising, a profit of $79 million, or 17 cents a share, compared with a loss of $437 million, or 95 cents, a year earlier. You’ll remember that last year’s results included a big whiff with the Fire phone. In the most recent quarter revenue gained 23 percent to $25.4 billion, pushed by Amazon Prime Day, which was even better than Black Friday.

As Amazon has been transformed from an online bookstore into a vast conglomerate, its video-streaming service competes with Netflix Inc. and its third-party logistics business rivals UPS. Its cloud business, with revenue growing 78%, competes with Google and Microsoft to rent storage and computing power. Meanwhile its core e-commerce business challenges brick-and-mortar chains such as Wal-Mart and Target. It has all worked well for CEO Jeff Bezos; with today’s gains Bezos saw his net worth climb to $55 billion, making him the third richest man in America.

Google parent Alphabet reported better-than-projected sales and profit in the latest quarter. Revenue was up 15% to $15.1 billion. Third-quarter net income was $2.74 billion. Total clicks on ads up 23 percent, even as the average price for an ad fell 16 percent. But Alphabet is now more than an online search engine.  Other initiatives range from computers and fast-Internet services, to projects such as like product-delivering drones, life sciences products, airborne wind turbines and self-driving cars. While the new areas have yet to bring in sales to rival Google’s core operations, they’re being given room to operate as distinct units under a new operating structure.

Financial Review

The Best Story

Sinclair Noe — October 6, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 13 = 16,790
SPX – 7 = 1979
NAS – 32 = 4748
10 YR YLD – .02 = 2.03%
OIL + 2.78 = 49.04
GOLD + 11.70 = 1148.60
SILV + .22 = 15.99

The U.S. trade deficit increased to a five-month high of $48.3 billion. The trade gap was 15.6% higher compared to a revised $41.8 billion deficit in July. U.S. exports dropped 2%;  exports have fallen 6% compared to one year ago, hurt by a rising value of the dollar that’s made American goods and services more expensive overseas. Most other economies are not performing as well as the U.S. and that’s also limiting demand.

A slowdown in emerging markets driven by weak commodity prices forced the International Monetary Fund to cut its outlook for global growth this year to 3.1 percent from a July forecast of 3.3 percent. Next year the world economy is expected to expand 3.6 percent, less than the 3.8 percent projected in July. Brazil and Russia’s economies are contracting, Japan and the euro area are struggling, and long-time growth engine China is decelerating.

The IMF advised emerging markets to be ready for the U.S. to tighten monetary policy, urged advanced economies to address “crisis legacies” and suggested nations consider the “compelling” case for public infrastructure investment at a time of very low long-term interest rates. The G-20 meets this week in Lima, Peru.

Officially joining the 0% bond club, the U.S. Treasury sold a new government security on Monday containing a three-month maturity and a yield of zero for the first time on record. In essence, buyers gave a free short-term loan to the government in exchange for a highly liquid debt instrument for their portfolio. The result adds to the diminishing expectations, stoked by Friday’s disappointing jobs report, that the Fed will keep interest rates at basement levels throughout 2015.

The U.S. Treasury can’t sell bills below 0%, but once sold at auction the bills can trade however they trade. In early morning trade, the 3 month bill traded at negative 0.003%, but finished the session with a positive yield. The three-month yield also briefly went negative on September 25 and on October 1 and July 13, but has otherwise been in positive territory all year.

Despite the financial turmoil in China and unexpected devaluation, the yuan has now become the world’s fourth-most-used payments currency, edging out Japan’s yen for the spot. According to international payments provider Swift, the renminbi accounted for 2.79% of global payments in value terms in August; although it still trailed the U.S. dollar (44.8%), euro (27.2%) and British pound (8.5%). As recently as August 2012, the yuan only ranked number 12 with a 0.84% share, but Chinese authorities have since aggressively promoted international use of the currency.

Europe’s highest court struck down an international agreement that had made it easy for companies to move people’s digital data between the European Union and the United States. The ruling, by the European Court of Justice, could make it more difficult for global technology giants to collect and mine online information from their millions of users in the European Union. The court declared the data-transfer agreement, which is known as Safe Harbor, immediately invalid.

In its ruling, the court said that the Safe Harbor agreement was flawed because it allowed American government authorities to gain routine access to Europeans’ online information. Such access infringes on Europeans’ rights to privacy. The ruling follows revelations from former National Security Agency contractor Edward Snowden about the Prism program that allowed U.S. authorities to harvest private information directly from big tech companies such as Apple, Facebook, and Google.

Yesterday we reported that 11 countries had reached agreement on the Trans-Pacific Partnership, a trade pact that would cut trade barriers on a bloc that includes 40% of world economic output, and that it was pretty much a done deal. Well, not exactly. The negotiations were wrapped up over the weekend; the actual deal, whatever it is, must still be ratified by the leaders of each country and ratified by their legislatures, where support for the deal is not universal.

In the US, expect a tough fight to push it through Congress next year. And even though negotiators came to some sort of agreement, they have not presented the text of the agreement to the public, and negotiators say it will take at least a month to prepare the text. So, it really isn’t a done deal, in large part because almost nobody knows what the deal is.

Corelogic reports home prices rose 1.2% in August to extend the 12-month gain to 6.9%. CoreLogic forecasts home price growth to slow to 4.3% in the 12 months through Aug. 2016, due to higher mortgage rates and more housing starts. Arizona is still suffering from the housing downturn; home prices are down 25.3% from the peak to current levels.

SABMiller has rejected an informal takeover bid from Anheuser-Busch InBev stating the offer was too low. An initial proposal made last week was worth slightly over 40 pounds a share, but the British firm’s executives and some shareholders regard a deal closer to 45 pounds as fair value. At the higher price, a deal would value SABMiller $110 billion, and would result in the largest merger this year.

Skyworks Solutions has agreed to buy PMC-Sierra for $2 billion in cash. PMC shareholders will get $10.50 per share, representing a 37% premium to the stock’s closing price on Monday. Semiconductor deal making has already reached more than $80 billion in 2015, surpassing every full year on record except 2000, when M&A in the sector hit $115 billion.

Microsoft’s held a big event in New York City to showcase their devices that run across the tech giant’s new, flagship operating system, Windows 10. What’s on tap? Two new versions of Lumia smartphones, a fitness band, an updated Surface Pro tablet to do battle with the Macbook Pro, and more details regarding HoloLens – an augmented reality headset. Microsoft also announced its first retail store in New York, scheduled to open in about 3 weeks.

Microsoft has less than 3% of the smartphone market, but their Windows 10 operating system is on over 100 million devices. So, the challenge is to get their operating system on mobile devices before mobile operating systems take over the desktop and laptop world. The trick is to make systems and apps that flow seamlessly from mobile to desktop, and whoever wins that battle will control operating systems for the near future.

The value of BP’s settlement with the U.S. government and five Gulf states over the Deepwater Horizon oil spill has been confirmed at $20.8 billion, a $2 billion increase from an agreement reached this past July. The agreement is “the largest settlement with a single entity in American history,” U.S. Attorney General Loretta Lynch declared. The deal takes BP’s total budget for the spill to more than $54 billion but resolves all federal and state claims against the company for the accident.

Freeport-McMoRan is considering spinning off its oil and gas business and other strategic alternative to focus on its copper mining business. The Phoenix-based company produces oil and natural gas around the country. Energy companies have been hurt by falling oil prices and weaker demand. Many have cut spending as a result. Earlier this year, Freeport-McMoRan slashed its quarterly dividend 84 percent because of falling oil prices. And in August, Freeport-McMoRan announced a cost-cutting plan due to falling copper prices and soft economic conditions.

Alcoa will unofficially kick off the earnings reporting season on Thursday.

We are already seeing some earnings numbers. PepsiCo reported a better-than-expected quarterly profit as its commodity costs fell and demand for its snacks and non-carbonated beverages rose in North America.

Yum Brands missed Wall Street’s earnings and revenue estimates. Same store sales in China, where it generates more than half of its operating profit, rose just 2 percent. The parent company for KFC, Pizza Hut and Taco Bell dropped 18% in after hours trade. The biggest embarrassment for Yum Brands may be this nugget:  “Year-to-date through October 5, 2015, we repurchased 4.5 million shares totaling $370 million at an average price of $82.” When you consider the response today, that means they paid a 20% premium because they were too stupid to spend the money on building their business.

McDonald’s is now serving breakfast all day. It only took 43 years. In 1972 a franchisee in California introduced Ray Kroc to a breakfast sandwich with Canadian bacon, egg, and cheese on an English muffin. The wife of a McDonald’s executive came up with the name, Egg McMuffin. The all-day breakfast menu is still a bit limited; you can’t get all breakfast items all day; and there are some quirks; you can’t get Egg McMuffins in the South – they sell biscuits down there. The whole idea is still a bit of a gamble because the breakfast menu has lower profit margins than the regular burger-centric menu.

The World Bank reports the number of people living in extreme poverty is likely to fall for the first time below 10% of the world’s population in 2015. World Bank president Jim Yong Kim said, “This is the best story in the world today. These projections show us that we are the first generation in human history that can end extreme poverty.”

Extreme poverty has long been defined as living on or below $1.25 a day, but the World Bank’s adjustment now sets the poverty line at $1.90 a day. The Bank said the change reflects new data on differences in the cost of living across countries, while preserving the real purchasing power of the previous yardstick. Using the new benchmark, the World Bank projects 702 million people or 9.6% of the world’s population will be living in extreme poverty in 2015, down from 902 million people or 12.8% of the global population in 2012.

The World Bank first introduced a global poverty line in 1990, setting it at $1 a day. It was adjusted last in 2008, when the group raised it to $1.25 a day. Basically that $1.90 today buys about the same as $1.00 in 1990. Across the planet, the number of people living in extreme poverty has dropped by more than half since 1990, when 1.9 billion people lived in extreme poverty.

Financial Review

Carry On

Sinclair Noe — September 2, 2015

Podcast: Play in new window | Download (Duration: 13:14 — 12.1MB)

Subscribe: iTunes | Android | RSS

DOW + 293 = 16351
SPX + 35 = 1948
NAS + 113 = 4749
10 YR YLD + .02 = 2.19%
OIL + .59 = 46.00
GOLD – 6.10 = 1134.70
SILV + .08 = 14.80

For the first 8 ½ months of the year, stocks traded in a very tight range, for the most part. We had an occasional triple digit move on the Dow, but that was the exception – now it looks like the norm. Investors have weathered over two weeks of unusually wide-swinging trade that has left the S&P 500 with its worst monthly drop in three years and a loss of 8.5 percent from an all-time high in May. There really isn’t anything that would tell you today marks some kind of recovery, rather it is just volatility and turbulence. Get used to it. Keep calm and carry on.

World markets were a bit more sanguine today; the Shanghai Composite stabilized, but still closed just slightly lower. Nine Chinese brokerages pledged additional funds to purchase shares, answering fresh government calls to support equities. Investors may see the trend continue. Shanghai’s stock market will be closed Thursday and Friday as China commemorates the 70th anniversary of the end of World War II.

U.S. index provider MSCI has declared the market gyrations in China, and a barrage of interventions by the authorities to stop the rout, not to be a factor in deciding whether to include China A-shares in its Emerging Markets Index. Just before the massive selloff began in mid-June, MSCI announced it would temporarily hold off on the move, but said it expected the shares to be incorporated once outstanding issues relating to Chinese market accessibility were resolved.

The Federal Reserve released its Beige Book this afternoon; this is a look at economic conditions around the country, not hard data but just observations and interviews. Manufacturers are starting to feel the effects of China’s economic slowdown and a strong dollar; the oil industry is starting to feel pressure from lower energy prices; housing and auto sales are strong. Economic activity has not slowed since July; keep in mind that the Beige Book runs through August 24, just before the recent volatility on Wall Street. The Fed uses the Beige Book as a guide heading into the FOMC meeting next week to determine monetary policy.

Now, here’s an interesting twist on whether the Fed might hike interest rates next week; it comes from Torsten Slok Deutsche Bank’s chief U.S. economist. The thinking is that if the Fed hikes rates, investors would see it as a policy error, in which case they would pressure yields at the long end of the US Treasury curve; in other words, long-term rates could drop and the dollar could get weaker. A flattening curve is generally considered an easing of financial conditions. He asserts that the central bank ought to “do the first hike exactly when there is a bearish narrative in markets” to ensure it doesn’t prompt yields further out along the curve to jump, as was the case in the infamous bond selloff sparked by 1994’s rate rise. So, if the Fed raises its interest rate target for Fed Funds Futures, don’t be surprised if interest rates and the dollar actually decline. At least that’s one theory.

Last week, as the stock market took a dive, interest rates dropped briefly; and mortgage applications increased dramatically. Jumbo loan borrowers were especially enticed by the potential savings. An index of application volume jumped 11.3 percent. Volume is now up 30 percent from a year ago. Refinance applications, which are most rate-sensitive, increased 17 percent from the previous week to the highest level since April, 2015. Loan applications to purchase a home, which have been less responsive to rates, rose 4 percent for the week and are now 25 percent higher than one year ago.  The average contract interest rate for 30-year fixed-rate mortgages remained unchanged at 4.08 percent.

Private-sector employment gains continued in August at a slightly faster pace than in the prior month. Payroll processing firm ADP reports employers added 190,000 jobs last month. The Labor Department’s employment report will be released Friday, and the consensus estimate calls for a gain of about 215,000 new jobs. A significantly more robust number might nudge the Fed to move, but global market volatility recently has prompted some analysts to predict a December rate increase. One wild card: In seven of the last 10 years, the August number for payrolls has come in 48,000 below the consensus, only to be revised upward later, according to RBS. In other words, the Friday Jobs Report is going to be a cliffhanger for nervous investors.

 The productivity of U.S. workers in the spring was stronger than initially reported, reflecting a pickup in economic growth after a poor start to the year. Productivity rose at a 3.3% annual pace in the second quarter, up from a preliminary 1.3% estimate.

Entrepreneurship in the United States is at its highest rate in at least 16 years. According to a study by Babson College and Baruch College, 14% of the United States working age population, about 24 million people, reported being entrepreneurs in 2014. The high entrepreneurship rate could be good news for non-entrepreneurs as well: 24% of entrepreneurs said they expect to hire 20 or more people in the next five years.

President Obama has 34 Senate votes in favor of an Iran Nuclear deal, and that means it is a done deal. With 34 senators favoring the accord between Iran and six world powers limiting the country’s nuclear program, opponents may still be able to pass a resolution disapproving the deal later this month, but they do not have the votes to override Obama’s promised veto. In most cases, support for the deal has not been enthusiastic, but enough Democrats have come to the conclusion that killing the accord would be far worse than approving it. The White House and Senate Democrats hope to find seven more votes next week to filibuster the Republican resolution of disapproval. That would ensure the resolution would never leave the Senate, and Obama would not be forced to use a veto.

ConocoPhillips is cutting about 10% of its global workforce, with the largest percentage of layoffs occurring in North America. News of the cuts came on the same day ConocoPhillips announced first oil at its new Surmont 2 thermal project in northern Alberta.

McDonald’s U.S. franchisees have voted to begin offering all-day breakfast on Oct. 6, a widely expected decision that the company and investors hope will help end a sales slump that began nearly three years ago. The move – the company’s biggest menu change in years – follows months of testing the idea at various locations. According to McDonald’s sales reports, breakfast currently accounts for about 25% of its U.S. sales.

A Federal Judge in San Francisco has granted class-action status to a lawsuit claiming that Uber misclassifies its drivers as independent contractors instead of employees. As many as 160,000 Uber drivers in California could now join the case as a group, seeking to require the company to pay payroll taxes, overtime pay, or possibly mileage. The case, filed in 2013, presents challenges to Uber’s business model. Classifying workers as contractors lets the company keep its labor costs low while recruiting scores of people who use their own cars to ferry passengers. The results of the high-profile legal battle may also reshape the sharing economy, setting a precedent for dozens of startups whose futures rely on independent contractors. Well, so much for those valuations.

Federal safety regulators have sharply lowered the number of vehicles likely affected by faulty Takata airbag inflators, cutting the figure by about 40% to 19 million from more than 30 million. New information shows that some of the vehicles were originally thought to be in the U.S. (instead of overseas) and that some cars were counted twice due to driver and passenger side air bags. The recall still remains the largest and most complex automotive recall in history – involving 11 different automakers.

CBS is planning a record amount of live-streaming NFL coverage this season, with all streams available to the public for free. The games will include two regular-season match-ups, four playoff events and Super Bowl 50. CBS’s streams will be available through its website for laptops, desktops, tablets, and on TV via some connected devices (Xbox One, Apple TV, Chromecast and Roku products).

Intel introduced its new generation of processors today – they call it Skylake.  The new chips will power the full range of PCs from entry-level laptops to Xeon workstations. Here’s what you need to know: the chips are really fast, the graphics are much better, and it uses less power which will extend battery life. The new graphics deliver a better picture than 4k ultra HD. The new chip was built to work with Windows 10 and the processors can wake up a computer in sleep mode in less than a half second; no more waiting around. Intel is also making a big deal about facial recognition; no more messing around with passwords; your computer will know who you are.

Notebooks and other devices equipped with Intel’s R200 RealSense camera will 3D-scan both your face and other objects, with lots of fun potential applications; including the ability to scan objects and send it to your 3D printer; finally we are getting to the Star Trek replicator. And finally, hassle-free wireless charging of laptops, tablets and notebooks. Using magnetic resonance coupling. Actually, they haven’t got that figured out just yet, but they are working on it and think they’ll have something ready to go in about a year.

And an extra note here. In the next 24 to 48 hours you will like see a very disturbing picture. It is a photo of a three year old child from the north Syrian town of Kobani near the Turkish border, scene of heavy fighting between Islamic State insurgents and Kurdish forces a few months ago. Like so many, his family tried to migrate to Europe; taking the treacherous path to sea, headed for the Greek island of Kos. Something went horribly wrong; the boat sank. Seven people were rescued and two reached the shore in life jackets.

The official said hopes were fading of saving the two people still missing. The confirmed dead included five children and one woman; the youngest child was 3 year old Aylan Kurdi. The picture you will see showed the little boy wearing a bright red t-shirt and shorts lying face-down in the surf on a beach near the resort town of Bodrum. It is all over the Twitterverse and will undoubtedly make the main stream media. Hashtag #humanity washed ashore. You should look at the picture. It will disturb you.