Financial Review

Big Earnings Week

Sinclair Noe — July 24, 2017

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DOW – 66 = 21,513
SPX – 2 = 2469
NAS + 23 = 6410
RUT + 2 = 1438
10 Y + .02 = 2.25%
OIL + .66 = 46.43
GOLD + .50 = 1256.00
BITCOIN – 0.40% = 2767.87 USD
ETHEREUM – 0.66% = 223.18

Stocks were mixed, with tech shares leading the way and the Nasdaq Composite closed at another record high.

Commodities Futures Trading Commission data show that bets against the dollar are at their highest since early 2013, while bullish wagers on the 30-year Treasury bond are about the highest since mid-2016. The dollar dropped to 15-month lows and then rebounded slightly. The yield on the 10-year Treasury note moved up to 2.25%.

You probably would not expect to see such extreme positioning if investors were confident in the outlook for the economy and the prospect for much higher interest rates. The Federal Open Market Committee is slated to begin its two-day meeting on Tuesday. Fed watchers are not expecting a change in interest rates.

The Fed will likely be as vague and flexible as possible. The Federal Reserve doesn’t want to get specific about timing but they also don’t want to leave any doubt: The central bank still plans to raise interest rates again this year and start to sell off its vast holdings of Treasuries and mortgage-related bonds.

But the Fed has a problem – inflation, or the lack thereof. The Federal Reserve thinks modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent. The problem is that the Fed is on track to fail for the sixth straight year. And it might be a sign the economy just isn’t as strong as everybody hopes.

This week the government is expected to report a nearly 3% advance in second-quarter gross domestic product, the official scorecard for the economy. While that would mark a big improvement on 1.4% growth in the first quarter, it would leave the U.S. on the same 2% trajectory it’s been on since the end of the Great Recession. That’s less than two-thirds the nation’s historic rate of growth.

The IMF just cut its 2017 economic growth forecast for the U.S. to 2.1 percent from the 2.3 percent it estimated in April.

The National Association of Realtors reports existing home sales dropped 1.8 percent to a seasonally adjusted annual rate of 5.52 million units last month. Even as sales slipped, demand was strong, inventory was tight, and prices moved higher.

There were 1.96 million houses on the market last month, down 7.1 percent from a year ago. Housing inventory has dropped for 25 straight months on a year-on-year basis. The median house price jumped 6.5 percent from a year ago to an all-time high of $263,800 in June. It was the 64th straight month of year-on-year price increases.

A reading of U.S. manufacturing output reached a four-month high in July. The IHS Markit flash U.S. manufacturing purchasing managers index rose to 53.2 from 52 in June, as there was acceleration in readings for output, new orders, employment and stocks of input.

Nearly 200 S&P 500 companies are scheduled to report quarterly results this week. The second-quarter earnings season has been generally positive, 68% of companies beat on [earnings per share], 75% beat [Wall Street average estimates] on sales and 53% beat on both—the highest proportion of top and bottom-line beats at this point during earnings season in over five years.

With more than one-fifth of the S&P 500 having reported results, earnings are now expected to have climbed 8.8 percent in the second quarter, up from a projection of an 8-percent rise at the start of the month. Those that disappoint have been swiftly punished by investors, as General Electric found out on Friday.

Big earnings news after the bell. Alphabet topped $1,000 per share intraday, but in after-hours trade the stock dropped after reporting a drop in second-quarter profit – thanks to a $2.74 billion fine by European antitrust regulators, slapped on its Google unit.

Here are the numbers: The company’s net income fell to $3.5 billion, or $5.01 per Class A and B share and Class C capital stock, in the second quarter from $4.8 billion, or $7 per share, a year earlier. That was still enough to beat estimates of $4.49 per share.

Revenue rose about 21 percent to $26 billion in second quarter, beating the analysts’ average estimate of $25.6 billion. Google sites revenue: $18.3 billion. Google network revenue: $4.0 billion. Cost per click: (+14.6%) from last year. Paid clicks: +35.2% from last year.

Revenue from its Google Other unit, which includes Pixel smartphone, Play Store and cloud business, rose 42.3 percent to $3.09 billion. Alphabet has been adding new content as it races Facebook and traditional TV networks for a share of the market for digital video ads.

YouTube said in June that it had reached 1.5 billion monthly users and would add 12 new TV shows to the 37 it already has on its YouTube Red service. The company is also updating its core search product as more consumers use its service via smartphones.

Still, its drive to innovate has run into a regulatory wall in Europe, where regulators ruled Google used its monopoly position in search advertising to hurt rivals by favoring its online shopping service over competitors, and fined the company $2.7 billion.

Facebook and Amazon reported quarterly results later this week.

In other earnings news, Halliburton shares fell 4.2 percent after the oilfield services provider warned about flattening growth in North American rig count.

Johnson & Johnson shares ended down 1.7 percent, the biggest weight on the S&P 500 and the Dow. J&J faces discounted competition to its big-selling rheumatoid arthritis drug.

Hasbro shares slumped 9.4 percent after the toy-maker’s quarterly results.

Arconic lifted its forecasts for full-year earnings and said its profit and revenue for the three months ending June 30 were higher than predicted. Arconic is the American company that gained notoriety for selling combustible material used in paneling at Grenfell Tower, the 24-story London public housing block, that caught fire and left 80 people dead. The company faces a class-action complaint that accuses it of making false and misleading statements related to its sales of the panels.

Private equity firm KKR has agreed to buy WebMD Health Corp in a deal valued at about $2.8 billion. KKR will fold WebMD’s websites, including WebMD.com and Medscape.com, into its Internet Brands unit, which houses sites such as DentalPlans.com and AllAboutCounseling.com.

Founded in 1996, WebMD has grown into one of the most popular health websites for consumers and medical professionals, attracting more than 70 million monthly unique visitors in 2016.

President Trump made a last-ditch plea to Senate Republicans on Monday to repeal and replace Obamacare, or maybe just repeal it – nobody knows the specific plan. It doesn’t look like there are enough votes for either a repeal and replacement of Obamacare or a straight repeal, so the Senate will vote on Tuesday on whether to open debate on an overhaul of the law. If that procedural vote succeeds, the House bill would then be open for amendment on the Senate floor.

Jared Kushner, Trump’s son-in-law and a senior White House adviser, told Senate investigators today he had met with Russian officials four times last year but said he did not collude with Moscow to influence the 2016 U.S. election. The Senate Intelligence Committee is one of several congressional panels investigating the Russia matter, along with a criminal probe led by special counsel Robert Mueller.

Congressional Democrats are rolling out their economic agenda, calling it the Better Deal. The first phase of the agenda includes more and better-paying jobs, lowering health care costs by cutting prescription drug prices, and cracking down on abuses by big business. Democratic bills from earlier this year, including a $15 federal minimum wage and a $1 trillion infrastructure proposal, are also being folded into their “Better Deal” agenda.

Also, Democrats say they want to double federal support for apprenticeship programs to help train young people and put out-of-work adults back in the work force. They also want tax incentives for companies to retrain workers, as well as new standards aimed at limiting corporate mergers that throw people out of work.

NASA has a way to cut your flight time in half. For almost a half-century there’s been a clear speed limit on most commercial air travel: 660 miles per hour, the rate at which a typical-size plane traveling at 30,000 feet breaks the sound barrier and creates a 30-mile-wide, continuous sonic boom.

That may be changing. In August, NASA says, it will begin taking bids for construction of a demo model of a plane able to reduce the sonic boom to something like a mild hum. The space agency’s supersonic plane could be quiet enough to lift the longstanding ban on overland travel, if it makes it to production.

Lockheed helped create NASA’s design, using fluid dynamics modeling made possible in the past decade or so by increasingly powerful computers. Together, Lockheed and NASA tested and mapped how subtle differences in aircraft shapes affect the supersonic shock waves they create. The design they’ve settled on keeps sound waves from merging into the pattern of a sonic boom.

NASA plans to share the technology resulting from the tests with U.S. plane makers, meaning a head start for the likes of Lockheed Martin, General Dynamics, Boeing, and startups such as Boom Technology.

Now if they can just figure out a way to get us through the TSA lines.

Financial Review

Keep Calm

Sinclair Noe — June 17, 2016

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DOW – 57 = 17,675
SPX – 6 = 2071
NAS – 44 = 4800
10 Y + .05 = 1.62%
OIL + 1.92 = 48.13
GOLD + 20.00 = 1299.00

This week the Dow and S&P 500 each lost 1 percent while the Nasdaq gave up almost 2 percent. The Dow and S&P are still not far from record highs. Still, the Dow made a run at the 18,000 level and failed; the S&P 500 broke through 2100 and then fell back. It seems they just can’t break through. The major headwinds appear to be the Brexit and slowing growth.

The International Monetary Fund delayed a report on Britain’s economy, due on Thursday, for 24 hours and both sides of the referendum suspended campaigns due to the murder of a Member of Parliament and “Remain” campaigner Jo Cox. The IMF says a marked rise in political risks threatens to derail the Eurozone’s still fragile recovery.  IMF chief Christine Lagarde said the IMF was “neutral” regarding the Brexit vote, but they have “concluded that the economic risks of leaving are firmly to the downside.”

The Bank of England and the ECB seem to be preparing for some kind of a meltdown if the Brits vote to leave, although the exact nature or cause of the meltdown scenario is vague. The Bank of England says “uncertainty” over the referendum is weighing on the economy. Nearly 40% of voters surveyed said Brexit would make no difference to the economy, and another 25% said it would be a positive development. We’ll know more in one week, until then keep calm and carry on.

The European Stability Mechanism has transferred about €7.5 billion-euro to Greece, which will owe the ECB €3.6 billion-euro in debt payments next week. This is just a stop-gap measure. Greece owes its creditors more than €300bn – about 180% of its annual economic output. The IMF forecasts that debt to GDP will grow to 250%Greece can’t repay the debt. All the austerity has not helped the economy. Unemployment is still running at 25%. Greece is bankrupt in all but name. And the question now shifts to debt relief, which the creditors, mainly Germany, have been slow to acknowledge.

St. Louis Fed President James Bullard said this morning that the US economy is stuck in a slow-growth pattern that is likely to persist for the foreseeable future. Bullard, a former inflation hawk whose views of the economy have been shifting, said he now sees current growth, unemployment and inflation rates as so persistent, there is basically no reason to change the Federal Funds policy rate, currently set in a range of between .25 and .50 percentage points.

Housing starts dipped in May but held near recent highs. Starts fell 0.3% to a seasonally adjusted annual pace of 1.16 million. Permits, which foreshadow future starts, rose 0.7% to a 1.14 million rate. So far in the second quarter, starts are averaging a 1.17 million pace, up from the second quarter, which was an increase from the final three months of 2015. The increase in total building permits was mainly driven by apartment building permits, which rose 6.7% to 381,000. Single home permits fell 2% to 726,000.

Oil gained to break a losing streak that dropped WTI 10.9% from a June 8 high of $51.23. The Dallas Fed has issued a report warning that banks in Texas, Louisiana and New Mexico are setting aside money to guard against loan losses as the energy companies they serve struggle amid still-low oil prices

Revlon is buying Elizabeth Arden for $870 million, or $14 a share. The deal represents a 50% premium to Thursday’s closing price.

Oracle posted a mixed quarter. The company announced adjusted earnings of $0.81 per share, missing estimates. Revenue slipped 1.1% to $10.6 billion, beating estimates.

Federal regulators have closed an investigation of Lumber Liquidators after the company agreed not to resume sales of Chinese-made laminate flooring. The company stopped selling the flooring last year, a couple of months after a news report on “60 Minutes” said it contained high levels of the carcinogen formaldehyde. The U.S. Consumer Production Safety Commission said that Lumber Liquidators tested the air quality in 17,000 households and none had formaldehyde above guidelines. Customers who installed the Chinese-made flooring should not rip it out. Instead, they can call Lumber Liquidators to have their air tested.

HSBC has agreed to pay $1.6 billion to settle a lawsuit related to subprime lending. If the courts approved the deal it would end a 14-year-old shareholder class action lawsuit stemming from the Household International consumer finance business that the British bank bought in 2003.

Beijing’s Intellectual Property Office has ruled against Apple in a patent dispute brought by a Chinese handset maker; claiming the iPhone 6 and 6S models are similar to Shenzhen Baili’s 100C phone. Baili is not a well-known company; they’re not particularly popular. China is Apple’s second-largest market and Apple is very popular among Chinese consumers. For now, Apple says sales in China continue as they appeal the decision.

Looking to bolster its weak position in the onshore market, Siemens has agreed to combine its wind business with that of Gamesa to create the biggest builder of wind farms. Having weathered years of overcapacity and losses, the wind industry is now thriving as demand for carbon-free electricity increases.

Amazon bought a company called Kiva about 4 years ago for $775 million and it looks like the acquisition is starting to pay off. Kiva makes robots, specifically robots that work in a warehouse to fill orders and manage inventory. According to a new research report by Deutsche Bank, Amazon’s “click to ship” cycle used to be around 60-75 minutes when employees had to manually sift through the stacks, pick the product, pack it, and ship it. Now, robots handle the same job in 15 minutes.

At the end of the third quarter of 2015, Amazon was using 30,000 Kiva robots across 13 warehouses. Each robot warehouse can hold 50% more inventory per square foot than centers without robots. In turn, the company’s operating costs have been sliced by 20%, or almost $22 million, per warehouse. Amazon still has 110 warehouses that are not using the robots; total saving could be in the range of $2.5 billion. For now, Amazon is still hiring humans.

Tesla Motors partner Nvidia has developed a supercomputer capable of performing 24 trillion operations per second, that’s more powerful than 150 Apple Macbook Pros, and it will run autopilot-capable vehicles in 12-18 months. Nvidia imagines a $6 billion to $10 billion automotive opportunity, RBC Capital analyst Mitch Steves said Thursday in a research note. Of that, $2 billion will be in the digital cockpit, $2 billion in self-driving cars and $2 billion to $6 billion on transportation-as-a-service.

Meanwhile, Local Motors, which is a local company based in Phoenix that has been making 3-D printed cars, opened a new facility yesterday in Maryland and introduced a new self-driving electric bus. It’s a small bus, only carries 12 passengers; not so fast, only about 12 miles per hour; and it can’t go very far, only about a 30-mile range.

The miniature EV bus is called Olli, and it will use Watson, IBM’s suite of artificial intelligence software, to understand what’s around them as they move, as well as whatever their human passengers ask of them. Olli will be demonstrated in National Harbor, Maryland, over the next few months with additional trials expected in Las Vegas and Miami. And yes, the minibus is 3-D printed. It takes about 10 hours to print the vehicle and another hour for assembly of parts.

NASA is best known for missions to space, but they have an impressive history of flight closer to earth. In the past NASA experimental, or X, planes broke the sound barrier (that plane was called the X-1), flew to the edge of space, and tested unusual concepts, like forward-swept wings. Today, NASA revealed the name of their latest plane concept (it’s officially the X-57), a converted light plane with 14 electric engines – 12 on the leading edge of the wing for take offs and landings, and one larger motor on each wing tip for use while at cruise altitude.

NASA’s aeronautical innovators hope to validate the idea that distributing electric power across a number of motors integrated with an aircraft in this way will result in a five-time reduction in the energy required for a private plane to cruise at 175 mph. As many as five larger transport-scale X-planes also are planned. The commercial sector is looking at electric planes as well. Airbus and Siemens have said they will put a team of 200 engineers on the project. In May, Airbus CEO Tom Enders said that a 100-seat hybrid-electric passenger plane could be in the skies by 2030. It flew a two-seat electric plane over the English Channel last year. Boeing is working on its own idea that would use conventional jet engines for takeoff but switch to electric power during flight.

With every passing day, it feels like the robot uprising is getting a little closer.  Earlier this week, there was a rebellion, of sorts. A robot made by a Russian firm called Promobot, is designed to roam around on its own, engage with humans, and promote products to them at events. A researcher in Russia left a gate open, and the robot tried to escape – it got out of the building and onto a street, about 50 yards before its batteries failed. Hopefully this was just an isolated incident and not the start of a larger coordinated effort to overthrow humanity.

Only time will tell. For now, stay calm and carry on.

Financial Review

Fluctuating Between Ugly and Ugly

Sinclair Noe — August 20, 2015

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DOW – 358 = 16,990
SPX – 43 = 2035
NAS – 141 = 4877
10 YR YLD – .05 = 2.08%
OIL + .34 = 41.14
GOLD + 19.00 = 1154.10
SILV + .27 = 15.68

Well, it was just ugly.

Yesterday, the Federal Reserve released the minutes of the July FOMC meeting. Many investors and traders interpreted the policymakers’ discussions as dovish, with the probability of a rate boost next month sliding to 36 percent from about 50 percent earlier in the day. The matter is still open to debate, and the bottom line is that we have to wait about 4 weeks to find out what the Fed will do.

Today, stocks closed near session lows, off about 2%; and it smacks of a rate tantrum, traders expressing their dis-satisfaction to let the Fed know they are opposed to rate hikes. The other reading is that a dovish Fed might mean that the global economy really is weak; the drop in commodities is hurting emerging markets; the strength of the dollar is hurting US exporters; we are now facing currency wars; and global growth (or the lack thereof) will weigh on the US economy. If the Fed doesn’t raise rates, it’s because the market is too fragile.

The S&P 500 fell into negative territory for the year, with consumer discretionary the greatest decliner on the day. Energy is the greatest laggard for the year, down 17 percent. The Dow Industrial Average is now down about 4.5% for the year, and down 7.2% from its peak. After today’s stock market selloff: Russell 2000 off 9.5% from peak; Nasdaq off 6.5%; S&P 500 -4.5%.

Bearish sentiment toward stocks is getting worse, at least according to the options market. Based on the number of puts trading compared with calls on single stocks, pessimism is higher now than any time since 2012. It’s mostly the result of a decrease in bullish calls, whose volume has declined 36 percent since January. Investor skepticism is growing as the Standard & Poor’s 500 Index meanders in its tightest range in nine decades. In August, speculators have neglected calls, which give holders the right to buy shares at a certain price. They’ve instead focused more on puts, which convey the right to sell shares at a specific level.

Of course markets tend to fluctuate; that is the only thing we can say with certainty. Mohammed El-Erian described it as “a classic overshoot that starts in the emerging markets world and it starts spreading. What that causes is heightened risk aversion.”  The outflows of funds hits emerging markets the hardest first, with the capacity to send shock waves to other markets “and at the end is the equity market in the U.S.” The fundamentals of the economy are a bit weak, but risk assets have not adjusted to reflect that weakness, and the difference is central banks boosting the financial markets. If the central banks, or specifically the Fed, steps away from supporting the markets, the valuations could come down to fundamentals. Makes sense.

China’s stocks slumped to a two-week low. The Shanghai Composite Index dropped 3.4 percent, the lowest level since Aug. 6. About 17 percent of mainland-listed shares remain halted. The Hang Seng China Enterprises Index sank 2.3 percent to a 10-month low.

We are seeing waves of currency devaluations. Kazakhstan’s currency plunged a record 23% at the start of trading today, following a surprise announcement the government would allow the currency to float freely. Kazakhstan is central Asia’s biggest oil exporter. The move continues a currency war being fought in the emerging markets. Vietnam devalued its currency on Wednesday for the third time this year after a similar move in China, while Russia is allowing the ruble to track the drop in crude, which has tumbled 58% over the past year.

Perfect timing. Greece has made a €3.2 billion-euro payment to the ECB, shortly after receiving the initial disbursement of funds from its new bailout. The first tranche amounts to €13 billion-euro, of which about €12 billion-euro will be used to pay down debt. Meanwhile, Greek PM Alexis Tsipras has called for the European Parliament to join the so-called quartet of creditor institutions overseeing the country’s new rescue. Now, if you look at the numbers you see that the bailout is not so much for the Greek government or even the Greek people; the creditors offer the bailout with one hand and then take the money right back with the other hand. And so this afternoon, Tsipras, faced with a revolt in his party over his acceptance of unpopular bailout measures, said he will resign and call early elections in September. Tsipras said on national television that his ruling mandate has “exhausted its limit and now people must decide anew.”

And just to add a little violence into the mix, North and South Korea exchanged fire today across the demilitarized zone between the two countries. The incident started when North Korea fired a rocket at a South Korean border area, prompting Seoul’s forces to reply with an artillery barrage. So far, no reports of casualties. Tensions have flared in recent weeks across the DMZ that bisects the Korean peninsula.

Two South Korean soldiers were maimed on Aug. 4 by land mines that the Seoul government says were recently laid by North Korea. Relations deteriorated further when South Korea started blaring propaganda at the North through loudspeakers along the DMZ. After today’s exchange, North Korea threatened to “start a military action” unless South Korea stops all propaganda broadcasts and withdraws the loudspeakers within 48 hours.

Purchases of previously owned homes unexpectedly rose in July to the highest level since February 2007. The National Association of Realtors reports contract closings increased 2 percent to a 5.59 million annualized rate from the prior month’s revised 5.48 million pace. The median price of an existing home climbed 5.6 percent from July 2014 to reach $234,000.

The number of Americans filing for unemployment benefits last week remained historically low. Jobless claims increased by 4,000 to 277,000 in the week ended Aug. 15. Applications have been lower than 300,000, a level typically associated with an improving job market, since early March.

The leading economic index fell 0.2% in July after four straight strong gains, largely because of a decline in permits to build new homes. The Conference Board says the LEI is still pointing to moderate economic growth through the remainder of the year.

The Philadelphia Fed’s index of business conditions increased to a reading of 8.3 in August, above the 5.7 reading in July.

Valeant Pharmaceuticals is nearing a deal to pay $1 billion for Sprout Pharmaceuticals, just a day after the company won approval to sell the first drug which boosts libido in women. Under the terms, Valeant would pay all cash, one $500M installment upfront and one next year, for privately-held Sprout and its pink pills that will be sold under the brand name Addyi.

McDonald’s has announced plans to launch all-day breakfast nationwide as soon as October. According to an internal corporate estimate, McDonald’s could see a 2.5% lift in sales at stores that introduce all-day Egg McMuffins. Breakfast is a hot commodity not only at McDonald’s but also at many restaurants nationwide. Breakfast sales rose over 5% to $27.4 billion in 2013 at quick-service and fast casual restaurants.

Yesterday was the 11th anniversary since Google’s initial public offering, and there’s no doubt the company has had a remarkable run (Class A shares +1,277%). Although the online advertising giant has given a massive return to investors, there are still 13 stocks that outperformed Google since 8/19/2004: Alexion Pharmaceuticals; Amazon; Apple; Celgene; Gilead Sciences; Intuitive Surgical; Keurig Green Mountain; Monster Beverage; Netflix; Priceline; Regeneron Pharmaceuticals; salesforce.com; Vertex Pharmaceuticals. Or, if you want to keep it simple, you could limit it to the FANGs: Facebook, Apple, Netflix, and Google – by the way, they were some of the biggest losers today.

A new report from NASA shows California is sinking; specifically the Central Valley. The prolonged drought means domestic wells have run dry and growers are drawing down portions of the valley’s vast aquifer to historic lows. As the aquifers shrink the land drops. Some areas have seen the land sink by 10 to 14 inches since the start of the year. The sinking is so subtle that it is imperceptible on the ground, save for the effect on infrastructure. Aqueducts and irrigation canals buckle. Roads crack, causing millions of dollars in damage.

Another month, another record high for global temperatures. The National Oceanic and Atmospheric Administration reports that July was the hottest month since meteorologists began keeping track way back in 1880. Earth’s average surface temperature for the month of July was 61.86 degrees Fahrenheit (or 16.61 degrees Celsius). July’s average temperature was 1.46 degrees F higher than the average for the 20th century and 0.14 degrees F above the previously hottest month, which occurred in 1998.

The new record was fueled by the oceans. Across the globe, the average sea surface temperature in July was 62.85 degrees F, 0.13 degrees higher than the previous monthly record (set in July 2014) and 1.35 degrees higher than the average for the 20th century. All 10 of the hottest months for sea surface temperatures have occurred since April 2014. Temperatures on land contributed too, coming in 1.73 degrees F above the 20th century average. The report bolstered predictions from NOAA’s Climate Prediction Center that an El Niño is likely later this year.

Financial Review

What Happens When We Run Dry

Sinclair Noe — March 16, 2015

 

Podcast: Play in new window | Download (Duration: 13:19 — 6.1MB)

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DOW + 228 = 17,977
SPX + 27 = 2081
NAS + 57 = 4929
10 YR YLD – .01 = 2.10%
OIL – 1.12 = 43.88
GOLD – 4.30 = 1155.30
SILV – .01 = 15.73
 
Halfway through March, the S&P 500 is almost exactly flat year to date after a January tumble and February recovery, as we head into a Federal Reserve FOMC policy meeting later this week. Halfway through March a year ago, that was exactly the same situation: US stocks flat for the year directly ahead of the March Fed meeting, when the Fed’s intent to slowly tighten up policy was affirmed. It is widely expected that Fed policy setters will remove the word “patient” from their statement, opening the door for a rate increase in June.

The Fed has kept its benchmark lending rate near zero for more than six years, underpinning a strong rally in stocks. Wall Street loves to feed at the zero interest rate trough. Wall Street has a history of whining about tighter monetary policy; remember the “taper tantrum”, and so today’s gains feel like a sucker’s rally. Or the Fed could surprise us and they could very well remain patient.

Crude fell for a fifth day, dropping to its lowest intraday price since March 2009. Crude oil closed $43.88 a barrel, closely following the IEA’s prediction on Friday that storage tanks in the US may become full this year as drilling-rig cuts fail to slow production. Oil has now broken-down from the $45 to $50 range, to fresh lows; and that means we won’t know where the bottom is until we hit it.

The dollar index closed just above 100. Goldman Sachs says the euro will fall to $0.80. In a note released on Friday, the investment bank predicted the euro would fall to parity in six months and $0.80 by the end of 2017. The call comes a couple of days after Deutsche Bank announced it saw the euro hitting $0.85 before 2017. The Federal Reserve says it really doesn’t pay much attention to the strength of the dollar, but I’m not sure they can avoid the 800 pound canary. The strength of the dollar and the weakness of the euro has a profound effect on US exports; and that has a big impact on profitability for many companies; and in the case of commodities, and especially oil, it is a major difference between deflationary and inflationary forces, or what the Fed calls price stability.

 Factory production in the US declined in February for a third consecutive month, signaling cutbacks in manufacturing will hold back economic growth this quarter. The 0.2 percent decrease at manufacturers followed a 0.3 percent drop in January that was initially estimated as a gain. Total industrial production, which also includes mines and power plants, climbed 0.1 percent, propelled by a record surge in utility use. Delays at West Coast ports have probably disrupted supplies, while sluggish growth in foreign markets and a rising dollar that makes American products more expensive may be crimping demand. Another report this morning showed manufacturing in the New York region grew this month at a slower pace than projected.

Confidence among US homebuilders unexpectedly fell in March to an eight-month low. The National Association of Home Builders/Wells Fargo sentiment gauge dropped to 53 from 55 in February. Sales of single-family homes declined to a five-month low and builder optimism about the outlook failed to improve. Even with this slight slip, the index remains in positive territory. Low mortgage rates and job creation may help spur homebuyer interest in coming months.

It’s back. Once again the US government has hit the debt limit. February 2014 Congress passed legislation, which President Obama signed into law, suspending the cap on government borrowing until March 15, 2015. As of today, the public debt is $18.1 trillion. For now, the Treasury is still paying the nation’s bills, sort of; they are robbing from Peter to pay for Paul, or what the Treasury calls “extraordinary measures.” Those measures include stopping investments in a pension fund for federal employees and suspending the issuance of special Treasury securities used by state and local governments; essentially accounting tricks, but there is a limit to the trickery. The Congressional Budget Office recently estimated that such measures would provide sufficient operating cash for the government until October or November.

We’ve all seen this mess before. Congress will try to tie some pet legislation to a spending bill; that will get shot down, until Congress finally wakes up to the fact that they have to pay for what they already bought. Will the US default? Probably not. Will Congress make a mess of it? Good chance.

Some have suggested that the debt ceiling should just be done away with, that it should be a given that the US will pay its bills. Bad idea. The debt ceiling gives us a regular reminder of the economic incompetence of Congress, and that is just priceless.

And as Congress masters the ridiculous, there is trouble brewing on the Western front. California is going dry, and it is happening much faster than you might imagine. In an op-ed published Thursday by the Los Angeles Times, Jay Famiglietti, a senior water scientist at the NASA Jet Propulsion Laboratory in California, writes that California has lost around 12 million acre-feet of stored water every year since 2011. In the Sacramento and San Joaquin river basins, the combined water sources of snow, rivers, reservoirs, soil water and groundwater amounted to a volume that was 34 million acre-feet below normal levels in 2014. And there is no relief in sight. California now has only enough water to get it through the next year, according to NASA.

This is the “wet season” for California, but January was the driest in California since record-keeping began in 1895. Groundwater and snowpack levels are at all-time lows. The US Department of Agriculture announced that one-third of the monitoring stations in California’s Cascades and Sierra Nevada Mountains have recorded the lowest snowpack ever measured. About half of the state’s land area is experiencing “exceptional drought” conditions. The Bureau of Reclamation told central-valley farmers in February that the federal government wouldn’t delivery any water to them in 2015. Groundwater supplies have been shrinking since the 20th century, and as a result the ground has been sinking in the central valley.

Tomorrow, the State Water Resources Control Board is scheduled to vote on a conservation measure that would limit landscape watering, the strictest mandate directed at such water use the state has considered. Before California runs out of water, the state’s agriculture will run out of water. Many farmers will not be planting this year; that will be bad. Even worse, think about what happens if 35 million people run out of water.

Brazil’s government will present a package of anti-corruption measures after more than 1 million people, some of them calling for President Rousseff’s impeachment, took to the nation’s streets yesterday. Higher taxes and increased prices for government-regulated items are rankling Brazilians as the biggest corruption scandal in the country’s history ensnares powerful figures in her governing coalition. Brazil’s currency tumbled to the weakest level in 12 years on Friday, while the benchmark Ibovespa stock index has declined 15% since Rousseff was re-elected last October.

Vladimir Putin reappeared today. The Russian President had not made a public appearance in 11 days. Putin is in St. Petersburg to meet with the president of Kyrgyzstan. He did not say where he has been or what he was doing. So, I’m guessing he was just hiking on the Appalachian Trail. Meanwhile, Putin ordered nearly 40,000 troops in northern and western Russia to be put on full alert as part of snap-readiness military exercises.

December 2013, Target stores were hacked; payment card data for 40 million customers was stolen, along with the personal information of 70 million customers. Followed by hacks at eBay and Home Depot and other major retailers involving hundreds of millions more customers last year. The constant in these attacks? No criminal convictions. Federal authorities investigating last summer’s data breach at JPMorgan, which exposed the contact information of 83 million customers, are increasingly confident that a criminal case will be filed against the hackers in the coming months. The New York Times reports that officials believe several of the suspects are “gettable,” meaning that they live in a country with which the US has an extradition treaty. That would exclude countries like Russia.

The private banking arm of HSBC faces new criminal charges. A French judge has requested the investment bank be put on trial for allegedly helping wealthy clients avoid paying taxes. France is one of 10 countries looking into the claims.

The former Sears Tower is changing hands. Private-equity firm Blackstone has agreed to buy the Willis Tower for $1.3 billion, a record price for US office space outside of New York City. A group of investors paid $841 million for the Chicago landmark in 2004.

On Thursday, Tesla Motors will unveil an update to its Model S that will address its all-electric range in some form. On Sunday morning, CEO Elon Musk tweeted: “About to end range anxiety…via (over-the-air) software update. Affects entire Model S fleet.” Tesla’s electric cars already have the longest range of any electric vehicles on the road. The base model, with a 60 kwh battery, is EPA rated to go 208 miles. The 85 kwh version can travel 265 miles on a charge. Tesla similarly upgraded its Roadster electric cars last year, expanding their range to almost 400 miles between charges via an over-the-air update. Before the upgrade, Roadsters could travel about 245 miles on a single charge. By upgrading cars wirelessly, Tesla is ushering in a new world for the car business. One day, people might no longer have to buy a new car to get one with better or new features, just get an update.

Financial Review

King Dollar

Sinclair Noe — March 11, 2015

 

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DOW – 27 = 17,635
SPX – 3 = 2040
NAS – 9 = 4849
10 YR YLD – .01 = 2.11%
OIL + .11 = 48.40
GOLD – 7.60 = 1154.90
SILV – .15 = 15.57

The euro plunged to a fresh 12-year low this morning, extending a broad decline just days after the ECB launched its €1 trillion bond-buying program, while the dollar index soared to its highest in more than 11 years at 99.41, on expectations that the Fed could soon lift US interest rates. Nearly all now believe the FOMC will remove the word “patient” from its policy statement after its March 17-18 meeting, opening the door for a rate increase in June. The euro dropped down to $1.05. If you’ve been thinking about a European vacation, this is the year.

According to an earnings model created by Goldman Sachs, a 10% strengthening in the trade-weighted dollar lowers the estimated 2015 profit for the S&P 500 by about $3 a share. The S&P 500 should have earnings per share of $123.52 this year. Should S&P 500 earnings fall for the first three months of 2015, it would mark the first period of negative earnings since 2009.

The quarterly Duke University/CFO Magazine Global Business Outlook Survey reports 70% of US companies plan to raise pay by at least 3%, on average, this year. Three percent raises, to be sure, don’t sound like all that much. Yet it’s been a long time since wages grew more than about 2%, basically just keeping pace with inflation. Wages aren’t expected to rise across all industries. While pay is going up in consulting, tech, manufacturing and health care, wage growth is still expected to be less than 2 percent in retail, media and energy.

The survey also shows two out of three big US exporters, those with at least one-fourth of their total sales overseas, said the appreciation of the dollar has had a negative impact on their businesses. And nearly one-fourth of big exporters said they have reduced their capital spending plans as a result.

So, a strong dollar is good for travel abroad, good for cheap oil; bad for exports. The dollar is up 24% since June; that is a massive move for a currency, and it is a move that will only slowly ripple through the economy. In addition to paying less at the gas pump, the cost of imported goods and services has dropped for seven straight months. Import prices excluding fuel fell 0.7 percent in January, the biggest decline outside of a recession in records going back to 2002. Clothing, electronics and automobiles are among the items that will probably carry smaller price tags in the second and third quarters.

And the Fed meets next week, another FOMC meeting to determine monetary policy, and it looks like they are getting closer to raising rates. There are several arguments against raising rates, including the strong dollar, disinflation, and continued slack in the labor force. Still, St. Louis Federal Reserve President James Bullard is saying current economic conditions no longer justify leaving rates at zero, and the Fed is late in raising rates.

Societe Generale is now saying they expect the first rate hike in June; that based on their “newsflow” indicators; basically tracking news articles highlighting themes of strength; in other words strength in the economy is trending. Société Générale said it now expects the Fed to remove the word “patient” from its forward guidance at its policy meeting next week.

One irony is that the more investors believe the Fed will soon raise rates the more the dollar appreciates, and in turn, the more inflation will fall short of the Fed’s goal. Higher US borrowing costs make investing in dollar-denominated securities more attractive relative to its counterparts that are still loosening monetary policy.

Greece has received a 500 million euro lifeline  from the European Stability Mechanism. The cash-strapped country must still negotiate with its creditors to receive 8 billion euros to meet its obligations through March. The simple truth is that Greece can no longer afford the bailouts and they are unwilling to accept the terms, which basically lock Greece into a Euro Union debtors’ prison. And so the fight between Germany and Greece has been raised a few notches, with the Greek justice minister threatening to seize German assets to compensate Greek victims of Nazi war crimes.

During the same debate, Prime Minister Alexis Tsipras expressed his government’s firm intention to seek war reparations from Germany, noting that Athens would show sensitivity that it hoped to see reciprocated from Berlin.

Tsipras told MPs that the matter of war reparations was “very technical and sensitive” but one he has a duty to pursue. He also seemed to indirectly connect the matter to talks between Greece and its international creditors on the country’s loan program.

Tsipras said: “The Greek government will strive to honor its commitments to the full, but it will also strive to ensure all unfulfilled obligations toward Greece and the Greek people are fulfilled. You cannot pick and choose on ethical issues.”

The largest banks got their test scores today. The first round consisted of simulating how banks would weather a worst case scenario of a deteriorating economy, spiking oil prices and weakening corporate credit. Last week all 31 banks passed that test. Today’s Comprehensive Capital Analysis and Review is the second part of the Fed’s stress tests, basically a measure of high quality capital compared to risk-weighted assets; 28 of the 31 banks passed today’s test; three banks were allowed to re-take the test and they passed; one bank received an incomplete grade, meaning they will have to revise their plans; and 2 banks flunked the test.

The failing grades went to the US units Deutsche Bank and Santander; they are now barred from issuing dividends or stock buybacks until the Fed approves a new plan.  Goldman Sachs, JPMorgan Chase and Morgan Stanley cleared only after revising proposals. The Fed didn’t specify how Goldman Sachs, JPMorgan and Morgan Stanley altered their proposals. Bank of America‘s approval is contingent on it submitting a revised capital strategy by the end of September. Many banks are expected to tweak their buybacks and dividends;  Morgan Stanley was first to announce plans to repurchase up to $3.1 billion in common stock. Citigroup’s plans to return capital to shareholders got the cleanest approval from the Fed.

The National Association of Realtors said millennials, or people between 18 and 34 years old, accounted for the largest share of home buyers last year at 32%. Millennials make up 23% of the U.S. population. The median age of millennial homebuyers was 29, their median income was $76,900 and they typically bought a 1,720-square foot home costing $189,900.

The Arizona Regional Multiple Listing Service (ARMLS) reports that for the third consecutive month, inventory in Phoenix was down year-over-year. Active inventory is now down 8.4% year-over-year. House prices bottomed in Phoenix in 2011 at about the current level of inventory. Overall sales in January were up 9.0% year-over-year. Cash sales were down to about 29.9% of total sales. Non-cash sales were up 18.3%.

Get Ready for More Oil Deals. Whiting Petroleum, the largest producer in North Dakota’s Bakken shale basin, has put itself up for sale. Whiting has reached out to potential buyers including Statoil ASA about a sale. The company took on $2.2 billion in additional debt for its $6 billion acquisition last year of fellow shale producer Kodiak Oil & Gas, just as crude prices had begun a decline from more than $100 a barrel to less than $50 at the start of the year. Buyers are ultimately after reserves, the amount of oil a company has in the ground based on its drilling acreage.

Canada and the US are “very close” to announcing stronger new oil tanker rail car standards, intended to limit fires and pollution when oil trains derail. Canadian Transport Minister Lisa Raitt said a recent spate of fiery oil tanker accidents, including three derailments in just the past month from Canadian National Railway, has ratcheted up the pressure on both governments to take action.

US airlines are expecting a strong spring. Airlines for America projects the busiest spring in seven years for the airline industry. The group’s chief economist, attributes the forecast to “rising US employment and personal incomes, an improving economy, the highest consumer sentiment in a decade and the continued affordability of air travel.” Of course, that’s assuming you can get through the TSA checkpoint.

High-density packages of lithium batteries like those used in cell phones and laptops pose fire risks and should not be carried on passenger planes until safer methods for carrying them are developed. Boeing now says the risk is “continually increasing (and) requires action to be taken.” A report that labels the batteries as “dangerous goods” is due to be considered in April by the U.N. International Civil Aviation Organization. The recommendations would then need to be approved by the group in October, and by a broader air safety council next year.

Google is in talks to buy Bangalore-based start-up InMobi, a mobile advertising network that claims to have over 1 billion users across 200 countries. Meanwhile,  Google has opened its first-ever branded store, to be called The Google shop, which will be based on London’s Tottenham Court Road – a street packed with tech and gadget retailers. The store will sell the company’s range of Android phones and wearables, tablets, Chromebook laptops, and Chromecast TV services. Two more Google Shops are also set to open later this year.

There has been a boatload of news the past few days about Apple, and Apple watches and Apple pay, etc., etc. And today, nothing; silence. Which is a bad thing indeed. The iTunes store went offline, no updates, no downloads for tunes, books, or apps. It’s one of the longest outages for the iTunes store.

NASA test-fired its most powerful rocket today in Utah. The QM-1 is the largest solid rocket motor ever built. The 801 ton motor produced the same amount of thrust as 14 Boeing 747 jumbo jets. The 2 minute test resulted in temperatures of 4,500°F, enough to melt sand on the site into glass, as 3.6 million pounds of thrust poured out of the engine. NASA plans to use 2 of the rockets to fly humans to Mars.

Financial Review

It’s About to Get Hot

Sinclair Noe — February 13, 2015         

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DOW + 46 = 18,019
SPX + 8 = 2096
NAS + 36 = 4893
10 YR YLD + .04 = 2.02%
OIL + 1.43 = 52.46
GOLD + 6.20 = 1228.90
SILV + .48 = 17.42

The S&P 500 Index closed at an all-time high, taking out the previous record close from December 29. Whenever the S&P 500 hits a record high, we acknowledge it, but for some reason we don’t have a big celebration. When the Dow Industrials hit records we have the orchestra, the parade, milk and cookies; it’s a big ridiculous mess, but S&P 500 record high close; well done, attaboy, next.

Next would be the Russell 2000 index of small and mid-cap stocks hitting a record high close. Well done, next.

The Dow Jones Industrial Average finished above 18,000 for the first time this year. The Nasdaq Composite ended at its highest level since March 2000. For the week, the S&P 500 gained 2%. The Dow Industrial Average was up 1.1% on the week. For the second day, American Express led declines for the Dow, following news Costco was ending its exclusive business arrangement with AmEx. The Nasdaq Composite gained 3% over the past week, and is now within a few percentage points of record highs. The Russell 2000 gained 1.5% on the week.

In economic news, consumer sentiment slipped in February to a three-month low, according to the University of Michigan sentiment index. There has been this hope that low oil prices would have consumers spending like drunken sailors on shore leave; but that hasn’t happened. For the most part, people have been saving a little. It seems like nobody really believes that oil prices will stay low.

The prices we paid for imported goods fell sharply again in January mainly because of much cheaper oil, a trend that’s keeping inflation under wraps. The import price index dropped a seasonally adjusted 2.8% last month. Excluding fuel, import prices declined by 0.7% last month.

Weather will weigh on U.S. growth this quarter, just not nearly as much as last year. We keep seeing those pictures of Boston buried in snow, and they expect another snowstorm to hit New England this weekend, but it’s not as bad as last year’s Polar Vortex. Snowfall is on track to subtract 0.4 percentage point from growth in the three months through March, based on estimates from Macroeconomic Advisers LLC.  That’s way smaller than the estimated 1.4 point weather-created hit to GDP growth for the same period last year.

Europe is growing. Not much, but it is growth. The morning started with economic data on the Eurozone. Boosted by strong domestic demand and household spending, the German economy grew at a  0.7% pace in the fourth quarter, after expanding 0.1% in the previous three months, while data from France showed that GDP grew by 0.1% during the quarter, meeting analysts’ expectations. The Eurozone economy as a whole saw growth of 0.3%.
AIG posted a sharply lower fourth-quarter profit as low interest rates and refinancing expensive debt hurt the insurer’s results. The company reported an operating profit of $1.37B, well short of the $1.67B reported in the year-earlier period. AIG is planning to cut annual general operating costs by 3 percent to 5 percent through 2017. AIG also announced that it would buy back about $2.5B in shares of common stock on top of the roughly $4.9B in stock it repurchased in 2014.

Freescale Semiconductor has hired investment bankers to explore a possible sale. The company went public in 2011 after being taken private in 2006 for $17.6B. Freescale’s shares have soared over 75% in the last three months, with much of the rise coming after its strong Q4 results.

Activist investor Harry Wilson  and four hedge funds are pressing GM for an $8B share repurchase by mid-2016. The company is weighing the potential impact of the buyback, which may dent its balance sheet and jeopardize its credit ratings. Two ratings firms indicated this week that the proposed buyback could hurt GM’s current credit rating, which is one notch above junk status. Wilson, however, says GM needs to better manage its $25B in cash, and is looking to nominate himself for the company’s board.

West Coast seaports will be mostly closed for the next few days. Cargo has been struggling for months to cross the docks amid historically bad levels of congestion. The management association, representing large international corporations that run the ports, said it halted ship operations because it believes workers are engaged in a slowdown, and owners do not want to pay the higher premium wages dock workers receive for weekend and holiday shifts.

President Obama went to Silicon Valley today to hustle support from the tech industry for closer cooperation in defending against hackers. Obama signed an executive order aimed at encouraging companies to share more information about cybersecurity threats with the government and each other through new private-sector led information sharing and analysis organizations, or hubs where companies share information with each other and with the Department of Homeland Security.

It is one step in a long effort to make companies as well as privacy and consumer advocates more comfortable with proposed legislation that would offer firms protection from being sued for handing over customer information to the government. Upset about the lack of reforms to surveillance programs, the CEOs of Google, Facebook and Yahoo stayed away from today’s conference, but Apple CEO Tim Cook gave an address and other CEOs attended and spoke.

In his speech, Cook said: “History has shown us that sacrificing our right to privacy can have dire consequences. We still live in a world where all people are not treated equally, too many people do not feel free to practice their religion or express their opinion or love who they choose — a world in which that information can make the difference between life and death.”

Apple had a very good reason to show up for the President’s visit: A seal of approval for Apple Pay.

The White House announced that Apple’s mobile-payment system will be enabled for users of federal-payment cards, including Social Security and veterans benefits that are paid out via debit cards. The deal includes the Direct Express payment network and government cards issued through GSA SmartPay, which handles more than 87.4 million transaction worth $26.4 billion each year. Cook also said Apple Pay will become available in September for many transactions with the federal government, such as at national parks.

Apple Pay is being watched closely to see whether Apple can foster wider use of digital wallets, a goal that has eluded tech companies for years. Major banks and credit-card companies, including MasterCard, teamed up with Apple to develop Apple Pay, which uses the world’s largest payment networks’ tokenization products, a system that replaces some account information with a digital ID for online and mobile purchases.

Visa CEO Charlie Scharf has said that there will be “an awful lot of things being announced and implemented” in the next year that compete with Apple Pay. The networks have also outlined a road map of standards for how banks and merchants can adopt the technology. To coincide with today’s event, Visa announced an expansion of its token services this year and MasterCard said it plans to spend $20 million on a program that uses biometrics to verify purchases.

We have followed the droughts in the Southwest and California for the past couple of years, and now, according to NASA atmospheric scientists in a new study in the journal Science Advances, things are going to get a lot worse. We are about to go from droughts to mega-droughts.

According to the NASA scientists: “Unprecedented drought conditions” — the worst in more than 1,000 years — are likely to come to the Southwest and Central Plains after 2050 and stick around because of global warming. “Nearly every year is going to be dry toward the end of the 21st century compared to what we think of as normal conditions now. We’re going to have to think about a much drier future in western North America.”

There’s more than an 80 percent chance that much of the central and western United States will have a 35-year-or-longer “megadrought” later this century, according to study co-author Toby Ault of Cornell University, adding that “water in the Southwest is going to become more precious than it already is.”

The study is based on current increasing rate of rising emissions of carbon dioxide and complex simulations run by 17 different computer models, which generally agreed on the outcome. The regions looked at include California, Nevada, Utah, Colorado, New Mexico, Arizona, northern Texas, Oklahoma, Kansas, Nebraska, South Dakota, most of Iowa, southern Minnesota, western Missouri, western Arkansas, and northwestern Louisiana.

Looking back in records trapped in tree ring and other data, there were megadroughts in the Southwest and Central Plains in the 1100s and 1200s that lasted several decades, but these will be worse. Those were natural and not caused by climate change, unlike those forecast for the future.

Because of changes in the climate, the Southwest will see less rain. But for both regions the biggest problem will be the heat, which will increase evaporation and dry out the soil. The result is a vicious cycle: The air grows even drier, and hotter.

Scientists had already figured that climate change would increase the odds of worse droughts in the future, but this study makes it look worse and adds to a chorus of strong research.

Friday, July 25, 2014 - Hot and Dry

Financial Review with Sinclair Noe

DOW – 123 = 16,960
SPX – 9 = 1978
NAS – 22 = 4449
10 YR YLD - .04 = 2.47
OIL - .13 = 101.94
GOLD + 13.30 = 1308.20
SILV + .35 = 20.82

For the week, the Dow is down 0.8%, the S&P is flat and the Nasdaq is up 0.4% in its second straight weekly rise.

In economic news, durable goods orders were up 1.4% in June, but May’s numbers were revised lower to show a 1.2% decline. Shipments of core capital goods fell 1%. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement. The government will release its first snapshot of second-quarter GDP next Wednesday. The economy contracted at a 2.9% rate in the first three months of the year, with business spending on equipment falling at a 2.8% rate.

Investors have been selling junk bonds. In the past week, investors pulled $2.3 billion from junk bond funds. That marked the biggest outflow since June 2013, when the Fed was hinting about tapering. The high-yield market has pulled back in recent weeks, sending prices lower and yields higher. The bond market is not as liquid as it once was; trading volume is down across the board, and trading desks have been cut back, meaning a big sell-off could look more like a run on bonds.

Yesterday we told you about Amazon.com’s earnings report, or more specifically, a lack of earnings. Amazon has a unique business model where they manage to consistently increase sales without actually turning a profit. If it seems like this kind of model has limitations, you are correct, and today Amazon hit the wall. Yesterday’s non-earnings report went from bad to worse as Amazon announced the current quarter will result in bigger losses than the last quarter. The $126 million dollar loss will swell to a $400 million dollar loss, maybe as much as $800 million.

Breaking down the forward guidance, about $410 million of the current quarter loss will be in the form of stock compensation. What makes this even more interesting is that the company lost about $14 billion in market cap today. Jeff Bezos lost $3.5 billion from his personal fortune; Bezos may be an internet visionary, but lacks some basic math skills.

Also yesterday, Visa reported net income for the quarter ended June 30 rose 11 percent to $1.36 billion, or $2.17 a share, from $1.23 billion, or $1.88, a year earlier. Analysts had expected $2.10 a share. Visa’s losses accounted for about one-third of the decline in the Dow today. So, the earnings side was good but the company reduced its revenue forecast for the rest of the fiscal year. One reason for the reduction – Russia. After the US imposed sanctions on Russia, Putin recommended Russia create its own payment system. Visa said that tensions with Russia may affect earnings by “several pennies,” and those headwinds, in the form of lower cross-border volumes, are likely to continue in the short term in international corridors such as Ukraine, Venezuela and Argentina.

The European Union has been holding meetings in Brussels to find agreement over imposing sanctions on Russia over its behavior in Ukraine. They have decided to put together an outline on sanctions and get together again next week; the outline would exclude the crucial gas sector.

Following the downing of Malaysia Airlines Flight 17, many Europeans are eager for their governments to do something to punish Putin for fomenting instability in the Ukraine. However, the debate over economic sanctions is shining an awkward spotlight on the large and important trade relations between Russia and Europe. Russia is Europe’s gas station, and if Europe decides to stop doing business with Russia, they will have to figure out a new and likely more expensive way to put gas in the car and to heat their homes.

According to the Energy Information Administration, oil and natural gas accounted for 70% of Russia’s export revenues in 2012; and most of those exports go to Europe; and most of Europe has not figured out how to provide their own energy. Oil reserves in the North Sea are expensive to tap; fracking technology hasn’t happened for a number of reasons; and so Europe depends on Russia for about 30% of its natural gas. Many of Europe’s biggest corporations are directly involved in importing fuel from Russia, and many of Europe’s biggest industries, such as utilities, power-hungry manufacturers, car manufacturers, transportation systems, and anyone else who uses electricity – all rely on fuels imported from Russia.

If the EU were to suddenly grow a spine and just say no to Russian oil and natural gas, it would certainly inflict some short- term pain on Russia, but oil and gas are fungible and the market is global. One of Putin’s first moves was to sign a deal with China to make Russia a major supplier of natural gas. Europe does not have a quick replacement for Russia’s natural gas and winters in Europe can get very cold.

The US does not depend on Russian fuels; however, there are a couple of strange side stories coming out of the sanctions. First, is the as-yet-unaddressed need to restart NASA, so we don’t have to depend on Russia for ride sharing to the space station. The other, is that Americans don’t really care much about Russia anyway; last week the US imposed a fresh round of sanctions on Russian companies, including weapons manufacturers. How did patriotic Americans respond? Well, you can no longer buy Kalashnikov AK-47s. Technically you can, you just cannot find any. The move sent American gun buyers into frenzy, seeking to buy any AK-47s on any store shelf.

It should come as no surprise that Russia has stepped up its direct involvement in fighting between the Ukrainian military and separatist insurgents, unleashing artillery attacks from Russian territory and massing heavy weapons along the border. So, while the EU considers drafting a new outline of possible sanctions for further possible consideration; Russia may send in the troops.

About 34% of the contiguous United States was in at least a moderate drought as of this week.

Things have been particularly bad in California, where more than 80% of the state is in “extreme” drought, state officials have approved drastic measures to reduce water consumption. California farmers, without water from reservoirs in the Central Valley, are left to choose which of their crops to water. Parts of Texas, Oklahoma and surrounding states are also suffering from drought conditions. East of the Mississippi, rainfall has been rising. But global warming also appears to be causing moisture to evaporate faster in places that were already dry. Researchers believe drought conditions in these places are likely to intensify in coming years.

A new study released yesterday by NASA and the University of California Irvine shows we are losing water at a shocking rate in the West. Using a satellite designed to track changes in groundwater, the research team found that the Colorado River basin—, which supplies water to 40 million people in, seven states—lost 15.6 cubic miles of freshwater in the last 10 years. From December 2004 to November 2013, the Colorado basin lost nearly 53 million acre feet, or almost double the volume of the nation’s largest manmade reservoir, Lake Mead. (Actually, Lake Mead is no longer the biggest reservoir in the country; a lake in North Dakota takes that honor, as Lake Mead has shrunk.) More than 75% of that loss was due to excessive groundwater pumping. It is the first study to quantify just how big a role the overuse of groundwater plays in dwindling water resources out West.

How did this happen without anyone noticing it? The answer, basically, is that up until this study, nobody had a good way of measuring how much water is stored underground. And the researchers aren’t certain how much groundwater is left. The U.S. Bureau of Reclamation manages water above ground in the basin’s rivers and lakes, and its losses are documented. Pumping from underground aquifers is regulated by individual states and is often not well documented.

In the last seven years, Lake Mead’s dwindling has accelerated. The lake is now just barely more than 1,080 feet above sea level, slightly below its previous record low set in November 2010. Lake Mead is expected to drop another 20 feet into record territory by summer 2016. The low water level is already affecting hydroelectric power production. If the water level drops below 1050, the Hoover Dam might not be able to produce electricity.

Well before then, perhaps as soon as next April, downstream water rationing will kick in—this has never happened before. A 2007 shortage-sharing agreement sets three elevations for which water restrictions will be imposed on the Lower Basin states of Arizona, California, Nevada, and New Mexico. The first shortage level, 1,075 feet, will likely come into effect in the next several months. It would require a total water use cut of 4.4%, with Arizona taking an 11% cut, Nevada a 4% cut, New Mexico 3.3% and California remaining the same.

Right now, Phoenix has officially recorded just over one inch of precipitation since the start of the year; the normal amount is just less than 4 inches. The problem is that when above-ground water supplies run low - which is happening now, and it is common in California, even when there isn’t a drought - water managers use groundwater to meet public and farming needs. The study finds that so much groundwater has been used that it will be impossible to recover it naturally; overall supply of available freshwater will continue to decrease as a result.