Financial Review

Cats and Dogs

Sinclair Noe — May 25, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

DOW + 70 = 21,082
SPX + 10 = 2415
NAS + 42 = 6205
RUT + 0.88 = 1383
10 Y – .01 = 2.25%
OIL – 2.50 = 48.82
GOLD – 3.20 = 1256.40
BITCOIN + .29% = 2483.51
ETHEREUM - 8.01% = 174.63

The S&P 500 and Nasdaq hit record closing highs. The surprising part is that retail led the charge.

Best Buy beat profit expectations, reported a surprise increase same-store sales and provided an upbeat outlook. The net profit for the quarter dropped to $188 million, or 60 cents a share, from $229 million, or 70 cents a share, in the same period a year ago. Still they blasted through analyst estimates.

Best Buy shares jumped 22% today.

Tommy Hilfiger owner PVH was the second-biggest S&P gainer with a 4.8-percent jump to a near 6-month high on strong results.

Dollar Tree reported earnings that matched estimates. Sales rose 4%, while same-store sales rose 0.5%.

Sears posted a quarterly loss on an adjusted basis. Revenue dropped. Same-store sales fell 11.2% in the quarter. But Sears recently announced cost cutting measures and they still have cash on hand for operations.

Today, shares popped 12%.

The trade gap in goods—services are excluded—widened to $67.6 billion in April from $65.1 billion in March, the government said in its advanced report. The full report will be released on June 2. Exports of goods fell in April, while imports expanded; that means the trade gap will likely cut into second quarter gross domestic product.

There had been hope for a big bounce back in the second quarter to make up for extremely sluggish first quarter growth of 0.7 percent, which had been blamed on temporary factors like weather.

Housing data this week was also disappointing when new home sales fell 11.4 percent and existing home sales fell by 2.3 percent in April.

Initial jobless claims rose by 1,000 to 234,000 in the seven days stretching from May 14 to May 20. That’s just a few notches above the post-recession low set in February, and near the lowest level since April 1973.

The U.S. economy has been churning out new jobs at a rapid pace since 2011, pulling the unemployment rate down to 4.4% and eliciting widespread complaints from businesses that they cannot find enough skilled workers to fill open positions, although not enough to push wages significantly higher.

OPEC agreed to extend oil production cuts for another 9 months, as expected. Oil traders were not impressed, maybe even disappointed cuts weren’t extended for 12 months. Production cuts have bolstered prices in the past, at least for a while, and then the euphoria fades – it just seemed to fade real fast today.

Of course, there is more at play. The biggest beneficiary of price cuts might be the US shale producers, who are expected to increase their output by about 900,000 barrels a day this year, soaking up much of OPEC’s production cuts.

Short-term projections call for a draw down in storage tanks in the coming weeks as the summer driving season gets underway, but the oil glut is likely to continue absent a big increase in demand – and the long-term outlook for demand faces headwinds from improved efficiency and conservation.

And a move to more electric engines.

There is a definite move away from diesel. The whole idea of clean diesel is being shot down in lawsuit after lawsuit. It started with Volkswagen cheating on diesel emissions; then Mercedes, Peugeot, Renault, and Fiat Chrysler. Add GM to the list.

GM is accused in a lawsuit of rigging hundreds of thousands of diesel trucks with devices like those used by Volkswagen AG, to ensure they pass emissions tests. The proposed class-action lawsuit covers people who own or lease more than 705,000 Chevrolet Silverado and GMC Sierra pickups fitted with “Duramax” engines from the 2011 to 2016 model years.

It said GM used at least three “defeat devices” to ensure that the trucks met federal and state emission standards, even if they generated more pollution in real-world driving. The complaint was filed in the federal court in Detroit.

In a 10-to-3 decision, a federal appeals court affirmed the freeze on the second iteration of President Trump’s executive order on immigration from six majority Muslim countries. The court said that national security “is not the true reason” for the order, despite Trump’s insistence to the contrary, saying it “drips with religious intolerance, animus and discrimination.”

Writing for the majority, Chief Judge Roger Gregory said Mr. Trump’s statements on the campaign trail concerning Muslims showed that the revised order was the product of religious hostility. Such discrimination, he wrote, violates the First Amendment’s ban on government establishment of religion.

Trump issued his initial order on Jan. 27, a week into his presidency. Less than two weeks later, the Court of Appeals for the Ninth Circuit affirmed an order halting it. Though Trump vowed to fight the ruling, he did not appeal to the Supreme Court. Instead, he issued a revised executive order. Now that it has been struck down, he is again faced with the choice of whether to appeal to the Supreme Court.

President Trump was in Brussels for a NATO meeting and he intensified his accusations that NATO allies were not spending enough on defense and warned of more attacks like this week’s Manchester bombing unless the alliance did more to stop militants.

In unexpectedly abrupt remarks as NATO leaders stood alongside him, Trump said certain member countries owed “massive amounts of money” to the United States and NATO — even though allied contributions are voluntary, with multiple budgets.

His scripted comments contrasted with NATO’s choreographed efforts to play up the West’s unity by inviting Trump to unveil a memorial to the Sept. 11, 2001, attacks on the United States at the new NATO headquarters building in Brussels.

Now, two of Germany’s leading newspapers are reporting that in a meeting with the EU’s top leadership he insulted Germany, calling the Germans “bad, very bad” for their running a trade surplus with the US and threatening to cut off car imports to the US.

The European Union said it doesn’t share a common position with Trump on Russia, while differences remain in key policy areas, including climate change and trade, adding to signs of strain in the world’s closest political and economic alliance.

Senate Republicans are weighing a two-step process to replace Obamacare that would postpone a repeal until 2020, as they seek to draft a more modest version than a House plan that the nonpartisan Congressional Budget Office analysts said would undermine some insurance markets.

Republicans say they may first act to stabilize premium costs in Obamacare’s insurance-purchasing exchanges in 2018 and 2019. Major insurers have said they will leave the individual market in several states. A Senate plan is likely to continue subsidies that help low-income Americans with co-pays and deductibles.

The Congressional Budget Office said Wednesday that the House plan narrowly passed May 4 would result in 23 million more people without insurance and, in some states, plans that are too costly for older or sicker people. A Quinnipiac University national poll released today said Americans voters disapprove of the House measure by 57 to 20 percent.

Nvidia has enjoyed a particularly charmed existence since November 8. The graphics-chip maker’s stock price has exploded 95% higher since then, the biggest gain in the S&P 500 by almost 30 percentage points.

On one hand, the company has been targeted by large speculators as a stock likely to decline, as reflected by the roughly $3 billion in short positions held by hedge funds. But it’s also one of the favorite stocks for millennial investors. And while share prices across the technology industry have soared since the election, Nvidia has even more going for it than strength by association and the adoration of millennials

On Wednesday, SoftBank announced a $4 billion stake in the company, sending shares climbing even higher. In the grand scheme of things, this discrepancy between large institutions and individual investors is nothing new to the stock market. Some people get drawn in by the hype and the prospect of a quick profit, while others get worried that valuations are overextended.

The United States can expect an Atlantic hurricane season with more than the usual number of storms. The season, which begins June 1 and runs to Nov. 30, is likely to produce 11 to 17 named storms.

Experts at the National Oceanic and Atmospheric Administration say as many as nine of those could become hurricanes, with winds of 74 miles per hour or higher, and as many as four could be major hurricanes with winds of 111 m.p.h. or greater, also known as Category 3 or higher.

In an average season, 12 named storms develop, and three of them become major hurricanes. The agency said there was only a 20 percent chance of a below-normal season this year. In 2016, NOAA forecast 10 to 16 named storms; fifteen storms developed, including four hurricanes of Category 3 or higher.

Phoenix is the nation’s fifth largest city. Estimates released today by the U.S. Census Bureau show Phoenix last July surpassed Philadelphia, its closest population rival, for the first time after losing the title in 2010.  The 2016 data puts Phoenix’s total population at 1,615,017.

The average 88 people per day the city added between July 1, 2015 and July 1, 2016 gives Phoenix another national distinction: It’s the fastest-growing city in the country, based on numeric increase. Phoenix isn’t the only place growing in Arizona. Maricopa County has the nation’s highest annual population increase among counties, according to recent census statistics.

Financial Review

Earnings Season Playlist

Sinclair Noe — October 26, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 30 = 18,199
SPX – 3 = 2139
NAS – 33 = 5250
10 Y + .03 = 1.79%
OIL – .76 = 49.20
GOLD – 6.40 = 1267.70

After the closing bell, yesterday, Apple reported its first decline in annual revenues in over a decade, profit just barely beat expectations. Apple forecast higher sales in the holiday quarter but that doesn’t seem to be enough to motivate investors. Meanwhile, iPhone sales continued their decline, falling 5% from the previous year, although that’s an improvement from the 15% drop seen in fiscal Q3.

Apple’s cash pile also continued to swell to a record of over $237 billion – if that was its own public company it would be the world’s fourteenth largest. Apple is still making money, about $9 billion in profits in the last quarter, but the bigger question is “what’s next?” The answer comes tomorrow, as Apple introduces the next generation of its MacBook laptop. And maybe something to do with Apple TV – possibly a playlist for TV. We’ll see. Apple sank 2.3 percent in today’s trading.

Boeing shares were trading at their highest level this year, after the world’s largest plane maker reported a jump in quarterly profit despite slower sales. The stock gave the biggest boost to the S&P and the Dow.

Coca-Cola reported better-than-expected quarterly revenue, helped by higher prices for sodas and strong demand for water and sports drinks in North America. Coke reported profit of just over $1 billion on revenue of $1.6 billion.

Tesla shares were up about 5% in after-hours trade, after the electric car maker reported results that were better than expected. Third-quarter was $2.3 billion in revenue, well above targets of about $1.9 billion. Tesla posted a profit of $111 million, or $0.71 on an adjusted per share basis, beating estimates that called for a loss. Tesla maintained its guidance for 24,500 vehicle deliveries in the third quarter, and its second-half estimate of 50,000 deliveries, at the low end of its full-year guidance of 80-90,000.

Chipotle is optimistic on next year. The burrito chain announced diluted earnings of $0.27 a share, missing Wall Street’s estimate of $1.56 by a wide margin. Same-restaurant sales dropped 21%. The company expects a rebound next year.

Pokémon Go didn’t help Nintendo much. Despite the success of the popular iPhone game, and a big one-time gain from selling its controlling interest in the Seattle Mariners baseball team, the Japanese games company’s figures were dented by the strength of the Japanese currency. The video-game maker posted an operating loss for the quarter and cut its operating profit outlook for the fiscal year.

Airbus missed forecasts on supply chain issues, but the aircraft maker maintained its full year guidance.

Brazil provided some bright side for Santander as a pick-up in performance lifted earnings above expectations.

Provisions ate into the quarterly profit at Lloyds, as the bank set aside another £1-billion-pounds to pay compensation for mis-sold payment protection insurance.

Bayer raised guidance for the full year on strong pharma results in its first quarterly scorecard since securing the Monsanto merger.

Southwest Airlines slid after saying a revenue measure may worsen this quarter.

Biogen rallied after its quarterly profit topped estimates.

Mondelez International rose after boosting its earnings forecast.

Northrop Grumman climbed to a record after raising its earnings outlook.

Comcast posted higher third-quarter revenue and profit, benefiting from its NBCUniversal unit’s broadcast of the Rio Olympics.

Google Fiber is halting its rollout in 10 cities and laying off staff, dealing a major setback to the Internet giant’s ambitions of blanketing the nation in super-speedy Internet. The change-up comes months after the company acquired Webpass, largely seen as an admission that fixed wireless might be a preferable route to laying fiber.

AT&T’s new streaming service is coming. DirecTV Now will offer more than 100 channels for just $35 a month. The service debuts in November.

New-home sales picked up in September, to an annual rate of 593,000. That was 3.1% higher than August’s figures. Sales in September were 29.8% higher compared to a year ago. The median price of new homes sold in September was $313,500, 6.7% higher than in August, and 1.9% higher than a year ago.

In part, that reflects dwindling supply. There were 4.8 months’ worth of homes available for sale at the current pace in September, fewer than in August. Despite robust demand, builders haven’t ramped up construction of new homes since the recession. Many continue to report difficulties in finding affordable labor and lots.

An early look at trade patterns in September points to a sharper than expected drop in the U.S. trade deficit – showing a deficit of $56.1 billion in September compared to $59.1 billion in August.

A smaller deficit boosts the official growth rate of the economy, or gross domestic product. The size of the decline in September could even be enough to generate 3% GDP. While exports of American-made goods rose 0.9% in September, imports fell 1.1% and retail and wholesale U.S. inventories rose in the month.

Britain will send fighter jets to Romania next year and the United States promised troops, tanks and artillery to Poland in NATO’s biggest military build-up on Russia’s borders since the Cold War.

Germany, Canada and other NATO allies also pledged forces at a defense ministers meeting in Brussels on the same day two Russian warships armed with cruise missiles entered the Baltic Sea between Sweden and Denmark. Those warships have now made their way to the Mediterranean, headed for Syria, but Spain denied refueling at one of its ports in North Africa.

Others NATO allies joined the four battle groups led by the United States, Germany, Britain and Canada to go to Poland, Lithuania, Estonia and Latvia. Canada said it was sending 450 troops to Latvia, joined by 140 military personnel from Italy. Germany said it was sending between 400 and 600 troops to Lithuania, with additional forces from the Netherlands, Norway, Belgium, Croatia and Luxembourg.

Every year for the past 24 years, the United Nations General Assembly has held a vote to end the US embargo of Cuba. The resolution is adopted each year despite the US vote. Such resolutions are non-binding, but can carry political weight. Today, the 25^th vote was called and the US abstained.

Mercedes-Benz is launching a pickup truck in late 2017, dubbed the new “X-Class,” entering one of the most lucrative segments in the car industry.

General Motors and IBM are combining AI system Watson with OnStar to market new services to drivers. Watson, a collection of artificial-intelligence software delivered as cloud-computing services, is a high-profile part of what IBM calls its “strategic imperatives” to help spur growth. IBM says Watson artificial-intelligence technology is on track to be used in some form by a billion people by the end of next year.

IBM also announced an arrangement with the business messaging service Slack, which helps workers to collaborate in private groups. Slack will use Watson Conversation to enhance the accuracy and efficiency of Slackbot, a customer-service bot that helps Slack users troubleshoot problems. IBM announced a relationship last week with Quest Diagnostics, in which Watson will help analyze the results of genetic sequencing of tumor samples of cancer patients.

Is it possible that Microsoft might have some cool software? I suppose anything is possible. Today, Microsoft executives introduced 3D as a core feature of Window’s 10 Creator’s suite; it was a splashy rollout, the way tech companies do.

Along with Microsoft Paint 3D, the company showed off a way to easily scan a real-world object with a phone so that it could become a 3D file you can manipulate with software. It linked 3D objects to its flagship piece of futurism, the Microsoft HoloLens, which makes sharing and interacting with 3D objects a lot more compelling than viewing them on a two-dimensional screen.

This vision for a new world, where ordinary users create and share 3D objects as casually as they share images on Instagram and Snapchat, won’t become a reality right away. Microsoft’s HoloLens hardware is still only available as a very expensive developer kit. Most people own smartphones, but most don’t own VR headsets.

Microsoft can’t sell most people the hardware to realize its vision of the future today; they’re still working on it. But they planted some seeds to capture that market with its new software, even if it is basically a beta version.

LG Chem, the world’s largest automotive battery maker, will enter the U.S. market for home energy storage through a partnership with rooftop solar company Sunrun. The move will put LG in direct competition with electric car maker Tesla Motors Inc, which unveiled its own home battery packs, called Powerwalls, last year. Sunrun has been using Tesla batteries in its home storage systems in Hawaii since earlier this year, and this deal will add LG to its list of suppliers.

Every time you tag a friend in a Facebook photo, Facebook stores their image in its database. You might consider that an invasion of your privacy. Facebook says it is not. Tomorrow, a San Francisco court will assess whether Facebook is breaking the law by using its facial-recognition tool, to identify faces in photographs uploaded by users.

Plaintiffs in the class action case are concerned on several fronts: Facebook could be selling identifying information to retailers or other third parties. More importantly, they worry that bio-metric data is just as susceptible to theft, hacking, and the long and invasive arm of law enforcement as other types of data. And yes, there is a law that requires companies to get consent from users before storing bio-metric information.

FINANCIAL REVIEW

Some Perspective on the Markets

Sinclair Noe — December 16, 2014

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

DOW – 111 = 17,068
SPX – 16 = 1972
NAS – 57 = 4547
10 YR YLD – .04 = 2.07%
OIL – .58 = 55.33
GOLD + 1.50 = 1196.00
SILV – .47 = 15.82

Allow me to provide some perspective. On December 5th the S&P 500 index hit an intraday high of 2079 and a closing high of 2075. That was 7 trading session in the past, which may be a long time if you are trading on the minute bars, but in the grander scheme of things it was just a few days ago. The downturn has been fast and sharp, as downturns are want to be. This downturn has lopped about 90 points off the S&P, or about a 4.3%; which does not qualify as a correction and certainly not a crash, but it does catch your attention.

Both the S&P 500 and the Dow Industrials have dropped below their 50 day moving averages. The Nasdaq Composite has pulled back close to the 50 day moving average. You will recall that stocks hit highs in September and then pulled off sharply in October; from October until 7 sessions ago, the Dow and the S&P just shot higher. With the recent downturn, the major averages have taken out the highs from September, which is to say we have broken near term support.

Then consider that December is usually one of the better months on Wall Street; and you’ve probably heard about the Santa Claus rally, which is the idea that there is happiness and good will on Wall Street… No wait. It is the idea that there are people investing Christmas bonuses, also some tax considerations (or buying after selling off the tax losses), and the idea that retail sales pick up for the holiday shopping season. And the Santa Claus rally does not apply to the entire month of December. It refers specifically to the last five trading days of the year plus the first two of the New Year. Over the past 60 years or so the rally has resulted in an average of 1.5% gains for that 7 day trading window. Of course not every year produces a Santa Claus rally, and 1.5% is good, it beats a 1.5% decline, but hardly reason for joy, or for specific trading. It sometimes serves as a more general indicator of market direction, and the easy way to remember it is the old jingle from Yale Hirsch: “If Santa clause should fail to call, bears may come to Broad and Wall.”

Today it was a Russian bear. Late yesterday we told you that the Russian Central Bank had raised interest rates from 10.5% to 17%. Imagine if the Federal Reserve hiked interest rates like that; you might, rightfully, suspect that there was an urgent problem. Russia has urgent problems. The currency, the ruble, is collapsing; capital is fleeing the country; oil, the number one export has crashed in price and now Russia faces a major budget deficit because the government is financed largely by oil revenue. The Central Bank of Russia is hoping that with interest rates so high, keeping money on deposit in Russia will start to look attractive; kind of like putting lipstick on a pig.

The Russians have tried this before, with five previous interest rate increases, usually 50 or 100 basis points at a time, which had zero effect; the central bank has spent at least $75 billion this year to prop up the ruble and that was just throwing money away because Russians pulled more than $100 billion out of the country; and so yesterday the Central Bank of Russia went whole hog. The hope is that by stabilizing the value of the currency, the interest rate increase will reduce the sense of financial panic and rapid outflows of money. Maybe. But consider the other effect of higher interest rates; it essentially puts the brakes on economic growth, or in this case economic growth just ran into a brick wall. Russia was already headed into recession, and now high rates will slow things down even more. And this is with a backdrop of 10% inflation.

The rate increase might be a last-ditch move by the Russian government to try to contain the drop in the currency without adopting controls on the flow of capital or other more extensive measures to keep money in the country. And if yesterday’s rate hike fails to stem the collapse in the ruble, then things might play out in very unusual ways. Secretary of State John Kerry suggested that Western sanctions could be removed quickly if Russia withdraws from Ukraine. At the same time, the White House announced that President Obama will sign a bill that would allow him to slap tough new sanctions on Russia.

So, it looks like Putin is getting his comeuppance, but this story hasn’t played out yet. There are no guarantees that Putin will rollover, and even if he does, there are no guarantees the Russian economy will bounce back. Instead of heading into recession, the Russian economy could run right into depression, and that might complicate a whole host of things.

Let’s set the way back machine for 1994. John Meriwether, the acclaimed head of bond trading for Salomon Brothers open a little hedge fund called Long Term Capital Management (LTCM). Meriwether brought on Myron Scholes and Robert Merton, a couple of geniuses who had earned a Nobel Prize for something known as the Black Scholes model, which was a way of pricing options over time – still used today – and really opened up the use of derivatives. LTCM was a big success, generating returns in excess of 40% in its second year.

Now let’s set the way back machine to the summer of 1997. The baht, the currency of Thailand ran into trouble and was devalued. You might not think it was a big deal; Thailand is not exactly a major player in the global financial markets, but it started a capital flight, with cash flowing out of developing Asian economies. Next thing you know the currency crises spread to Malaysia and the Philippines and South Korea. Several Asian companies defaulted. And then the crisis spread to Russia, driving the value of the Russian ruble sharply lower and the Russian stock market went into free fall.

In 1998, Russia’s central bank raised its key rate to 150 percent and it wasn’t enough to stop the flight of capital from Russia. The ruble collapsed. LTCM is heavily invested and heavily leveraged in global markets, including Russia.

Risk is generally considered to be a function of potential market movement based on historical market data. For example, the odds of drawing the ace of spades from a deck of cards is 1 in 52 because there are only 52 cards in a deck and only one is the ace of spades. But financial markets are subject to uncertainty, which is another way of saying there are an unknown number of possible outcomes in the deck, not just 52. Before 1929, a computer would have calculated very slim odds of a Great Depression; after it, considerably greater odds. Just so, before August 1998, Russia had never defaulted on its debt, at least not since 1917, at any rate. When it did, credit markets behaved in ways that Long-Term didn’t predict and wasn’t prepared for.

In August 1998, the LTCM calculated that its daily “value at risk”, meaning the total it could lose on any given day, was only $35 million. Later that month, it dropped $550 million in a day. Eventually the losses grew to $4.5 billion. And LTCM was leveraged about 33 to 1, meaning that the hedge fund only held about 3% in equity; meaning that if the hedge fund went belly up, the losses would grow as they rippled out through investors and financial institutions. Wall Street feared that its unraveling could set off a systemic meltdown. The Federal Reserve stepped in and arranged a bailout among 14 major banks to rescue LTCM. The only major bank that did not go along with the Fed bailout was, ironically, Bear Stearns. Within a few weeks, calm returned and the crisis passed.

The current situation has a way to go before it gets as desperate as the summer of 1998, but you never know exactly how and where contagion can spread. In 1998, the global financial system came close to a meltdown as a hedge fund run by geniuses failed to accurately measure risk. Fast forward to today, and substitute LTCM for a bunch of highly leveraged European banks. And just a reminder, the Eurozone is going through a bit of a rough patch itself right now.

The saga of Long-Term Capital Management looms large in the psyche of global markets, even if the lesson went unlearned. We saw another near meltdown of the global financial system in 2008 and the story line was eerily similar to the summer of 1998. Highly leveraged financial institutions used derivatives to place big bets on the subprime mortgage market rather than bets on the Russian ruble. Bear Stearns, ironically, was one of the first to falter. The risk was ill-considered. When people figured out there was a problem, liquidity evaporated. The belief that one can safely get out of a liquid market is one of the great lessons that went unlearned.

This is not to say that the collapse of the Russian ruble is going to repeat like 1998. History doesn’t repeat, but sometimes it rhymes. The ruble plummeted into a freefall, losing as much as 19% before recovering slightly (down just 5%) as panic swept across Russian financial markets after the surprise interest-rate increase failed to stem the run on the currency. But the panic in Russia spread to other developing markets from Dubai to Indonesia.

And nobody really knows how this will play out. Putin may feel pushed into a corner, he might lash out; he might think NATO is afraid of him. Imagine Cyprus with nukes. The last time oil prices experienced this kind of run-up and decline, the Soviet Union fell. If that’s not terrifying enough, consider that Russia is not the only country headed for problems. The Middle East is full of countries that need a high oil price to protect their economies.

We’re heading into the holidays, usually a good time for the markets, usually a time when you can get together with family and friends and leave all your cares behind. Stay awake kids.

FINANCIAL REVIEW

War, Pay Phones, Small Business and Big Banks

Sinclair Noe — September 24, 2014

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Financial Review

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

DOW + 154 = 17,210
SPX + 15 = 1998
NAS + 46 = 4555
10 YR YLD + .03 = 2.57%
OIL + 1.18 = 92.80
GOLD – 6.30 = 1217.60
SILV – .11 = 17.78

President Obama addressed the United Nations General Assembly today. He condemned ISIS, and said there was no reasoning and no negotiation with their brand of evil. He said the US “will work with a broad coalition to dismantle this network of death”; that coalition is now up to 40 countries. He urged Muslims to reject the ideology of ISIS and al-Qaeda. He also announced a US warplanes hit ISIS vehicles and arms dumps in new air strikes in Iraq and Syria. ISIS continues to advance in Syria and aid agencies report some 130,000 Kurdish refugees have crossed into Turkey in the past few days. An Algerian jihadist group linked to ISIS has released a video which it says shows militants beheading a French tourist.

The president’s speech also criticized Russia for the recent invasion of Ukraine. Today, NATO reports Russia has withdrawn a sizable number of its troops from eastern Ukraine, although some remain. Russian backed rebels in the region said they had begun pulling back their heavy artillery after Ukrainian troops did the same. For now, the cease fire appears to be holding.

The stock market recovered after three days of losses; for the Dow Industrials it was two days of triple digit declines. Not much in the way of economic news today. New home sales were up 18% in August. In a separate report, the Mortgage Bankers Association said applications for loans to purchase homes fell last week as mortgage rates crept up. New loan applications are well off peaks seen early last year. Yesterday, the NAR reported existing home sales had flat lined, with both “cash sales” and “sales to investors” dropping, or rather plunging since late 2013. Every month since late last year, existing home sales have been below their year-ago levels. Bad news for flippers. Looking at the bigger picture it might give some hints to family formation, or lack thereof. For economists, it might serve as a lesson that rising home prices are a symptom of economic strength, not a cause; and you can’t sustain rising home prices without rising wages.

European Central Bank President Mario Draghi renewed a pledge to keep monetary policy loose for an extended period. The euro dropped below $1.28. The dollar has now posted gains for 10 straight weeks, pushing the dollar index above 85 for the first time since July 2010. A stronger dollar likely means lower prices on basic commodities; it also serves as stimulus for the Eurozone and Japan, making their exports cheaper; and a strong dollar might even fuel another round of M&A activity; also, this might be a great time to take a European vacation.

You’ve heard the stories of data breaches at Target, and then the big one at Home Depot, potentially affecting some 56 million customers; now add Jimmy John’s to the list; 216 stores of the restaurant chain were involved in a security breach on July 30. There has to be a more secure way to buy a sandwich. The security breach at Home Depot is now resulting in fraudulent transactions that may be draining cash from some customer bank accounts as criminals use stolen card information to buy prepaid cards, electronics, groceries, or whatever. Financial institutions are also stepping up efforts to block the transactions by rejecting them if they appear unusual. Best advice is to keep a close eye on your own accounts.

Some people think the next big thing is Apple Pay; it doesn’t store credit card data and Apple fingerprint reading technology could provide an extra layer of security, but it’s a long way from being ubiquitous. It is estimated Apple could end up taking in around $90 million in transaction fees from Apple Pay next year, climbing to more than $300 million by 2016. That should make payments absolutely, super-duper safe and secure.

Meanwhile, Apple announced it is pulling its latest update of the new iOS 8 operating system, which they sent out to fix the glitches in its new HealthKit app. The problem with the update is that people who installed it lost the fingerprinting ID capability and phone calls kept getting dropped. Other than that, how did you enjoy the play Mrs. Lincoln?

Remember Blackberry. Once upon a time Blackberry was the cool mobile phone, and then Apple became the cool mobile phone and Blackberry was so square. Well, they’ve embraced that. Blackberry introduced a new phone today, it’s called the Passport, and the screen is square, not rectangular, so it won’t fit in any pocket.

Wal-Mart thinks the next big thing is a Wal-Mart checking account; they will partner with Green Dot to offer checking accounts accessible by mobile phones, and it comes with a debit card, and monthly fees are waived if you use direct deposit, and it doesn’t rely on credit scores or credit bureau ratings. Wal-Mart is trying to tap into the vast “unbanked” market, which now gets raked over the coals at check cashing stores.

Earlier today, it was reported that the Securities and Exchange Commission has been investigating whether bond fund manager Pimco inflated the returns of its Total Return Exchange Traded Fund run by founder Bill Gross. The probe is said to have sped up in recent weeks but has been going on for “at least a year.” Which means that it was happening when Mohamed El-Erian announced he was leaving the firm.

Investigators from the SEC’s enforcement division are examining whether the $3.6 billion Pimco Total Return ETF bought investments at discounted prices but relied on higher valuations for the investments when the fund calculated the value of its holdings shortly thereafter. Such a maneuver could make it seem as though the ETF had scored quick gains when it was in fact taking advantage of variations in the way some investments are valued in the bond market; which is another way of saying Pimco may have provided inaccurate information about the fund’s performance.

Do you remember where you were in 1988? Do you remember where you worked? Do you remember what you were paid? If you can’t remember what you were paid 26 years ago, don’t worry, there’s a good chance it is the same as today. The economic recovery has yet to translate into higher incomes for the typical American family. After adjusting for inflation, US median household income is still 8% lower than it was before the recession, 9% lower than at its peak in 1999, and essentially unchanged since the end of the Reagan administration. And the income of the median US household is just under $52,000; the same as it was in 1988. Now granted, that number, reported last week in the latest income and poverty data, is based on median income; also, it refers to households, and the typical household has changed over the years. Still…

Six years ago the financial crisis hit Wall Street, turning a housing crisis that was already hammering Main Street into the worst recession since the Great Depression. Job losses averaged nearly 800,000 per month between November 2008 and April 2009 as the unemployment rate climbed. The economy contracted at a rate of 8.3% between the fourth quarter of 2008 and the first quarter of 2009. The crisis hit businesses big and small, but it hit small business harder.

Jobs at small businesses fell 60% from the pre-crisis peak in December 2007 until the private sector started adding jobs again in February 2010. That represents a decline that is 40% larger than the fall in jobs among larger businesses. This is especially problematic because small businesses employ half of the private sector workforce, and since 1995 small businesses have created about two out of every three net new jobs, or 65% of total net job creation. Small businesses have created jobs in every quarter since 2010, and are back to creating two out of every three net new jobs, but still remain well below the job creation levels that we need to see to fill the “jobs gap” left in the wake the recession.

Part of the decline in job creation has also been due to anemic new business formation. Over the past 20 years, businesses less than two years-old accounted for one-quarter of gross job creation even though they employed less than 10% of workers. But, during the crisis new business formation fell sharply. In the decade prior to the crisis, more than 620,000 firms were started every year. But, starts have averaged just about 550,000 annually since 2009, a decline of about 11%. And small business just keeps getting smaller; in 2000, the average new firm had 7.7 employees; by 2010, that number had declined to 5.5.

The formation and growth of small businesses depends on well-functioning credit markets, but throughout the recession and even during the recovery today critical parts of our credit markets are shut for small firms. Small business loans on the balance sheets of banks are down about 20% since the financial crisis; meanwhile, loans to larger businesses have risen by about 4% over the same period. The Federal Reserve Bank of New York reports that 37% of all small businesses applied for credit in the fall of 2013. About 45% did not apply, presumably because they did not need credit, but about 20% did not apply because they were discouraged from doing so. Of businesses that did apply, over 40% either received no capital at all or received less than the amount that they requested.

Part of the problem is that many small community banks closed in the crisis, and they haven’t been replaced; just one new community bank charter was granted in 2010, just 3 new charters in 2011. There were 6,840 banks and 1,173 thrifts last year, down from 14,507 banks and 3,566 thrifts in 1984. And of course the big banks just consolidated and got even bigger, and the Federal Reserve Bank of Atlanta reports that big banks are less likely to extend credit to a small business than a small regional bank.

Another Glass of Kool-Aid

Financial Review with Sinclair Noe

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

DOW + 10  = 17,078
SPX – 1 =  2000
NAS – 25 = 4572
10 YR YLD – .01 = 2.41%
OIL – .36 = 95.18
GOLD + 3.50 = 1270.30
SILV + .02 = 19.27

The Commerce Department reports orders for goods produced in US factories rose 10.5% higher in July, mainly due to a big surge in contracts for commercial aircraft. Yet excluding transportation goods, factory orders fell 0.8% in July.

Meanwhile, auto sales rose to a seasonally adjusted annual rate of 17.5 million in August, up from 16.5 million in July. Recalls finally caught up with General Motors and sales declined 1%; Chrysler sales were up 20%; Ford sales were up less than 1%; VW slipped 13%; Nissan sales were up 12%; and Toyota gained 6%.

Tesla is expected to announce tomorrow that it has selected Nevada to be the home of its gigafactory, which will build batteries. Arizona, California, New Mexico, and Texas were also in the running for the $5 billion plant, a key part of Tesla’s plan to scale up its production and launch a mass-market car in the next couple of years. The factory is expected to employ more than 6,000 people.

The Federal Reserve gathers information from its districts two weeks before they get together for the FOMC policy meetings. They publish the information in a beige folder, and it is called the Beige Book; the information is not necessarily economic data or statistics, but rather opinions and anecdotes. They ask people what they see and think about different parts of the economy. So the Beige Book, which was released this morning, usually includes some vague and fuzzy terms; for example the economy has been expanding at a modest to moderate pace. The Beige Book describes manufacturing, job growth, the housing market, and consumer spending as modest, moderate or mixed. Auto sales and tourism remain bright spots. Demand for residential mortgages was less robust. The Fed described the labor market and hiring trends as generally modest. Employers, however, increasingly are struggling to find skilled employees. Wage and price pressure were little changed. That might be one of the more interesting findings. If employers can’t find skilled workers, one answer is to pay better.

The OECD, the Organization for Economic Cooperation and Development reports that high unemployment rates in the developed world are mainly the result of a tepid economic recovery rather than a lack of appropriate skills in the work force.

Today the S&P 500 index hit an intraday high, and the Dow nearly set an intraday high. Financial markets have been downright giddy for the past couple of years; we’ve seen 32 record high closes for the S&P 500 this year. Meanwhile, the Fed looks around and the consensus is that the economy is moderate to modest, not robust or booming. If it seems there is a disconnect between the market euphoria and the underlying economy, well, don’t worry, have another glass of Kool-Aid. That disconnect worked for a while. The financial markets were correct to dismiss the contraction in the first quarter GDP. After all, the second quarter GDP snapped back with 4.2% growth, which must be proof positive that the first quarter was a one off fluke. Meanwhile, the gap between exuberant markets and a moderate economy is filled with longer-term risks.

Some of those risks have been with us for quite a while. Regulators are just now getting around to issuing rules for banks to hold enough liquid, or easy-to-sell assets, to keep them afloat during a crunch, such as back in 2008. The Federal Reserve said big U.S. banks would need to hold a total of about $2.5 trillion in highly liquid assets by 2017, and that they would have a shortfall of about $100 billion if that threshold applied today. The regulators also proposed rules determining how much money – or margin – swaps buyers and sellers must set aside when they do trades outside central clearing houses, which makes them more risky than cleared derivatives trades.

What is considered liquid? Well, cash, treasuries, and other securities are considered liquid. What are those other securities? They’re still working on that. The idea is that it is some sort of asset that can be easily converted to cash. Of course, when there is a crunch or a freeze, it means that securities can’t be converted. Easy to sell assets are only easy to sell when you can sell them.

Medicare provides health coverage for people over age 65 and for people with disabilities. Spending per Medicare patient has almost always grown more rapidly than the economy as a whole, often by a wide margin. This year, Medicare will spend about $ 11,200 on average for every person enrolled in the program. By comparison, it spent $12,000 three years ago, in inflation-adjusted dollars. The Congressional Budget Office forecasts that the number will fall below $11,000 by 2017 and stay below this year’s number until 2020.

Medicare spending is dropping for two main reasons: first, the baby boomers are entering the program and in the short-term it skews toward a slightly younger and healthier population; second, over the last few years, Medicare patients have been using fewer expensive medical services, particularly hospital care and prescription drugs. The budget office is increasingly persuaded that such a pattern is going to last for a while.
NATO meets tomorrow to try and figure out what to do about the Ukraine-Russia situation. Russian president Putin has said that Russians aren’t actually fighting in Ukraine. Today he proposed a ceasefire plan to end the conflict, which Russia is not a party to.

Meanwhile, President Obama was in Estonia, which is a member of NATO and he hinted that NATO might now be willing to provide military assistance to Kiev. Obama said that any assault on the Baltic States would be met by force. “We’ll be here for Estonia. We’ll be here for Latvia. We’ll be here for Lithuania. You lost your independence once before. With NATO, you will never lose it again.” Estonia is a former Soviet republic just like Ukraine, but unlike Ukraine, Estonia is a member of NATO. Ukraine says it would like to become a member of NATO.

European leaders are contemplating a fourth, harsher round of sanctions against Russia, with France announcing that it was suspending the delivery of a new Mistral warship to Russia. For months, French officials have deflected and deferred any discussion about a controversial deal to supply two advanced warships to Russia. Even after several rounds of sanctions, travel bans, and asset freezes, this is perhaps the harshest penalty that any country in Western Europe has taken against Russia so far. It is only a suspension, rather than a cancellation, but the financial hit to France’s defense industry could be significant. To date, EU sanctions against Russia have covered only future business, leaving existing contracts untouched. If any European country was going to voluntarily endanger current business deals, instead of things at some unspecified time down the line, few would guess that it would be France.

Of course there are creatures with far less backbone, and far looser scruples than even France. I’m talking about politicians. Specifically, two former US senators. Gazprombank GPB is a subsidiary of Gazprombank, the third largest Russian bank; the same Russian bank already targeted with sanctions. Former Senators Trent Lott of Mississipppi and John Breaux of Louisiana have signed on as lobbyists for Gazprombank. This is bipartisan slime; Lott is a republican and Breaux is a democrat.

NATO is looking to the US to shore up energy security, particularly as tensions rise with gas-rich Russia over the Ukraine crisis. At this week’s NATO Summit, European allies will likely press President Obama for accelerated gas exports and a lift of the US oil export ban as a counter to Russian influence.

Latvian President Andris Bērziņš said, “We wish to develop a real transatlantic bond between Europe and the U.S. on energy. Recent developments in Ukraine are the further proof of the urgency to reduce dependency on one supply here. Thereby, the U.S. involvement is very important for our efforts to make strong energy security and develop integrated energy markets in the region.”

The US is the world’s largest natural gas producer thanks to recent drilling innovations, and the US rivals Saudi Arabia and Russia in oil production. Countries across the globe would rather do energy trade with the US than with less stable energy superpowers, but US law largely prohibits oil exports and limits natural gas exports.

On another front, Obama announced that the United States now has a plan for dealing with the Islamic State, or ISIS, or ISIL, or whatever you call it. The plan is to destroy and degrade them. It will take time because of the power vacuum in Syria and the importance of building coalitions, including with local Sunni communities. Obama told a news conference, “The bottom line is this, our objective is clear and that is to degrade and destroy ISIL so that it’s no longer a threat not just to Iraq but also the region and to the United States.”

Vice President Joe Biden used a little more powerful language in a speech in New Hampshire, saying, “They should know we will follow them to the gates of hell until they are brought to justice. Because hell is where they will reside.”

At some point, somebody will look around and figure out that most of the bad actors on the global stage get their funding from oil; until then, have another glass of Kool-Aid.