Financial Review

Getting Warmer

Sinclair Noe — August 8, 2017

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DOW – 33 = 22,085
SPX – 5 = 2472
NAS – 13 = 6370
RUT – 4 = 1410
10 Y + .03 = 2.28%
OIL – .23 = 49.16
GOLD + 3.40 = 1261.70
BITCOIN – 1.06% = 3416.49 USD
ETHEREUM + 7.34% = 286.39

President Trump said North Korea will be “met with fire and fury and, frankly, power the likes of which the world has never seen before” if Kim Jong Un’s regime continues to threaten the US. Trump was speaking with reporters in Bedminster, New Jersey.

Trump’s comments followed a report in the Washington Post, citing a Defense Intelligence Agency analysis, that North Korea successfully developed a miniaturized nuclear warhead that could fit onto its missiles. And it comes just days after the United Nations Security Council ratcheted up sanctions on North Korea, targeting about $1 billion of the nation’s approximately $3 billion in exports.

Those restrictions followed two intercontinental ballistic missile tests in July. The S&P 500 Index fell to session lows and the CBOE Volatility Index jumped 11 percent about a half hour before the end of the trading session on Wall Street. The 10-year Treasury yield rose. Crude retreated toward $49 a barrel.

The effects of climate change are already having an impact on the U.S. after average temperatures have risen dramatically over the last four decades. The U.S. Global Change Research Program Climate Science Special Report, compiled by a group of scientists from 13 federal agencies, found with high confidence that it was “extremely likely that more than half of the global mean temperature increase since 1951 was caused by human influence on climate.”

The report states: “Evidence for a changing climate abounds, from the top of the atmosphere to the depths of the oceans. Thousands of studies conducted by tens of thousands of scientists around the world have documented changes in surface, atmospheric, and oceanic temperatures; melting glaciers; disappearing snow cover; shrinking sea ice; rising sea level; and an increase in atmospheric water vapor.

Many lines of evidence demonstrate that human activities, especially emissions of greenhouse gases, are primarily responsible for observed climate changes in the industrial era. There are no alternative explanations, and no natural cycles are found in the observational record that can explain the observed changes in climate.”

The report is part of the National Climate Assessment, which has been congressionally mandated to take place at least every four years since 1990. A National Academies of Science committee reviewed the study and said it was “timely, accurate, and well-written.”

The report’s authors also described a link between climate change and severe weather events, citing: “A change in the frequency, duration, and/or magnitude of extreme weather events is one of the most important consequences of a warming climate,” with an increase in heavy precipitation, extreme heat events and tropical storms as a result.

The report says that the cost of extreme weather has exceeded $1.1 trillion since 1980. The National Academy of Sciences has signed off on the paper, and it is now awaiting approval from the Trump administration.

The New York Times released a draft of the report today. According to the Times, scientists fear that the Trump administration could either alter or suppress the findings, and for good reason. The report directly contradicts claims by Trump and members of his cabinet who say that the human contribution to climate change is uncertain, and that the ability to predict the effects is limited.

This past week, the State Department began the formal process to withdraw from the Paris climate accord, officially notifying the United Nations. Trump has instructed the Environmental Protection Agency to scrap or change regulations aimed at reducing greenhouse gases, and has started to open more public land and waters to fossil fuel activity.

Mentions of the perils of climate change have been removed from the White House’s Web site and the Department of Interior and, in April, the EPA eliminated its online climate-change section pending a review that will be focused on “updating language to reflect the approach of the new leadership.” How the Trump administration decides to handle the report remains to be seen. The EPA and 12 other agencies have until Aug. 18 to approve the report.

Shortly after the Bureau of Labor releases the monthly non-farm payroll report, we get more details in a report called Job Openings and Labor Turnover Survey; the JOLTS report is on a one month lag. The number of advertised job openings rose to a record-high 6.2 million in June.

While the record high in job openings was good news, actual hiring declined in the month, and the number of workers quitting their jobs — a gauge of confidence in the jobs market — wasn’t significantly changed. The report shows that layoffs have become more and more rare in the past year, with about one worker in 100 getting laid off per month. With layoffs so infrequent, it doesn’t take much net job creation to keep the unemployment rate trending down.

Even though the unemployment rate dropped to 4.3%, there is ongoing concern about weakness in wage growth. The Labor Department reports that 7.6 million workers held multiple jobs last month, up 2% from 7.4 million in July 2016. That’s back to highs not seen in 20 years.

And it should not be mistaken as a sign of healthy entrepreneurship. The principal reason workers hold more than one position is that no single job provides a sufficient income. In a strong economic recovery, the number of full-time workers should be rising, and the number of workers employed part-time or holding multiple jobs, should decline.

Sentiment among small-business owners skyrocketed in July as customer demand improved, despite continued gridlock in Washington. The sentiment gauge from the National Federation of Independent Business rose 1.6 points to 105.2. That snapped a five-month streak of readings that either declined or remained the same, and easily beat the consensus forecast for a decline to 103.2.

The jump in the July survey reflected better views of the labor market: owners reported having more open positions now as well as plans to hire more in the future. Survey respondents also have stronger sales expectations, and expect better business conditions, thanks in part to resilient American consumers.

The NFIB said little about Washington in the release, except to note that “stronger consumer demand” came despite dysfunction among lawmakers.

The CoreLogic Home Price Insights report shows home prices nationwide, including distressed sales, increased year over year by 6.7 percent in June 2017 compared with June 2016 and increased month over month by 1.1 percent in June 2017 compared with May 2017.

The CoreLogic HPI Forecast indicates that home prices will increase by 5.2 percent over the next 12 months. The report finds inventories tight, with unsold inventory at 1.9 percent, the lowest second quarter reading in over 30 years.

As a result, prices are marching higher and affordability is deteriorating nationally. In Arizona, home prices climbed 6.1 percent over the past 12 months, and 0.7 percent from May to June.

Disney reported a near 9 percent fall in quarterly profit, pulled down by higher programming costs and declining subscribers at its flagship sports channel ESPN. Disney also announced it will stop providing new movies to Netflix starting in 2019 and launch its own streaming service.

CVS Health forecast current quarter profit below Wall Street estimates and said it has been ordered to cooperate with investigations into possible false claims submitted to a government healthcare program and drug pricing.

The No.2 US drug store chain reported quarterly profit above Wall Street estimates on strength in its pharmacy benefits management business, which helped to more than offset a 2.6 percent drop in same-store sales. The attorney general for the Southern District of New York has sought information on possible false claims submitted regarding reimbursements for Medicare Part D prescription drugs.

Minnesota’s attorney general wants info regarding a probe into pricing of insulin and epinephrine drugs. Sanofi, Eli Lilly and Novo Nordisk were named in a proposed class action lawsuit, which alleged the firms simultaneously hiked insulin prices by over 150 percent in the past five years.Mylan, the maker of emergency epinephrine injectors EpiPen, is facing investigations after it doubled the cost of its syringes used to treat severe allergic reactions.

On Monday, a class-action lawsuit was filed against CVS Health, which alleged the company colluded with third-party PBMs to raise generic drug prices. The suit claims that the pharmacy agrees with pharmacy benefit managers, or PBMs — the middlemen of the industry who manage the list of what drugs an insurer will and will not pay for — to sell certain drugs at a higher price if a customer is paying with insurance.

US News & World Report publishes and annual “Best Hospital Honor Roll”, ranking the 20 hospitals that outperformed all others in its review based on a variety of specialties. Mayo Clinic Hospital in northeast Phoenix ranked No. 20. It was the first time the Phoenix hospital had cracked the honor roll and the first time any Arizona hospital made the top 20.

The hospital also was ranked No. 1 in Arizona and the Phoenix metro area on the publication’s overall review. Mayo Clinic in Rochester, Minnesota, where the health system is headquartered, was ranked No. 1. The Phoenix hospital was cited for excelling in: cancer; cardiology and heart surgery; ear, nose and throat; gastroenterology and gastroenterologic surgery; geriatrics; nephrology; neurology and neurosurgery; orthopedics; pulmonology; and urology.

Right now, Earth is plowing through a cloud of tiny bits of comet dust, turning the rice-grain-size debris into what many call shooting stars.  Known as the Perseid meteor shower, this recurring astronomical event is easily the most watched — and beautiful — shower every year.

The peak viewing time will be this weekend – Friday, Saturday, and Sunday, enjoy.

Financial Review

No Small Thing

Sinclair Noe — May 13, 2015

 

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

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DOW – 7 = 18,060
SPX – 0.64 = 2098
NAS + 5 = 4981
10 YR YLD + .02 = 2.28%
OIL – .62 = 60.13
GOLD + 22.10 = 1216.10
SILV + .61 = 17.19

U.S. retail sales were flat in April. Americans went out to eat more and made plenty of Internet purchases, but we cut back on gasoline, autos, home furnishings and electronic goods, among other things. While March’s retail sales were revised up to show a 1.1 percent increase instead of the previously reported 0.9 percent rise, that was not enough to offset the general weak tone of the report. Retail sales excluding automobiles, gasoline, building materials and food services were also unchanged. Core retail sales correspond most closely with the consumer spending component of gross domestic product.

You can’t blame the bad winter weather for this report. The American consumer is acting in a most bizarre manner…, they are not spending, they are saving. The most recent data, from March, shows that Americans saved 5.3% of their pre-tax income, down from 5.7% in February. But the average savings rate so far in 2015 is higher than it was last year and in 2013. Savings spiked following the recession, but it was widely expected the savings rate would eventually fall back to the pre-bubble rates of 3% or 4%. Yea, that’s not happening.

Saving is a good thing but a recent survey by Moody’s Analytics showed some interesting demographic details. Younger people, under age 35 are not saving; they overspend and go into debt. Older people, over age 55, are saving at a 13% pace. This likely indicates that older people did not save enough and now they are playing catch-up. This also means that younger people are saddled by student debt and fewer good-paying job opportunities; as a result of not saving when they are young, they will never realize the full power of compounding on their savings. Low savings activity among today’s under-35 generation means that wealth inequality will continue to grow worse as time goes on. And in the short-term wages are likely to remain low because consumers are not spending.

The prices paid for imported goods fell 0.3% in April, as the lower cost of goods such as food and industrial supplies offset a rise in petroleum. Excluding fuel, import prices fell by 0.4% last month. For the past 12 months import prices have declined by 10.7%, mostly because of a steep drop in oil in the second half of 2014 and a stronger dollar. In a separate report, inventories at U.S. businesses rose 0.1% in March, compared with 0.2% growth in the prior month.

So, flat retail sales point to weak GDP growth and import prices are deflationary. Remind me again why the Federal Reserve is talking about raising interest rates.

For the first time since 2010, all four of the Eurozone’s largest economies (Germany, France, Italy and Spain) recorded growth. And for the first time since first quarter of 2011, the currency area grew more rapidly than both the U.S. and U.K. The Eurozone economy expanded by 0.4% at the start of the year, marking a pickup from the 0.3% growth recorded in the final quarter of 2014.

China released a flurry of data today that broadly missed estimates, suggesting that more monetary easing may be needed to kick start the world’s second largest economy. Industrial output rose 5.9% in April from the year-ago period, accelerating from 5.6% in March, although it missed forecasts. Retail sales and fixed asset investment also missed estimates.

Chicago may have to pay banks as much as $2.2 billion after Moody’s Investors Service dropped its credit rating to junk. The credit rating agency’s decision to cut Chicago’s $8.1 billion of general obligations two ranks to Ba1, one step below investment grade, allows banks to demand that the city repay debt early and exposes it to fees to end swaps contracts. The downgrade adds to the financial pressure on Chicago, which was already the lowest-rated of any big U.S. city except Detroit.

The Department of Agriculture has released its annual honeybee survey and it shows that beekeepers are starting to lose large numbers of bees during both the summer and winter. More than 40% of US honeybee colonies died in a 12 month period ending in April.

Responding to shareholder pressure to improve transparency, Wal-Mart said it will start directly disclosing to investors what it spends on lobbying on a state-by-state basis. The step would make Wal-Mart the first company in the Dow to itemize state expenditures on lobbying.

Toyota, Nissan, and Honda are expanding a huge global recall triggered by potentially fatal air bags made by Takata Corp.  They are recalling more than 6.5 million vehicles. Today’s announcements raise to roughly 31 million the number of vehicles recalled worldwide since 2008 over Takata air bag inflators, which can erupt with too much force, spraying shrapnel inside the car.

Seven deaths confirmed in the derailment of an Amtrak train near Philadelphia, hundreds more injured.  Investigators believe the train was traveling at 100 mph, or twice the speed limit when it derailed. The commuter rail route where the Amtrak train left the track was not governed by an advanced safety technology meant to prevent high-speed derailments. Positive train control, or PTC, automatically slows or even halts trains that are moving too fast or heading into a danger zone. Under current law, the rail industry must adopt the technology by year end. The NTSB is also looking into the condition of the tracks and equipment, as well as crew training. Coincidentally, the House Appropriations Committee voted today to approve a measure that cuts $260 million from Amtrak’s budget.

Danaher Corp. agreed to buy  Pall Corp. for $13.8 billion, and following the acquisition it will split itself into two independent, publicly traded companies. The new entities will be a “science and technology growth company” retaining the Danaher name and an industrial company.  Danaher’s business lines span water filters to dental equipment to medical-testing devices; Pall makes water-filtration and purification systems.

Five big banks are expected to reach settlements with US regulators over allegations that they manipulated currency markets; the deals could be announced next week.   Four of the banks – Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland – will likely enter pleas related to antitrust violations. The fifth bank, UBS, cooperated with the Department of Justice on antitrust violations – so they have immunity there – but the bank is still facing fraud charges in that case for failing to make disclosures to clients and counterparties. If this all sounds familiar, it is because the banks are repeat offenders. And now the DOJ might be ready to say enough is enough – at least in the case of UBS.

Back in 2012, UBS signed a non-prosecution agreement with the US to resolve a worldwide investigation into the manipulation of the London interbank offered rate, or Libor. UBS promised not to commit crimes for two years. That agreement was set to expire last year, but it was extended through December as the Justice Department investigated currency rigging. As part of the currency settlements, UBS is expected to plead guilty to a charge stemming from the Libor agreement.

The move by the DOJ would be a first for the industry; in other words, they have never done anything to a bank that signed a Non-Prosecution Agreement. The idea of an NPA is like putting a convict on parole; go on with your life but if you break the law again, you go to jail. But the banks that signed Non-Prosecution Agreements have repeatedly violated the law, and it is like the NPA was completely toothless. Leslie Caldwell, the head of the Justice Department’s criminal division, said in March she wouldn’t hesitate to tear up non- or deferred-prosecution agreements in exchange for banks’ cooperation in other probes.

So, even though UBS is a repeat offender, the most likely result is a fine, a slap on the wrist. The prosecutors could invoke the nuclear option, and pull the bank’s charter but nobody expects that. The fear is that pulling a charter could result in collateral damage; innocent people could lose their jobs; it could hurt the broader economy. So, even if the Department of Justice compels a guilty plea to criminal charges, the punishment will still be a fine. Because the law is different for the banksters than for regular people.

The New York Times will begin publishing articles directly to Facebook’s platform today. The project is called “Instant Articles” and it involves a partnership with 9 news organizations, including BuzzFeed, NBC News, The Guardian, and National Geographic. Under the terms of the deal, entire news stories from those partners will appear inside Facebook’s mobile app and be able to be read there, as opposed to the traditional practice of news publishers posting an excerpt and a link to their website.

On the surface, this sounds like a pretty straightforward exchange of value. Facebook gets content for its 1.4 billion or so users, and publishers get the reach that the social network provides, plus they get to keep any revenue from advertising that they sell around that content (if Facebook sells the ads, then publishers reportedly get to keep 70%.) But this is hardly a deal among equals. Facebook holds the advantage.  For Facebook, this is a way to engage their customers. If the NYTimes is not engaging, then Facebook will move on to the next thing. For the publishers, there aren’t many places to go.

Once upon a time, if you wanted news, you subscribed to the paper and maybe a few magazines. Times changed but the publishers did not. As a result of their own incompetence and/or inflexibility, combined with the shifting sands of the digital-media market, they have lost their grip on the audience that both they and advertisers are trying to reach.

Case in point: Cablevision will drop its $1 bid for the New York Daily News when second-round bid deadlines arrive next week. Cablevision couldn’t justify even the one dollar considering the paper’s poor financial condition. It’s reportedly losing $30 million each year with a heavy dependence on newsstand sales.

And so the face of journalism is now Facebook, or at least Facebook will now control much of the access to news; and that is no small thing.