Stocks Finish Mostly lower, Snap Weekly Winning Streaks

On the Market

Posted: 11/10/2017 4:15 PM EST

Stocks Finish Mostly lower, Snap Weekly Winning Streaks

 

U.S. stocks came off the worst levels of the day, but still finished the regular trading session mostly lower as the major domestic indexes snapped their recent weekly winning streaks with market participants weighing the potential for tax reform after the Senate released its plan yesterday. Treasury yields advanced and the U.S. dollar ticked lower, while crude oil prices and gold also lost ground. In equity news, Dow member Walt Disney's outlook overshadowed its softer-than-expected quarterly results, while J.C. Penney and NVIDIA rallied following their earnings reports. 

The Dow Jones Industrial Average (DJIA) declined 40 points (0.2%) to 23,423, the S&P 500 Index was 2 points (0.1%) lower at 2,582, and the Nasdaq Composite ticked nearly 1 point higher to 6,751. In moderate volume, 853 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.43 to $56.74 per barrel and wholesale gasoline was $0.01 lower at $1.81 per gallon. Elsewhere, the Bloomberg gold spot price was $9.49 lower at $1,275.58 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 94.39. Markets were lower for the week, as the DJIA decreased 0.5%, while the S&P 500 Index and the Nasdaq Composite declined 0.2%.

Dow member Walt Disney Co. (DIS $105) reported fiscal Q4 earnings-per-share (EPS) of $1.13, or $1.07 ex-items, versus the $1.15 FactSet estimate, as revenues declined 3.0% year-over-year (y/y) to $12.8 billion, below the projected $13.3 billion. Revenues at its media and networks unit missed expectations, along with its studio segment, while its parks and resorts topped forecasts. The Street appears to be positive about the company's outlook that included the announcement of new Star Wars Trilogy, details of its new streaming service that will launch in the new year, and investments to bolster its parks and resorts division that was the lone segment to show growth in Q3. Shares traded nicely higher.

J.C. Penney Co. Inc. (JCP $3) posted a Q3 loss of $0.41 per share, or $0.33 per share ex-items, compared to the expected $0.42 shortfall that the Street had projected, with revenues decreasing 1.8% y/y to $2.8 billion, roughly in line with estimates. Q3 same-store sales increased 1.7% y/y, well above the forecasted 0.6% gain. The company said it took aggressive actions to clear slow-moving inventory, allowing for an improved apparel assortment heading into the holiday season. Shares rallied.

NVIDIA Corp. (NVDA $216) announced Q3 EPS of $1.33, above the expected $0.95, with revenues jumping 32.0% y/y to $2.6 billion, topping the estimated $2.4 billion. The chip company issued Q4 guidance that bested forecasts and it increased its quarterly dividend by 7.1% to $0.15 per share. Shares gained solid ground.

Hertz Global Holdings Inc. (HTZ $20) reported Q3 earnings of $1.12 per share, or $1.42 ex-items, versus the estimated $1.35, as revenues rose 1.0% y/y to $2.6 billion, roughly in line with projections. The company said its operating turnaround plan, focused on growth through enhanced fleet, service, brands and technology, is showing encouraging progress. Shares traded solidly lower.

Consumer sentiment surprisingly declines from 13-year high 

The preliminary University of Michigan Consumer Sentiment Index (chart) pulled back from a 13-year high, dropping to 97.8 in November, from 100.7 in October, and compared to the Bloomberg expectation of an improvement to 100.8. The current economic conditions and expectations components of the report both fell. The 1-year inflation forecast rose to 2.6% from October's 2.4% rate, while the 5-10 year inflation outlook remained at the prior month's level of 2.5%.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of the all-important consumer heading into the key holiday period in his latest, Schwab Sector Views: 'Tis the Season…Almost. Brad notes that the status of the American consumer is vital to the overall economy, and the holiday season can go a long way to determining the fate of retailers. Low unemployment, increasing wages, and high confidence among consumers paint a positive picture for both the holiday season and the overall economy. The retail sector may not be as dire as you have been led to believe.

Treasuries traded lower with the yield on the 2-year note rising 3 basis points (bps) to 1.66%, the yield on the 10-year note gaining 6 bps to 2.40%, and the 30-year bond rate advancing 7 bps to 2.88%.

The U.S. dollar came under pressure and Treasury yields gave up gains yesterday as volatility ramped up along with tax reform uncertainty. This stemmed from the Senate unveiling its tax bill details, which differed in some key areas from the last week's House bill, notably its call for a delay of the corporate tax cut to until 2019. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend delivers his latest commentary, Tax Reform: Key Differences Between the Senate and House Plans, noting that we continue to suggest that investors take no action at this time. Investors need to understand that the bill can and will change dozens of times in the weeks ahead, making specific analysis of how the bill affects any particular taxpayer’s situation nearly impossible. Until we have more detail, investors should not overreact. And while the bills are beginning to move forward, passage of tax reform remains far from a certainty.

Europe extends yesterday's drop, Asia mostly lower

Most European equity markets added to yesterday's drop, with exacerbated U.S. tax reform uncertainty, which led to a jump in volatility on Thursday, festering to stymie sentiment. Also, U.K. Brexit negotiations continued but remain in a deadlock and the markets digested a mixed bag of earnings and economic reports. U.K. and French manufacturing and industrial production data all came in stronger than expected, while the U.K. trade deficit narrowed. The euro and the British pound rose versus the U.S. dollar, while bond yields in the region moved higher. For a look at global stock investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, U.S. vs international: what do earnings tell us about what may be ahead?.

Stocks in Asia finished mostly lower following the declines and ramped up volatility in the U.S. yesterday as tax reform uncertainty was exacerbated by the Senates bill that differed in several key areas from the House's plan. The yen gained ground on the increase in volatility to weigh on Japanese equities. South Korean and Australian securities declined. Mainland Chinese shares ticked higher as U.S. President Trump continued his tour of Asia and on the heels of the government's announcement that it will ease limits on foreign equity ownership, while stocks trading in Hong Kong dipped. Indian equities gained ground ahead of a read on industrial production. After the closing bell, India's industrial production rose by a smaller amount than expected for September. With volatility relatively flaring up to hamper the global markets, Schwab's Jeffrey Kleintop, CFA, and Randy Frederick discuss in the video, Is An Optimistic Outlook for Global Equities Warranted?.

Stocks snap winning streak as data yields to fiscal concerns

U.S. stock markets snapped a string of 8-straight weekly gains with the economic docket relatively quiet and earnings season winding down to open the door further for fiscal uncertainty to shape market action. Last week's House tax-reform bill continued to garner scrutiny and uncertainty regarding a timely passage was exacerbated by the Senate's plan that differed substantially and caused volatility to flare up. Financials fell despite gains in Treasury yields and healthcare stocks saw some pressure amid the political uneasiness, while technology issues, which have led the global rally, slipped. The U.S. dollar came under modest pressure as risk aversion nudged higher in the second-half of the week. Over 90% of S&P 500 companies have reported and 67% have topped revenues forecasts and 77% have bested earnings estimates, per data compiled by Bloomberg.

Next week's economic calendar will heat back up, with inflation a focus courtesy of the Producer Price Index (PPI) and Consumer Price Index (CPI), and the consumer heading into the holiday season in the form of retail sales. Moreover, housing activity will be on display as the NAHB Housing Market Index will be followed by housing starts and building permits. The Fed's Industrial production and capacity utilization report will round out the heavy dose of data.

As noted in the latest Schwab Market Perspective: Incredible, Amazing…Unstop-a-bull?,
the long-running bull market continues and has shown few signs of faltering. Even modest pullbacks have failed to gain any momentum and the uptrend has been largely intact throughout the course of 2017. But there are signs that the potential for a “melt up” is heightened. Additional support for the ongoing bull market could come from the holiday shopping season, which is shaping up to be a good one, as well as ramped up capital spending and productivity as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her articles, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle and One Thing Leads to Another: Productivity's Rebound.

International reports due out next week that deserve a mention include: Australia—employment change and consumer confidence. China—lending statistics, retail sales, and industrial production. India—trade balance, CPI and PPI. Japan—Q3 GDP and industrial production. Eurozone—industrial production, Q3 GDP, trade balance and CPI, along with German investor confidence. U.K.—CPI and PPI, employment change and retail sales.

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

You’re Fired

Sinclair Noe — May 9, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 36 = 20,975
SPX – 2 = 2396
NAS + 17 = 6120
RUT + 0.22 = 1391
10 Y + .03 = 2.40%
OIL – .23 = 46.20
GOLD – 4.90 = 1222.10

President Trump has fired FBI Director James Comey. White House spokesman Sean Spicer said the president “terminated and removed” Comey from office “based on the clear recommendations of both Deputy Attorney General Rod Rosenstein and Attorney General Jeff Sessions.”

In Trump’s letter to Comey, the president said, “It is essential that we find new leadership for the FBI that restores public trust and confidence in its vital law enforcement mission.”

The FBI Director is appointed to a 10-year term and it is unusual for a director to be removed from the office before the term expires. Comey was appointed in 2013. Comey, who has led an investigation into Russia’s meddling during the 2016 election and possible links to Trump aides and associates, is only the second FBI chief to have been fired.

Earlier in the day, the FBI clarified a statement Comey made before a Senate panel that overstated the number of classified emails Hillary Clinton aide Huma Abedin forwarded to the personal computer of her husband, former Rep. Anthony Weiner.

Comey had come under fire from Democrats last year after announcing an investigation into Clinton’s emails right before the presidential election, while not disclosing until later a probe into ties between Donald Trump’s campaign team and Russian intelligence officials.

In a letter sent to Comey, Trump wrote: “While I greatly appreciate you informing me, on three separate occasions, that I am not under investigation, I nevertheless concur with judgment of the Department of Justice that you are not able to effectively lead the Bureau.”

Stocks trade at fresh highs (at least on the Nasdaq) and volatility across assets is so subdued it’s touching near-record lows (the VIX inched slightly higher at the close but is still in single digit territory and dipped as low as 9.56).

With the French election out of the way, investors have stopped paying what had been a five-month high in the cost of insuring against declines in the S&P 500 Index. The price of hedging against a 5 percent drop in the gauge over the next month is 36 percent below its five-year average.

For some, this sense of calm in the market is anxiety-inducing especially as valuations stretch to levels not seen since the aftermath of the 1990s-internet bubble. It has been a long time since we had a 5 or 10 percent correction, and the clock is ticking. Or maybe the bull market is just catching a breath, but the markets are almost never this calm.

Goldman CEO Lloyd Blankfein said today, “Every time I get accustomed to low volatility, like we were towards the end of the Greenspan era, and we think we have all the levers under the control … something erupts to remind us that the idea that anybody is in control of everything is hubris. I don’t know what brings us out of the doldrums, but I do know this is not a normal resting state.”

Fed funds futures pricing shows investors are almost universally expecting the Federal Reserve to raise overnight interest rates at its next meeting, with close to a 90 percent perceived chance of an increase next month. Yields on U.S. two-year notes, considered most sensitive to rate-hike expectations, rose to eight-week highs.

While the U.S. economy saw a marked deceleration in the first quarter, the overall outlook remains solid and the Fed is still widely expected to raise U.S. lending rates in June and likely again in September. The positive sentiment (or at least the ubiquitous complacency) and rising U.S. Treasury yields also boosted the dollar. The dollar index, which tracks the greenback’s value against six major currencies, rose to a three-week high, in line with the gains in yields.

Not everyone is cheerfully confident about economic growth. Commerce Secretary Wilbur Ross says the US economy won’t achieve the Trump administration’s 3 percent growth goal this year and not until all its tax, regulatory, trade and energy policies are fully in place.

US trading partners have been spooked by Trump’s vow to renegotiate or pull out of trade deals, such as the North American Free Trade Agreement. A possible rise in the use of tariffs to punish foreign companies deemed to be competing unfairly also has raised concerns of a wave of protectionism. Ross, however, insisted that the Trump administration was not aiming to restrict trade with its actions.

Kansas City Federal Reserve President Esther George said today the central bank should keep gradually raising short-term interest rates despite some economic indicators, like car sales, flashing “yellow”. Among the cautionary areas, auto sales are down from last year’s record pace, and first quarter GDP growth was up at only a 0.7% annual rate, George noted in a speech at the University of California, Santa Barbara.

But other indicators, like consumer sentiment, remain strong, and household balance sheets are, on average, healthy. And as labor markets continue to strengthen, “continuing the gradual removal of monetary accommodation is the appropriate course for the Fed,” George said. George said that rate hikes must be timed right and that a gradual pace seems appropriate. Going too fast risks derailing the economy, while moving too gradually can pose a risk to financial stability

Boston Federal Reserve President Eric Rosengren said today that efforts to overhaul Fannie Mae and Freddie Mac could lead to “a potential and significant shock” to the commercial real-estate sector.

The pair of mortgage-finance giants, which were bailed out by the U.S. government and placed in conservatorship in 2008 during the height of the financial crisis, have historically boasted outsize influence on the single-family mortgage market, but Rosengren expressed concern that the duo’s growing clout in the multifamily sector may pose risks, as the government considers new structures for the entities.

Job openings and hires moved sideways in March as economic momentum stalled out. The Labor Department says there were 5.74 million job openings, the same number as previously reported in February, which was cut to 5.68 million. Labor’s Job Openings and Labor Turnover Survey lags the closely watched monthly non-farm payroll data but provides more detail.

In March, the JOLTS report showed that the number of workers voluntarily leaving their jobs ticked up by 2.6%. That signals more worker confidence in the labor market.

South Korean liberal politician Moon Jae In has won the country’s presidential election. Moon’s win was fueled by a surge in liberal sympathy after the former conservative president, Park Geun Hye, was removed from office months ago. Park is now in a jail cell as she awaits trial on accusations she took about $52 million in bribes from major companies, including Samsung.

In light of the scandal with the former president, Moon was a seen as a clean candidate who would end corruption. The country’s National Election Commission said more than 33.8 million people voted in the election, a turnout of 77 percent, the highest in two decades. Moon has pushed for a more calm and conciliatory stance toward North Korea. Separately, the North Korean ambassador to the UK told Sky News the country will proceed with its sixth nuclear test.

Disney reported profits that topped expectations, but revenues that fell short of forecasts amid continued weakness at ESPN.  Disney said it earned $1.50 in adjusted earnings per share during its fiscal second quarter, and $13.3 billion in revenue. Revenues from Disney’s parks and resorts increased by 9% to $4.3 billion, helped by Shanghai Disney Resort.

Nvidia reported a 48 percent jump in quarterly revenue, helped by strong demand for its graphics chips and its diversification into fast-growing areas such as self-driving systems and artificial intelligence. Net income rose to $507 million, or 79 cents per share, from $208 million, or 35 cents per share, a year earlier. Nvidia’s revenue rose to $1.9 billion from $1.3 billion.

Yelp reported revenue of $197 million, just short of analysts’ estimates. Yelp cut it full-year 2017 estimates for revenue and earnings. Yelp was slammed – down 28%.

Passengers at an airport in Florida protested on Monday night after the cancellation of multiple flights, leading to a confrontation with airline employees and sheriff’s deputies who arrested three travelers while attempting to restore order. The airport altercation is only one skirmish in Spirit’s war, its customers’ discomfort a kind of collateral damage.

According to a federal lawsuit filed in the Southern District of Florida on Tuesday morning, the Miramar-based airline is accusing the Air Line Pilots Association, an AFL-CIO-affiliated labor union that represents more than 55,000 American and Canadian pilots, of arranging a pilot shortage and forcing Spirit to cancel flights to “purposely and unlawfully disrupting the airline’s operations” as retribution over ongoing pilot contract disputes.

In response to the Fort Lauderdale fracas, Spirit officials quickly passed the buck, blaming the incident on ALPA’s truant pilots. Spirit and ALPA have been at it since 2015, per CNN, but multiple contract negotiations have so far failed to produce an agreement. According to the lawsuit, Spirit has canceled about 300 flights in the past week alone.

A federal court granted Spirit Airlines a temporary restraining order today, compelling the pilots’ union to return to status quo. The pilots’ union said Spirit Airlines pilots will fully comply with the court to help restore normal operations.

Financial Review

Keep Calm

Sinclair Noe — June 17, 2016

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

Subscribe: iTunes | Android | RSS

 
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.