Financial Review

Apple Bites

Sinclair Noe — October 25, 2016

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DOW – 53 = 18,169
SPX – 8 = 2143
NAS – 26 = 5283
10 Y un 1.75%
OIL – 1.22 = 49.30
GOLD + 8.70 = 1274.10

More than 90 companies delivered quarterly results today. Dow components 3M, Caterpillar and DuPont reported earnings before the bell. Caterpillar and 3M posted mixed results, as both beat estimates on the bottom line, while missing on revenues. Caterpillar also lowered its 2016 earnings per share guidance. DuPont posted better than expected quarterly earnings and raised its yearly profit forecast.

The largest S&P 500 stock by market capitalization – Apple – is the highlight of today’s earnings reports. After the closing bell, Apple reported net income per share of $1.67, down from $1.96 a share a year earlier. Revenue fell 9 percent to $46.9 billion. Analysts expected profit of $1.66 a share on sales of $46.9 billion.

Apple experienced its first annual sales decline since 2001. For the third consecutive quarter, iPhone sales were down from the year-ago period. Apple sold 45.5 million iPhones, down from last year’s sales of 48 million. But only a few weeks of iPhone 7 sales were included in this quarter. Next quarter is the holiday quarter, which is Apple’s biggest quarter, and it will be the first full period of iPhone 7 sales. Apple is projecting revenue of between $76 billion and $78 billion, which would be a slight return to growth for the company.

Apple spent much of the past year pushing services, such as the App Store, iCloud storage and Apple Music. That division has become the company’s fastest growing. Though those businesses represent a fraction of iPhone revenue, they foster customer loyalty by making it harder to trade in handsets for those made by rivals. Apple was trading down about 2% in after hours.

European earnings roundup: Syngenta’s third quarter revenue came in at $2.5 billion dollars, down 3%, dragged lower by weak Latin American sales. Orange’s core operating profit beat expectations as strong growth in Spain offset waning revenue in its home market of France. Novartis posted a 4% slump in third quarter profit as sales in its Alcon eye care division and cancer drug Gleevec continued to see declines.

Merck gained 1.9% after beating earnings and sales expectations. Whirlpool took an 11% hit after missing sales and earnings estimates, and lowering its outlook. Procter & Gamble reported better than expected earnings. Lockheed Martin posted higher than expected revenue as sales of Sikorsky helicopters rose nearly 15% and Lockheed announced it will hike its dividend.

Under Armour, the No. 2 U.S. sportswear maker, reported its slowest quarterly sales growth in six years. Although, net sales in North America grew 15% in the third quarter, it was below the 20 percent growth mark that the company normally. The stock dropped 14%.

FreePort McMoRan reported earnings of $217 million, or 13 cents a share on an adjusted basis – missing estimates. Revenue grew to $3.8 billion from $3.3 billion – missing estimates.

General Motors doubled its net income and notched record revenue in the third quarter with strong truck sales in the U.S. market and continued strength in China, but the auto maker signaled continued weakness in Europe because of Brexit fallout. Profit and revenue beat analysts’ estimates. Still, there is a nagging concern that the auto industry has seen 6 years of improving earnings and sales have plateaued. GM dropped about 4% today.

A federal judge has approved Volkswagen’s $14.7 billion settlement with regulators and owners of 475,000 polluting diesel vehicles that don’t meet emissions standard. Volkswagen admitted last year that the cars were programmed to cheat on emissions tests. The German automaker will spend up to $10 billion to either buy the cars back or fix them and compensate owners. The deal covers 475,000 VW models with 2-liter diesel engines dating to 2009. U.S. models include the 2009-2015 Jetta and Audi A3, the 2010-2015 Golf, and the 2012-2015 Beetle and Passat.

Most owners are expected to take the settlement. As of Sept. 16, which was the deadline opt out of the settlement, 3,298 owners said they wouldn’t participate. Those who don’t accept the settlement could sue VW, but it’s not guaranteed they would get better terms. Another 90,000 cars with 3-liter diesel engines also have cheating software, but they aren’t part of this settlement. Owners have a choice – VW will buy back the car or fix the car, although a fix has not yet been approved. The official settlement web site is vwcourtsettlement.com.

Reeling from the biggest and most costly car recall in history, Takata is now at the center of a messy takeover battle that could put the company on a path towards bankruptcy. Its fate will rest heavily on global automakers that will gather in New York today to discuss options for an outside investor to help the firm replace potentially defective airbags in more than 100 million vehicles.

Maybe we should call it driver-less beer. In a major milestone for autonomous trucking, some 45,000 cans of Budweiser beer arrived late last week to a Colorado warehouse after traveling over 120 highway miles in a self-driving semi with no driver at the wheel. Otto, the autonomous truck subsidiary of Uber, shipped the brew with a driver monitoring from the truck’s sleeper berth for the entire two-hour journey.

U.S. home prices rose slightly in August. The S&P/Case-Shiller U.S. National Home Price Index was up 5.3 percent on an annual basis in August from 5.0 percent in July. Top gainers in August were Portland, Oregon, with an 11.7 percent increase year to date, and Seattle, at 11.4 percent over the last year. Phoenix posted a gain of 0.6% from July to August, and prices advanced 5.2% over the past year.

While rising home prices point to a healthy housing market on the demand side, they also expose an affordability problem that has locked some potential buyers out. According to S&P/Case Shiller, the index of national house prices is within 0.1% of the record it set 10 years ago. Higher home prices are indicative of a shortage of homes for sale.

The Mortgage Bankers Association says lenders are expected to issue more than $1 trillion in mortgages for home purchases in 2017, marking the first year this would happen since the housing bust a decade ago. On the other hand, the MBA forecast a steep 40 percent drop in mortgage refinancing next year to $529 billion as the Federal Reserve raises interest rates gradually through 2018.

The Conference Board’s Consumer Confidence index dropped to 98.6 this month from 103.5 in September, a number that was revised lower. Consumer confidence is still near a post-recession peak despite the drop in October. The present situation index, a measure of current conditions, fell to 120.6 from 127.9. Fewer Americans said jobs are “plentiful.” The future expectations index declined to 83.9 from 87.2. That’s the lowest level since July.

The average premium for benchmark 2017 Affordable Care Act insurance plans sold on Healthcare.gov will jump 25% to $302 compared to this year, the biggest increase since the insurance first went on sale in 2013. Seeking to downplay the cost hikes, the administration said that including subsidies 77% of people would be able to find insurance plans with monthly premiums below $100, however, one in five consumers will only have one insurer from which to choose coverage.

The Federal Reserve is inclined to raise interest rates higher than would otherwise be the case if the next president pursues an expansionary fiscal policy. Speaking yesterday evening, Federal Reserve Bank of Chicago President Charles Evans said that the Fed should be more explicit about how policy makers would respond to new information on the economy. Market-implied odds of a rate increase by the central bank in 2016 were at 71 percent.

Renewable energy reached an important turning point last year with record new installations of emissions-free power surpassing sources that burn fossil fuel. According to a new report from the International Energy Agency new installations of renewable energy overtook conventional power for the first time in 2015. Global green power rose by a record 153 gigawatts, equivalent to 55 percent of newly installed capacity last year. Total installed capacity exceeded coal for the first time.

The report shows the acceleration toward clean-power generation was already picking up pace before governments agreed in Paris in December to reduce carbon dioxide emissions. The IEA raised its estimate of the amount of green energy on power grids by 13 percent, revising its forecast to 42 percent by 2021. About 500,000 solar panels were installed each day across the globe in 2015, according to the report.

Renewables will be the world’s fastest-growing source of electricity over the next five years. And the cost is coming down; solar panels are expected to be a quarter cheaper over the next 5 years.

Financial Review

Illusion of Growth

Sinclair Noe — May 17, 2016

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

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DOW – 180 = 17,529
SPX – 19 = 2047
NAS – 59 = 4715
10 Y + .01 = 1.76%
OIL + .78 = 48.50
GOLD + 5.10 = 1280.10

One day up, one day down. If you can spot a trend, give yourself a pat on the back.

Prices at the retail level increased in April at the fast pace in more than 3 years.  The CPI, or consumer price index, rose a seasonally adjusted 0.4% last month. Americans paid more for medical care, food, recreation, tobacco, motor vehicle insurance, airline fares and grooming. Much of the recent increase has been driven by higher oil prices.

A spike in gas pushed the energy index up by 3.4% in April. Food prices also rose 0.2% last month, though the cost of groceries has fallen in the past year. Stripping out food and energy, so-called core consumer prices rose 0.2% in April. The CPI has risen just 1.1% in the past 12 months. The core CPI increased 2.1% in the 12 months ending in April.

So, we really are pretty close to the Fed’s target of 2%, depending on which numbers you, or the Fed, consider important. And so several Fed officials have been talking up the idea of a June rate hike, which just kills the mood on an otherwise beautiful Tuesday.  Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams said the Fed’s decision on whether to hike rates at the June FOMC meeting depends on the data, but June is “certainly” on the table.

The Fed has said that the effect of low oil prices was “transitory” and with a big jump in the CPI last month, it looks like we are seeing the transition. This means expectations for a rate hike are now being pulled forward, which probably means weaker markets. Tomorrow, we get the minutes from the April FOMC meeting. If the policymakers are strategic, they will have been clever enough to have included a serious debate about hiking rates in June.

Construction on new houses rebounded in April after a sharp dip in the prior month. Housing starts climbed 6.6% last month to an annual pace of 1.17 million. Construction on apartments, condos and other buildings with at least five units surged 10.7%. Single-family home starts advanced a smaller 3.3%. Permits are running 5.3% below year-ago levels.

Industrial production grew 0.7% in April – the fastest monthly rate in 17 months, bouncing back after two straight monthly declines as auto production rebounded and cooler temperatures boosted utility output. This was only the second increase in industrial production in eight months. Compared to a year ago, production was down 1.1%.

US companies stepped up big to support their own shares at the start of the year, making the first quarter potentially one of the best ever for share buybacks. Based on preliminary data, share repurchases are 20 per cent higher in the first three months of the year versus the fourth quarter and 31 per cent above the year-ago period. Among the biggest buyers of their own shares were Apple, General Electric, McDonald’s and Boeing, while ExxonMobil has significantly cut back on its share repurchases after falling oil prices have hit the energy industry.

Companies have been big buyers of their own stock for the past few years, helping to boost earnings per share as revenue growth has shriveled.  Activist investors pushed for better returns; over the long-term you improve returns by re-investing in the business, improving innovation and productivity; the quick fix is to buy back shares.

Coming into 2016, rising rates were expected to curtail share repurchases as it would become more expensive to borrow to fund them, and better uses would be found for cash. However, the downturn in the market and expectations for fewer rate rises combined to create a nice scenario for buybacks. The question is, how long can this continue? For the past 7 years, the market has been propped up with easy money from the Fed, the market has grown dependent on finance as an engine of growth, or finance as the illusion of growth.

The IMF is pressing the Eurozone to let Greece skip paying interest or principal on bailout loans until 2040. The IMF is also pressing for Greece’s interest rate on its Eurozone loans to be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due. Eurozone governments, led by Germany, are reluctant to make such major concessions on their loans to Athens, which currently total over €200-billion-euro, but they also want the IMF to rejoin the bailout as a lender to boost the program’s credibility.

A compromise between Germany and the IMF is needed by June, when Greece is in danger of running out of money to pay its bills, and definitely by July, when major debts fall due. This is all happening as the UK considers a referendum to exit the Euro Union.

Greece is entering the seventh year of its troubled bailout still struggling to begin a recovery. The country has largely closed the gaping budget deficit that triggered its debt crisis. But the IMF-European bailout—including austerity measures that in total have amounted to more than 30% of GDP so far—contributed to a 25% decline in the country’s economic output since before the debt crisis.

Portions of Hong Kong have been shut down as part of a drastic security increase as the city prepares for a rare visit by National People’s Congress Chairman Zhang Dejiang. He will be the first senior Chinese official to come to Hong Kong since the 2014 Occupy pro-democracy demonstrations which shut down the territory’s financial hub for months. Zhang is scheduled to speak at an economic conference, but will also meet with a small group of pro-democracy legislators' tomorrow evening.

Warren Buffett has several rules for investing. The first rule is don’t lose money. The second rule is don’t forget the first rule. Also, Warren Buffett does not bid in auctions. Warren Buffett does not invest in technology. More like guidelines than hard and fast rules. Buffett announced a nearly $1 billion stake in Apple, and he’s already lost about a $100-million (give or take); he also announced he’s financing a bid for Yahoo!’s internet assets as part of a group along with Quicken Loans founder Dan Gilbert. Refer back to Rule number one.

Jack Dorsey is making it easier for Twitter users to stick more stuff in their tweets. Not by dropping the service’s famous 140-character limit – an idea the company had previously floated – but by expanding it, in a way: Twitter won’t count the characters used to insert photos, links or other media into tweets. The change could happen in the next two weeks.

LendingClub, which plunged 51 percent last week with the surprise departure of its leader and disclosure of faulty internal controls, dropped again this morning following a regulatory filing from the company that said strategies to restore investor confidence and obtain new capital for loans might include equity or debt sales, fee changes or other moves that could be “costly or dilutive” to shareholders. Lending Club has received a subpoena from the DOJ, and says it “intends to cooperate” with the department.

Phone book publisher Dex Media has filed for bankruptcy protection after reaching a restructuring deal with creditors. The Chapter 11 announcement marks the fifth time in seven years the firm or its predecessors have found themselves in a bankruptcy court as yellow-pages companies struggle with the move of advertisers and consumers to the Internet.

Picture an 18-wheel truck barreling down the highway with 80,000 pounds of cargo and no one but a robot at the wheel. A team of former Alphabet executives is launching a start-up called Otto, O-T-T-O, focused on self-driving trucks, in an attempt to improve driverless technologies in the long-haul trucking industry. Otto plans to sell kits to retrofit existing trucks with autonomous platforms, but has not disclosed when they will go on sale. The technology will only work on highways for now, with human drivers required off-highway, potentially allowing the vehicles to travel much greater distances.

The Supreme Court has rejected Exxon Mobil Corp’s appeal of a $236 million judgment against the oil company in a case brought by the state of New Hampshire over groundwater contamination linked to a gasoline additive. The justices left in place the New Hampshire Supreme Court’s 2015 ruling upholding the judgment by a jury that in 2013 rejected Exxon’s claims that the contamination linked to its fuel additive was not its fault but rather the fault of the local gas stations and storage facilities that spilled it.

Exxon argued in its appeal that its due process rights were violated because New Hampshire had not proved the company’s liability for the alleged pollution at each individual site. The additive at the center of the case is called methyl tertiary butyl ether, or MTBE. It is an oxygen-containing substance that was added to gasoline to promote more complete combustion and reduce air pollution. It was one of several additives that had been recommended by regulators to reduce emissions but has now largely been phased out of the U.S. fuel supply because of the hazard it poses to groundwater. New Hampshire officials called the $236 million judgment the largest MTBE-related verdict since states and other agencies began making claims for remediation and other damages.

The court agreed to hear exactly zero new cases, continuing to set a sparse stage for its next term, which may see the lightest caseload in its already-light recent history. So far, only 12 cases are on the court’s docket for the October 2016 term, which runs through June 2017. The most likely reason for the slowdown is that there are now just 8 justices (split 4-4) and the court is reluctant to take on an issue in which it might not be able to provide a clear answer.