Financial Review

Theresa May is Britain’s new prime minister, replacing David Cameron

Sinclair Noe — July 13, 2016

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DOW + 24 = 18,372
SPX + 0.29 = 2152
NAS – 17 = 5005
10 Y – .03 = 1.47%
OIL – 1.37 = 45.43
GOLD + 9.60 = 1343.30

The cost of imported goods increased 0.2% in June, led again by the higher cost of fuel. Import prices have risen four straight months following five straight declines, largely because of the price of oil has climbed from multiyear lows. Excluding fuel, the cost of imports fell 0.3% in June. Over the past year, import prices are still 4.8% lower, reflecting a big drop in the oil prices in 2015.

That’s helped to keep overall U.S. inflation on the low side. Import prices minus fuel are down 1.8% in the past 12 months. U.S. export prices climbed 0.8% in June. Export prices are 3.5% lower in the past 12 months.

Corporations are paying less to the Treasury this fiscal year, and the government’s budget deficit is ballooning because of it. In its latest monthly budget report, the Treasury Department said the deficit through June was $401 billion, up 27% from the same period a year ago. In the month of June, the government managed to post a budget surplus of $6 billion, but that was down from a surplus of $50 billion in June of 2015.

While individual income tax collection has risen so far this fiscal year, it’s a far different story with corporate taxes: revenues are down 11%. The government’s budget year runs from October through September.  The nonpartisan Congressional Budget Office blamed the tax extenders, legislation that gives breaks for both businesses and individuals, for helping to blow up the federal debt in the long term; another possible culprit is that the decrease in corporate taxes may partly reflect lower taxable profits earned so far this calendar year.

The Federal Reserve published its Beige Book today, two weeks before the next FOMC policy meeting. The anecdotal assessment finds the economy chugging along through the end of June with little indication of inflation now or in the near future. Despite a strong rebound in U.S. job growth in June; pressure to raise wages at the end of the second quarter was centered on skilled workers and difficult-to-fill positions. Fed districts also reported some signs of softening in consumer spending but most retained an optimistic outlook, the report said. Manufacturing activity remained mixed while growth in the services sector was seen as “slight to modest.”

Oil industry hopes that markets are about return to balance, ending a global glut that pulled down prices by over 70 percent between 2014 and early 2016, might be abruptly dashed. Despite recent disruptions and output cuts, there is mounting evidence that plentiful supplies and brimming inventories will delay a much-quoted re-balancing of oil markets. Not just are supplies improving, now demand may be waning.

With the United States and Europe stagnating, Asia has been the main pillar of oil demand growth. But that too is now stuttering, with tanker flows into the region down for four straight months. So much oil is now stored that the world is running out of space, forcing traders to charter supertankers in which to keep unsold fuel. There is so much oil in storage that it could take well into 2018 for the glut to clear.

The latest American Petroleum Institute (API) showed crude oil supplies rose to their highest point in ten weeks. Meanwhile, the International Energy Agency said oil production from the Middle East has climbed to a record while U.S. output slumps. Middle Eastern output exceeded 31 million barrels a day for a third month in June amid near-record supply from Saudi Arabia, while U.S. oil production slid 140,000 barrels a day to 12.45 million. The IEA, which mostly kept forecasts for supply and demand unchanged, said that while the rebalancing of the oil market is progressing, brimming inventories remain “a threat to the recent stability of oil prices.”

Theresa May is Britain’s new prime minister, replacing David Cameron. The appointment was official today. May will face immediate pressure from EU leaders to serve formal notice of Britain’s withdrawal and set the clock ticking on a two-year countdown to its final departure. May has already started naming new members of her cabinet. She appointed former foreign minister Philip Hammond to take charge of the finance ministry. He replaces George Osborne, whose determination to balance Britain’s books made him synonymous with austerity.

May also named Boris Johnson, the former mayor of London and a leading Eurosceptic who had until recently been seen as her main rival for the prime minister’s job, to take over as foreign secretary. Meanwhile, the Bank of England holds a policy meeting tomorrow and they are expected to cut the key lending rate to 0.25% form 0.5%, to try to ward off a recession and to reassure markets.

PC sales in the US are growing again. Both Gartner and IDC data shows that PC shipments in the US have returned to growth for the first time in over a year. Gartner data, which includes Windows tablets, showed that PC shipments grew 1.4% in the second quarter. IDC data, which doesn’t include Windows tablets, showed growth of 4.9%.

A federal appeals court ruled General Motors’ 2009 bankruptcy does not shield it from lawsuits over a deadly ignition-switch defect that led to criminal charges against the automaker and prompted the recall of 2.6 million vehicles in 2014.  The 2nd Circuit’s decision affects some injury and death cases stemming from pre-bankruptcy crashes. It will also impact claims from customers who say their vehicles lost value as a result of the ignition switch and recalls involving other parts, which plaintiffs’ lawyers have estimated to be worth between $7 billion and $10 billion.

A bankruptcy judge ruled in 2015 that New GM was shielded from liability over Old GM’s pre-bankruptcy actions, but he allowed some “independent” claims based solely on New GM’s conduct to proceed. Lawyers for GM customers argued that New GM should not be protected because it knowingly concealed the switch defect for more than a decade before it recalled the vehicles in 2014. The ruling allows the cases to proceed but does not address the underlying merits of the claims.

Line Corp. shares are getting popular in the gray market ahead of this week’s trading debut, which will mark the largest initial public offering for a tech company in 2016. According to Cantor Fitzgerald, investors are willing to buy shares for $36, 15% higher than the IPO price. Line will debut in a dual listing in the U.S. tomorrow and Tokyo on Friday.

The FTC has requested additional information from Abbott Laboratories and St. Jude Medical, which are attempting to complete a $25 billion deal combining two of the leading makers of heart-related devices. The request extends the waiting period – the time frame before companies can close a transaction – by 30 days.

One year after hackers showed they could control a moving Jeep; Fiat Chrysler has a new solution to get computer whizzes to work more closely with the company: pay them. The automaker is launching a bug bounty program aimed at compensating hackers between $150 and $1,500 every time they uncover potential cyber-security flaws in vehicles and alert the company.

Elon Musk has no plans to disable Tesla’s Autopilot function in the wake of a fatal Model S crash in May that used the technology, and instead plans to redouble efforts to educate customers on how the system works. Tesla also confirmed that the weekend crash involving Autopilot in Montana, the third serious accident tied to the self-driving feature, resulted from the driver’s hands not being on the wheel ahead of the collision.

Seven years ago, chemistry researchers from Oregon State University were conducting an experiment testing materials for applications in circuit boards and semiconductors; they heated manganese oxide and other substances to 2000 degrees Fahrenheit, when one of their samples came out a vivid blue. They had accidentally created a new color and they named it YInMn, after the elements yttrium, indium and manganese that compose it. Some artists have already given the new color a nickname – Mas Blue. In about a month, the new color will be available as paint.

While the same shade could be created in other ways, what makes this pigment particularly special is its durability and color-fast properties as a chemical coloring agent. Most blue dyes tend to fade, but Mas Blue is resistant to water, oil or acid and non-toxic. The paint will be distributed by the Ohio-based color supplier Shepherd Color Company. Scientists are also exploring the use of Mas Blue as an energy-saving roofing material, since the compound has been found to reflect 40% of infrared light.

Financial Review

Bueller? Bueller?

Sinclair Noe — October 9, 2015

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

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DOW + 33 = 17,084
SPX + 1 = 2014
NAS + 19 = 4830
10 YR YLD – .01 = 2.10
OIL + .14 = 49.57
GOLD + 17.40 = 1157.40
SILV + .16 = 15.93

World shares were green across the board after details from the Fed’s minutes cast further doubt on the prospect of a rate rise this year. European stocks broke a one-month high for their best weekly gain since late January on renewed hopes central banks will keep monetary policy loose for longer. Overnight, Asian equities and currencies also moved higher following yesterday’s gains on Wall Street (the Dow ended above 17,000 for the first time since August, while the S&P 500 closed well past its 50-day MA of 1,995).

Oil prices traded above $50 a barrel this morning, with a gain of nearly 9% this week; for the biggest weekly gain in 6 years.

Investors are now positioning themselves for corporate earnings season, which picks up steam next week with most of the nation’s largest banks reporting their results, as well as big companies including; Intel, Netflix, UnitedHealth and GE. Earnings are expected to be down roughly 5.5 percent from a year ago, according to FactSet, mostly because of the drop in commodity prices. Now there is a game on Wall Street where analysts set the bar very low and then celebrate when a company stumbles over it. However, if the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings declines since 2009. In other words, the last time we had consecutive quarters of negative earnings growth, the US economy was in a recession.

Yesterday the Fed published the minutes of the September FOMC meeting; most of the attention was on the policymakers’ decision to leave interest rates unchanged for now; they’re worried about global economies and inflation running below their target of 2%; they think we are at or near full employment. Generally the tone was dovish. The current Fed has talked about raising rates for about a year.  Now we have the Fed saying future interest rate increases will be “data dependent.” Also in the minutes, we saw economic projections and they are basically calling for 2% GDP growth. Slow, sluggish – get used to it.

Emerging market currencies have had a strong week. The Indonesian rupiah was the leader with a 9.2% gain against the dollar, followed by the Russian ruble, with a 7.3% gain. The Malaysian ringgit gained 6.4%, and the Brazilian real was up 4.8%. This does not mean emerging market currencies are in a bull market; for now, it’s just a bounce.

If you follow all the data the Fed is looking at, you would stay quite busy; there are at least 30 economic reports that must be monitored in order to get a clue as to what the Fed’s next move will be. The quick and easy monitor is the dollar index, because the greenback affects just about every tradeable market: inflation, manufacturing, exports, trade balance, jobs, and more – in one handy chart. The dollar index is just a hair under 95. It has traded from a high of 98.7 in August to a low of 92.5 (also in August).

The dollar index has been in a downtrend since September 25, and this is why we have seen a bounce in oil (probably a greater cause than rig counts and demand, or Russia’s moves in Syria.) This is why the commodity indices have had a nice little rally in the month of October. Emerging-markets currencies have been battered over the past year by the expectation that the Federal Reserve will soon raise interest rates, but as the dollar has experienced a recent dip, the emerging currencies have bounced.

The trend lines on the dollar index suggest resistance around 97.5 and support, right about where we landed today; any further breakdown could see the dollar index testing the 92.5 lows. If we see a bounce, or even some sideways action here, then we look for the support and resistance trend lines to cross in the final week of the month, which is coincidentally, when the Fed FOMC holds its next meeting.

Today, New York Fed President William Dudley and Dennis Lockhart of the Atlanta Fed each said they expected a policy tightening in 2015 despite some recent red flags.

In a brief press conference yesterday, Rep. Kevin McCarthy announced he would not seek the nomination as House Speaker, saying he was still short of the support needed to be an effective speaker. Rep. Jason Chaffetz of Utah, current House Oversight chairman, and Rep. Daniel Webster of Florida were running against McCarthy. Rep. Darrell Issa of California says he’s considering jumping into the race for House speaker; Issa says he would support Paul Ryan of Wisconsin, the Chair of the House Ways and Means Committee; Ryan has said he does not want the job. Anybody else? Anybody? …Bueller?

Meanwhile, Congress faces another deadline to lift the debt limit on Nov. 5; today John Boehner acknowledged that getting enough votes to pass a debt-limit increase would be difficult. And another potential government shutdown threat looms in December when the current stop-gap spending bill expires.

U.S. import prices declined 0.1 percent. A surge in value of the U.S. dollar last year, fueled by expectations a strengthening U.S. economy would lead to higher interest rates, has been a factor pushing down inflation, evident by declines of non-oil import prices. The smaller than expected decline in import prices might lay a bit of groundwork for an eventual interest rate hike by the Federal Reserve because a smaller downward push on inflation from imports could alleviate the Fed’s concerns that inflation is too low.

In a separate report, the Commerce Department said wholesale inventories rose 0.1 percent in August, boosted by larger stocks of computers and professional equipment used by businesses. Inventories are a key component of gross domestic product changes. The component of wholesale inventories that goes into the calculation of GDP – wholesale stocks excluding autos -rose 0.1 percent. At August’s sales pace it would take 1.31 months to clear shelves. An inventory-to-sales ratio that high usually means an unwanted inventory build-up, which would require businesses to liquidate stocks. That in turn could weigh on manufacturing and economic growth.

Glencore is slashing its zinc production by a third in reaction to a 30% plunge in the commodity’s price over the past few months. The company will cut 500,000 tons of zinc production, 4% of the world’s total supply. Glencore is the world’s biggest miner of the industrial metal.

Chipmaker Intel is set to get the go-ahead from EU antitrust regulators for its $16.7 billion offer for Altera. A decision is scheduled by Oct. 14.

PC sales dropped sharply again in the third quarter. IDC estimates global PC shipments fell 10.8% year-to-year to 71 million units, a drop nearly as large as the second quarter’s 11.8%. Sales have been declining for so long — 14 consecutive quarters — that it is becoming harder to remember a time when PCs ruled the tech world. However, the market’s four biggest players all grabbed share from smaller firms with less scale. IDC calculates market leader Lenovo’s unit share rose 130 basis points year-to-year to 21%, HP’s increased 110 basis points to 19.6%, Dell’s jumped 120 bps to 14.3%, and Apple’s climbed 60 basis points to 7.5%.

Apollo Education Group, the parent company of The University of Phoenix has released information that the Department of Defense has suspended the university from recruiting military students. University of Phoenix, the largest for-profit college in the US, has brought in $1.2 billion in GI Bill money since 2009 and received $20 million in tuition assistance from the Pentagon last year alone. That outsized share of the market, in addition to alleged predatory tactics at the school to lure in military personnel, resulted in an investigation into the school earlier this year. Though the order to stop military recruitment at the University of Phoenix is not yet permanent, it is likely a distressing development for the school, as well as the larger for-profit college industry.

Combining two vaccine components from Crucell Holland and Janssen Pharmaceutical, Johnson & Johnson is beginning clinical trials of a preventive Ebola vaccine regimen in Sierra Leone. Is the Ebola outbreak finally over? For the first time since the disease was reported in March 2014, the World Health Organization reported no new cases over the past week. According to the WHO, this is part of a trend: The number of cases in West African countries has remained below 10 per week over the past three months, but that doesn’t mean the virus can’t surface again. A total of 11,300 have died since the start of the epidemic.

According to the International Monetary Fund, 6.5 percent of global gross domestic product currently goes to energy subsidies. The United Nations Environmental Program has just published a report calling for a $6 trillion cut of public and private investments in high-polluting energy by 2030. The agency estimates the world’s governments and private institutions should be investing $5 to $7 trillion annually on things like infrastructure improvements, clean energy, sanitation and agriculture, starting now, in order to meet the U.N.’s 2030 goals for reducing the pollution that causes climate change.

The 2015 Nobel Peace Prize was awarded today to Tunisia’s National Dialogue Quartet for its efforts to bring democracy to the country. The National Dialogue Quartet is made up of four organizations: the Tunisian General Labor Union; Tunisian Confederation of Industry, Trade and Handicrafts; Tunisian Human Rights League; and Tunisian Order of Lawyers. The Tunisian revolution, which forced the country’s long-time president to step down in what was called the Jasmine Revolution, led to uprisings against dictators in other nations including Egypt, Libya and Syria in what became known as the Arab Spring. Today, Tunisia is the only country in the region to make genuine progress transitioning to a democracy.