Financial Review

Big Stuff

Sinclair Noe — April 24, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 216 = 20,763
SPX + 25 = 2374
NAS + 73 = 5983
RUT + 18 = 1397
10 Y + .03 = 2.27%
OIL + .06 = 49.29
GOLD – 7.90 = 1277.00

Last Friday we spent some extra time talking about the French election; thinking it might be a significant event for the markets. Results in France’s election on Sunday saw centrist Emmanuel Macron and far-right nationalist Marine Le Pen emerge as the top two candidates for a run-off in two weeks’ time.

Early polling shows that Macron is expected to win by a wide margin, with one poll showing the 39-year-old is expected to get 62% of the vote. Le Pen is considered a risk to markets for a variety of reasons, including her vow to hold a referendum on France leaving the EU were she to win election as president. That is early polling and anything can happen in the next couple of weeks, and even if Macron wins, he will need to forge a parliamentary majority.

But for now, nervous investors and traders flipped the switch from safe haven bets to “risk on”. European shares surged to a 17-month high. The euro scaled back gains after its best open on record. The major Wall Street indexes posted their best one-day advance since March 1. The Nasdaq Composite closed at a new record high.

This should be a very interesting week. President Trump tweeted on Saturday that he plans to announce a “big” tax reform and reduction plan on April 26. Trump has ordered White House aides to accelerate efforts to draft a tax plan slashing the corporate rate to 15% and prioritizing cuts in tax rates over an attempt to not increase the deficit, according to Marketwatch.

Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn are scheduled to meet Tuesday to discuss Trump’s tax proposals with Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, Senate Finance Chairman Orrin Hatch and House Ways and Means Chairman Kevin Brady of Texas. The meeting comes in advance of a Wednesday announcement by Trump; although you might think these leaders should already know the plan.

Mick Mulvaney, the director of the Office of Management and Budget, has said it is unlikely the administration will release a full plan until June at the earliest. So, it sounds like the Wednesday announcement might be long on concept and short on detail.

The Trump administration is preparing to brief all 100 senators Wednesday on the situation in North Korea. Today, Trump said the UN Security Council must be prepared to impose new sanctions on North Korea as concerns mount that it may test a sixth nuclear bomb as early as tomorrow, which marks the 85^th anniversary of the foundation of North Korea’s army.

US officials told Reuters tougher sanctions under consideration include an oil embargo, banning North Korea’s airline, intercepting cargo ships and punishing Chinese banks and other companies doing business with North Korea.

The State Department said Secretary of State Rex Tillerson would chair a special ministerial meeting of the Security Council on North Korea on Friday that would give members the opportunity to discuss ways to maximize the impact of existing sanctions and “show their resolve to respond to further provocations with appropriate new measures”. Two Japanese destroyers have joined the U.S. carrier group for exercises in the western Pacific, and South Korea said it was in talks about holding joint naval exercises.

Also on Wednesday, Federal Communications Commission Chairman Ajit Pai is expected to unveil his plan to replace the agency’s hotly contested net neutrality rules.

Meanwhile, a government shutdown is possible on April 29 if Congress doesn’t approve a spending bill to fund the government. Trump’s biggest demand is a Democratic deal-breaker: money for his long-promised border wall with Mexico. Democrats hope he’ll blink to avoid partial shutdown which would start on Saturday, Trump’s 100th day in office.

Trump insists that Mexico will pay for the wall eventually, later, in some form. Until then, he wants American taxpayers to foot the bill. There is an out for both sides – a short-term spending plan that would provide another week or so for negotiations after the deadline early Saturday.

US investors are also gearing up for the busiest earnings week of the earnings reporting season, with over 190 S&P 500 members. Earnings are coming in better than expected. Of the 100 S&P 500 companies that have reported results so far, 77 percent have beaten profit expectations, according to Thomson Reuters I/B/E/S.

This has helped lift profit growth estimates to 11 percent from 10 percent forecast at the start of the earnings season. Alphabet, the parent company for Google, just passed $600 billion in market capitalization – they report earnings Thursday. Also on the earnings calendar this week: Microsoft, Amazon, Twitter, Intel, Credit Suisse, Barclays, Daimler and Total.

On Friday, we’ll get a look at first quarter gross domestic product.  GDP is forecast to grow by 1%, maybe as high as 1.5%. But the earnings per share for S&P 500 corporations is expected to do much better, up by 11% year-on-year, maybe a bit higher, depending on the forecaster. Ultimately, this divergence is a reminder that what affects the stock market does not necessarily have a run-off effect on the economy.

Outside of recessions, S&P EPS can vary from negative to double-digit growth rates when US GDP is anywhere between 2-4%. Outside of recessions, it is global growth, investment spending, US exports/global trade, commodity prices, FX rates, loan growth, and non-operating factors like taxes, acquisitions, buybacks, and other reinvestment that drives S&P EPS growth.

The economy certainly matters very much to earnings, especially for companies that earn most of their revenue in the US. And financial markets, reflecting confidence levels and expectations for future earnings, tend to lead economic growth and downturns. But ultimately it is a mistake to think that success on Wall Street equates to success on Main Street.

The number of bank branches in the United States will shrink by as much as 20 percent in five years, according to a report from commercial real estate firm JLL. This reduction comes as banks are looking for ways to cut costs and to encourage their customers to embrace mobile banking technology rather than completing basic transactions within a physical branch.

The U.S. banking industry could save as much as $8.3 billion annually if it trimmed the number of branches and downsized the average bank branch from 5,000 to 3,000 square feet, JLL found. U.S. banks have reduced their footprint by around 8 percent since the financial crisis, from 97,000 branches to roughly 90,000.

PPG Industries, an American paint and chemicals giant, again raised its takeover bid for Akzo Nobel, the Dutch maker of Dulux paint, hoping to persuade its rival’s management to engage in merger talks. Akzo Nobel has rejected two previous offers. PPG’s latest offer would value Akzo Nobel at about $26.4 billion.

Supermarket operator Albertsons is exploring a takeover of Whole Foods, according to the Financial Times. Albertsons is owned by private-equity firm Cerberus Capital Management, which has held preliminary talks with bankers on a bid for Whole Foods.

The news comes just weeks after hedge fund Jana Partners LLC said it had amassed a 9% stake in Whole Foods, and was urging it to look at a possible sale, change its management board and revise contracts with suppliers and others.

iHeartMedia, the biggest operator of radio stations in the US, plans to include language in its next quarterly report warning investors that it may not survive another year. iHeartMedia expects cash flow to be negative and is uncertain as to whether it will be able to refinance or extend the maturities of some of its borrowings, according to a regulatory filing.

The company has almost $350 million of debt coming due this year, part of a massive $20 billion debt load it took on as part of a $24 billion leveraged buyout of then Clear Channel Communications

T-Mobile beat earnings estimates but missed on revenue. T-Mobile said it added 914,000 branded postpaid subscribers, who pay bills monthly – that was better than expected. Shares moved higher.

 Alcoa rose more than 2 percent in extended trading on Monday after the aluminum company reported an earnings beat. However, the company also reported a revenue miss.

Steve Ballmer is the former Chief Executive Officer of Microsoft and the current owner of the Los Angeles Clippers NBA basketball franchise. In his spare time, Ballmer has been trying to figure out what the government does with our money, taxpayer money.

Tomorrow, Ballmer plans to make public a database and a report that he and a small army of economists, professors and other professionals have been assembling as part of a stealth start-up over the last three years called USAFacts. The database is perhaps the first nonpartisan effort to create a fully integrated look at revenue and spending across federal, state and local governments.

Want to know how many police officers are employed in various parts of the country and compare that against crime rates? Want to know how much revenue is brought in from parking tickets and the cost to collect? Want to know what percentage of Americans suffer from diagnosed depression and how much the government spends on it? That’s in there. You can slice the numbers in all sorts of ways.

In an age of fake news and questions about how politicians and others manipulate data to fit their biases,  Ballmer’s project may serve as a powerful antidote. Using his website, USAFacts.org, a person could look up just about anything: How much revenue do airports take in and spend? What percentage of overall tax revenue is paid by corporations? At the very least, it could settle a lot of bets made during public policy debates at the dinner table.

Financial Review

Quiet, Almost Too Quiet

Sinclair Noe — March 9, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 2 = 20,858
SPX + 1 = 2364
NAS + 1 = 5838
RUT – 5 = 1360
10 Y + .05 = 2.60%
OIL – .53 = 49.75
GOLD – 7.20 = 1201.80

Stocks dipped in afternoon trade but held on for minor gains, next to nothing really. Another quiet day. The S&P 500 and the Dow Industrials have not suffered a 1% decline in 102 trading sessions, dating back to October 11.

The longest stretch of trading days without a 1% decline since Dec. 18, 1995 for the S&P 500 and the longest since Sept. 20, 1993, for the Dow. It’s quiet, almost too quiet.

Another drop in oil prices weighed on energy shares while financial shares pared some of their early gains. When asked during a briefing whether President Donald Trump still backs his campaign pledge to restore the Glass-Steagall Act, White House spokesman Sean Spicer said that he did.

The law, which separated commercial and investment banking, was repealed in 1999 and, if reinstated, would mainly apply to larger banks, which have been market leaders in the past few months. Much of the gain for financials has been built on the idea of deregulation.

The European Central Bank left interest rates unchanged. The Governing Council left the main refinancing rate at 0%, while the rate on deposits parked overnight at the bank remains at minus 0.4%. The rate on the bank’s marginal lending facility remains at 0.25%.

In a statement, the bank repeated that it expects rates to remain “at present or lower levels for an extended period and well past the horizon” of its bond-buying program, which is scheduled to run through at least December. The ECB also repeated that it stands ready to extend the size or the duration of the bond-buying program if the outlook deteriorates.

The Labor Department reports imports rose 0.2 percent in February, above the expected gain of 0.1 percent, after climbing 0.4 percent a month earlier. Export prices, meanwhile, rose 0.3 percent.

Outplacement consultancy Challenger, Gray & Christmas reported employers announced plans in February to cut 36,957 jobs, a 19 percent decline from January. Per Challenger, employers said they would hire 166,266 workers in the first two months of 2017, the highest January-February on record.

The retail sector once again planned the most cuts as companies closed brick-and-mortar locations and steered business online. Retailers said they would cut 11,889 jobs in February. The energy sector saw a massive year-over-year drop in job cuts, announcing only 5,930 compared with 45,154 in February 2016.

The number of Americans who applied for unemployment benefits jumped by 20,000 to 243,000 in early March, but layoffs remained near a 45-year low. The four-week average of initial claims, meanwhile, rose by 2,250 to 236,500. Continuing jobless claims dropped by 6,000 to 2.06 million. Tomorrow, the government is expected to report a gain of about 210,000 new jobs in February.

Meanwhile, the Arizona Department of Labor published the state jobs report for January and it shows the Arizona unemployment rate unchanged at 5%, however the state lost 53,600 jobs in January. The biggest job losses per sector were in Trade, Transportation, and Utilities (-18,000 jobs); Professional and Business Services (-16,400 jobs); and Government (-13,700 jobs). Arizona Non-farm employment grew by 2.0% (53,700 jobs) over the year in January.

If you are looking for entertaining analysis of the markets, it’s tough to beat Bill Gross’ monthly investment letter. Gross, who runs the Janus Global Unconstrained Bond Fund, characterized the run-up as the “Trump bull market and the current ‘animal spirits’ that encourage risk.”

Details on Trump’s plans remain scarce, however, and equity gains have moderated on growing concerns that stock valuations may be high. The S&P 500 is trading at about 18 times forward earnings estimates against the long-term average of about 15 times.

Gross said the global economy has created more credit relative to GDP than that at the beginning of 2008’s great credit recession. Gross said: “In the U.S., credit of $65 trillion is roughly 350 percent of annual GDP and the ratio is rising,” adding, “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road.

One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.” It happened in 2008, Gross said, noting central banks could drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. “Today, central bank flexibility is not what it was back then.”

You may recall that back in January, Bill Gross said that if the yield on the 10-year Treasury note crossed 2.60%, that would be the critical level both to the bond market and to stock prices. “If 2.6 percent is broken on the upside … a secular bear bond market has begun,” Gross said.

“Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017.”

Gross said the 10-year yield has been in a downward trend line since 1987. If that channel is broken, look out. Today, the 10-year note closed at 2.60%.

House Democrats on the Energy and Commerce Committee staged a marathon fight to slow down the GOP’s Obamacare replacement, but ultimately failed to stop the bill. After a 27-hour delay, the Energy and Commerce committee approved the American Health Care Act in a party line vote. The bill will next be considered by the House Budget committee. The Congressional Budget Office is expected to score the bill next week.

As part of a plan to reshape its business, Royal Dutch Shell is selling its oil sands interests in Canada in a two-part deal worth $7.25 billion. It will offload stakes and reduce its share in the Athabasca Oil Sands Project for $8.5 billion in shares and cash, while jointly purchasing Marathon Oil Canada Corporation with Canadian Natural Resources for $1.25 billion.

Oil drops below $50. West Texas Intermediate crude oil plunged more than 5% on Wednesday after Department of Energy data showed US inventories swelled to a record-high 528 million barrels. That selling has continued day, with WTI dropping below $50 a barrel, its lowest since the end of November.

PPG’s bid to buy Dutch paints and chemicals rival Akzo Nobel was rejected. A deal would have created a global behemoth in specialty chemicals that would have made ingredients for products including skin creams, car paint and iPhone coatings. Akzo said the unsolicited $22.1 billion cash and stock offer undervalues the company and isn’t in the best interests of shareholders.

The French waste and water company Suez Environnement said it has partnered with a Canadian pension fund manager to acquire General Electric’s water treatment technology business in an all-cash deal that valued the business at about $3.4 billion.

GE put its Water and Process Technologies unit on the sales block in October after it agreed to merge its oil and gas division with a fellow services provider, Baker Hughes. The GE business provides water treatment and process services to industrial clients and reported revenue of $2.1 billion last year, with about half of that in North America.

Sears reported a narrower loss in the fiscal fourth quarter than the period a year earlier, but revenues continued to fall, as they continue to close stores and sales continue to decline at its remaining stores. The company’s long-term debt obligations nearly doubled from the prior year, despite the chain’s efforts to raise cash by selling off assets.

Sears took a $381 million charge during the quarter to write down the value of its trade name. Sears completed the sale of its Craftsman brand to Stanley Black & Decker for an initial upfront cash payment of $525 million with additional payments over time.

The Great Recession and the housing bubble left many homeowners underwater, with negative equity in their homes, they were stuck – under house arrest; they couldn’t sell, they couldn’t move, and many homeowners could not keep up important maintenance, much less upgrades. That’s good news for home flippers.

In 2016, the median age of a flipped home was 37 years, per a report out from Attom Data. That’s the oldest in the nearly two decades, and about double the median age of homes flipped before the downturn. The median size of flipped homes was the smallest on record in 2016, at 1422 square feet.

There were 3.1% more flips in 2016 than 2015, and 0.5% more flippers. And flippers could sell their properties for a median of $189,900 in 2016, offering a median gross profit of $62,624, or 49.2%, the highest on record. So, it looks like flippers still have legs.

Gallup-Healthways has released its  Community Well-Being Index . Researchers analyzed 350,000 interviews to rank 189 communities by physical, emotional, financial, community and social health; basically, a look at the happiest and healthiest cities in America. They found that living near the beach doesn’t guarantee your happiness — but it certainly doesn’t hurt.

Communities in the Southeastern US and industrial Midwest were generally ranked lower in well-being, partly due to health problems including higher smoking and obesity rates. Topping the list: Naples, Florida. Phoenix ranked 47 out of 189.