Financial Review

Records Across the Board

Sinclair Noe — June 1, 2017

DOW + 135 = 21,144
SPX + 18 = 2430
NAS + 48 = 6246
RUT + 25 = 1396
10Y + .02 = 2.22%
OIL – .30 = 48.02
GOLD – 3.20 = 1266.40
BITCOIN (Undefined %) = 2452.09
ETHEREUM – 4.09% = 221.44

A record high close for the Dow Industrial average, taking out the last high from March 1^st. Also records for the S&P 500 and the Nasdaq Composite.

In many ways, the Dow is just playing catch-up with the other indexes that were already in record territory. While the Nasdaq is up 16% this year and the S&P 500 has rallied 8.5%, the Dow is up a more modest 7%.

The Institute for Supply Management’s manufacturing index inched slightly higher, hitting 54.9. This implies the overall manufacturing economy grew for the 96th consecutive month.

The Commerce Department announced that spending in the construction sector fell 1.4 percent for the month, the biggest drop since a 2.9 percent fall a year ago. Construction spending was forecast to have grown 0.5 percentage points in April, after falling 0.2 percentage points in March. The drop reflects significant weaknesses in home building, non-residential construction and government projects.

The number of Americans filing for unemployment benefits increased more than expected last week, but the rise probably does not signal a material shift in labor market conditions as claims for several states, including California, were estimated. Initial claims for state unemployment benefits jumped 13,000 to a seasonally adjusted 248,000 for the week ended May 27.

The ADP private sector employment report showed that 253,000 jobs were added in May. The report could signal a strong government payrolls report on Friday that includes hiring in both public and private sectors.

Forecasts are for 185,000 non-farm payrolls created in May. Mark Zandi, chief economist at Moody’s Analytics said, “The current pace of job growth is nearly three times the rate necessary to absorb growth in the labor force. Increasingly, businesses’ number one challenge will be a shortage of labor.”

The Federal Reserve’s latest Beige Book report, a collection of economic anecdotes from businesses across the country, indicated that employers everywhere are under pressure to both hire workers and pay them more. Economists in the Cleveland Fed’s district report, “Staffing firms noted an increase in the number of job openings and placements during the past two months, a situation which they attributed to an improving business climate.” These comments were echoed across the country.

Forecasts from Fed officials suggest that a median of two more hikes are planned before the end of the year – for a total of three. However, San Francisco Federal Reserve Bank President John Williams said that while he sees three interest rate hikes this year as his baseline scenario, four rate increases would also be appropriate if the economy got an unexpected boost.

Perhaps even more important than rate hikes, is what the Fed will say about trimming its $4.5 trillion balance sheet which expanded sharply in response to the Great Recession. The bank massively expanded that balance sheet by buying mortgage and Treasury bonds, as a way of helping keep interest rates low.

Jerome Powell, a Fed board governor, said on CNBC the impact of the Fed’s pullback from bond buying would be minimal. The Fed seems to be trying to have its cake and eat it too, arguing that its bond purchases, also known as quantitative easing or QE, were highly powerful when implemented but will make little difference when withdrawn.

President Trump announced the US will withdraw from the Paris climate agreement and will seek to renegotiate the pact in a way that treats American workers better. Trump is kicking off a withdrawal process that will take until November 2020 to unfold.

While the decision wasn’t exactly unexpected (it was a campaign promise, after all), in today’s announcement Trump said it will bring back clean coal jobs. It won’t. Much of America’s coal gets shipped to a fast-shrinking fleet of power plants that burn the fuel, and there’s no easy path to boosting demand from the sector.

The country’s use of natural gas and renewable energy to produce electricity is meanwhile gathering speed — and creating new generations of energy jobs. Low natural gas prices, at the end of the day, have decimated most of the U.S. coal production. Coal plants have closed and you’re not reopening them.

In a Rose Garden ceremony at the White House today, Trump said, “The bottom line is the Paris accord is very unfair,” citing the deal’s “draconian” financial and economic burdens and a litany of economic projections backing up his case. But the estimates at the heart of the debate varied so widely, some analysts viewed them as unreliable.

Supporting the pro-pullout side was one estimate saying $3 trillion in gross domestic product and 6.5 million in jobs will be lost over the next quarter century — numbers Trump cited without pointing out the timeline. Another view puts the GDP hit at more than $8 trillion through 2100 — but that’s the damage estimated if the U.S. exits the deal.

More worrisome than the long-term guesses could be the expected tariffs on U.S. carbon emitters slapped on by other countries. Twenty-five US companies signed on to a letter running today as a full-page advertisement in the New York Times and Wall Street Journal arguing in favor of the climate pact, and warning of potential “retaliatory measures” by other nations.

Trump said he would like to re-negotiate the Paris accord but today France, Germany, and Italy said they would not enter discussions to change the deal.

While there are still a large number of workers in the traditional fossil-fuel industries according to the Department of Energy, the number of Americans employed in energy-efficient and renewable-energy jobs is also huge.

For instance, 1.1 million Americans work in electric-power generation through traditional fossil fuels, but renewables follow closely with 880,000 employees. Additionally, from a long-term economic perspective, shifting toward renewable energy would likely be more beneficial for job growth.

The Department of Energy said the renewable sector is booming with solar employment growing by 25% and wind-generation employment growing by 32% in 2016. Add on the fact that 2.2 million people are employed in the “the design, installation, and manufacture of Energy Efficiency products and services,” and it’s clear that combating climate change is a big employment driver for the US.

Illinois paid the price for its ongoing budget impasse, with both S&P Global Ratings and Moody’s Investors Service dropping the state’s general obligation credit ratings to one step above junk. The rating downgrades came a day after Illinois’ spring legislative session ended without a budget deal.

S&P cut its rating on $26.3 billion of bonds one notch to BBB-minus, the lowest it has rated any state, and warned that Illinois could sink to the junk level unless it passes a budget that addresses a gaping structural deficit.

Moody’s downgraded Illinois to Baa3 from Baa2, citing the prolonged political impasse that has impeded progress in dealing with a nearly $130 billion unfunded pension liability and fueled growth in unpaid bills now approaching $15 billion, equal to 40 percent of the state’s operating budget.

The boards of Linde Group and Praxair voted to merge, creating a $73 billion global industrial gases leader. Linde’s shareholders will not vote on the deal but 75 percent must tender their shares to the new company for the deal to go through. The deal is expected to close in the second half of 2018.

Deere & Co said it would buy privately held German company Wirtgen Group for about $4.88 billion to expand its road construction operations as it looks to cut down its dependence on its slowing farm business. Deere makes equipment for part of the road-building process – loaders and dump trucks to load rocks into crushers from quarries, earth-moving tools at construction sites, and dozers and motor-graders that help grade roads.

Wirtgen makes crushers that break down large rocks, milling machines, plants to supply hot asphalt for road projects, and pavers and rollers. It has a network of company-owned and independent dealers in about 100 countries.

Financial Review

Earth Day

Sinclair Noe — April 22, 2016

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

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DOW + 21 = 18,003
SPX + 0.10 = 2091
NAS – 39 = 4906
10 Y + .02 = 1.89%
OIL + .55 = 43.75
GOLD – 15.80 = 1233.20

Most of the session, stocks were in negative territory, and as expected, Alphabet and Microsoft kept the Nasdaq in the red. The stock market hit a wall today. After a rally that pushed the Dow above 18,000 and the S&P 500 above 2100 – close to record high, we have now hit resistance.

And we are about to move into May. Remember the old wisdom: sell in May and go away. For the week, the Dow added 0.6 percent, the S&P 500 gained 0.5 percent and the Nasdaq lost 0.6 percent. Oil gained about 11% on the week.

Investors withdrew $7.3 billion from stocks in the week to April 20, the largest outflows in nine weeks, while continuing to shovel money into corporate and emerging market debt. The equity redemptions were led by $4.2 billion of outflows from U.S. stocks and $2.6 billion from Japan.

Caterpillar reported first-quarter earnings that were weaker than forecast, and lowered its expectations for the rest of the year. The company warned in March that its sales and earnings would drop amid low commodity prices, weak demand and the strong dollar.

McDonald’s reported first-quarter earnings of $1.23 per share on $5.90 billion in revenue; beating top line and bottom line estimates. McDonald’s introduced all-day breakfast at its U.S. restaurants in October. The move boosted sales last quarter and appears to be a factor in the Golden Arches’ earnings beat.

General Electric posted an operating profit and higher revenue in the first quarter, compared to a year earlier, but profit fell short of Wall Street’s expectations. GE technically posted a net loss of $98 million in the first quarter, up from a loss of $13.6 billion, although it recorded a profit of $210 million from continuing operations. The company is selling off a substantial portion of its GE Capital unit as it refocuses its efforts on its industrial businesses.

American Airlines said it was disappointed with its first-quarter revenue. Passenger revenue for each seat flown a mile, a benchmark gauge for airlines, will continue falling all year. Still, first-quarter profit topped analysts’ expectations as tumbling jet fuel prices helped reduce operating costs.

The first tech IPO of 2016 is already a disappointment. Dell’s spinoff SecureWorks priced its initial public offering at $14 per share. This was below the $15.50 to $17.50 range that the company was hoping for. The pricing gives the cyber-security firm a market cap of about $1.13 billion. SecureWorks will trade on the Nasdaq under the ticker ‘SCWX.’ Opened at $14, closed at $14.

Looking to return to profitability, Sears Holdings is closing 68 Kmart stores and 10 Sears stores in late July. The company says that, together with $1.2 billion in debt financing raised earlier this month – to provide capital to execute its transformation and meet its financial obligations – it believes it has taken important steps toward its 2016 objectives. Liquidation sales are expected to start in the coming days.

SunEdison is vowing to press ahead with plans to build solar projects across India, despite filing for Chapter 11 on Thursday. The bankruptcy excluded India, the clean-power giant’s largest market outside the US.

Volkswagen has struck an agreement with the Justice Department to either repair or repurchase approximately 500,000 cars in the US, as part of the reparations for its emissions-cheating scandal. Lawyers in the case are still negotiating details. Volkswagen estimates the cost of the scandal has escalated to more than $18 billion, more than double the amount the company had previously set aside

More emissions trouble… Daimler reported net profit dropped 32% in the quarter, but that was overshadowed by news that the German automaker was reviewing its emissions certification process.

Leaders from 170 nations gathered today in New York for the formal signing of the climate change accord reached in Paris four months ago. The event, at the United Nations headquarters, coincided with Earth Day and marked the largest number of countries ever to sign an international agreement in a single day.

The goal of the climate accord is to keep global temperatures “well below” 2-degrees Celsius increase and “to pursue efforts to limit the temperature increase to 1.5-degrees Celsius above preindustrial levels”. By signing the accord today, leaders from China, Brazil, France, Congo, Italy, Morocco and other nations affirmed that climate change is indeed real and vowed to address it.

Signing the accord is not the same as “joining” it. For it to become law, at least 55 countries representing at least 55% of global emissions have to formally join it by ratifying or approving it within their national governments. There is no fixed timeline for this to happen, but at a minimum it is expected to take several months.

The United States and China, which represent about 40% of all emissions, have said they intend to join this year. Different countries have different ways of approving the accord. The United States is among the countries that will enter it through executive action. China’s centralized government is expected to approve it quickly. The European Union, which accounts for about 12%, has met delays in its effort.

The stated goal of the accord is to keep global temperatures well below 2 degrees Celsius, or 3.6 degrees Fahrenheit, above preindustrial levels. That is a level scientists have said could avert the most damaging effects of climate change. Yet other scientists say 2 degrees is too much, prompting a continuing effort to strengthen the goal to 1.5 degrees. But that climate accord might not be enough. The US has said it will reduce its greenhouse gas emissions by 26% to 28% below its 2005 level by 2025, but the plans currently in place fall short of that target. Still, things are starting to change.

The growth in demand for coal has been dropping. Several countries are suspending coal production, or have announced their intention to go coal-free, including China, as have several US states. President Obama announced in January that he would end most new coal leasing on public lands, but his Clean Power Plan to reduce emissions from power plants was temporarily stayed by the Supreme Court in February while a lower court considers a challenge by some states and industries that say the Environmental Protection Agency lacks the authority to enforce it.

Still, the Paris climate accord has accelerated some of the trends that were evident going in. Last year the world spent a record high of $329 billion investing in renewable energy, with more than half coming from developing countries; keep in mind the increase in investment happened while oil prices were crashing, and also as prices for solar photovoltaics were dropping.

Moreover, 40 countries have adopted or are planning carbon pricing, and 28 countries are undertaking energy subsidy reforms, helped by lower oil prices. Also, more than 1,000 major companies and investors have indicated they support the carbon pricing approach. The issuance of “green bonds” for sustainable infrastructure has tripled to $37 billion during the past year.

Countries, companies, academic institutions, and others have begun divesting from fossil fuels, and turning to clean energy.  JPMorgan, for example, has decided against further financing coal mining projects, and the Rockefeller Family Fund with a long and profitable history of fossil fuel investments, announced last month that it was getting out. Valuation procedures often now include reviewing a company’s environmental impact, including its investment in clean energy.

More than 200 religious leaders gathered in New York this week to say they support the climate change accord negotiated in Paris last week and they want it to be put into effect quickly. They released a statement to the General Assembly of the UN, basically stating that the Earth is a gift, not just a commodity; that we need to consider the long-term protection of life, not just short-term economic gain; and environmental stewardship is a fundamental moral and religious value shared by traditions across the world.

The Paris agreement spurs countries to increase their goals over time. The next target is in 2018. The response to climate change is happening, and that is an irrefutable fact. In the very near future the marketplace for energy will change. The Bank of England and World Bank have warned of the risks to the global economy of climate change and the G20 has asked the international Financial Stability Board to investigate the issue.

In January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016. A new study, published in the peer-reviewed journal Nature Climate Change, used economic modelling to estimate the impact of unchecked climate change. It found that in that scenario, the assets were effectively overvalued today by $2.5 trillion, but that there was a 1% chance that the overvaluation could be as high as $24 trillion.

If action is taken to tackle climate change, the study found the financial losses would be reduced overall, but that other assets such as fossil fuel companies would lose value. Scientists have shown that most of the coal, oil and gas reserves such companies own will have to stay in the ground if the global rise in temperature is to be kept under 2C. The total stock market capitalization of fossil fuel companies today is about $5 trillion.

In other words, there is no scenario in which the risk to financial assets are unaffected by climate change. There will be winners and losers. Fortunes will be lost; fortunes will be made. And while climate change is a huge story for science, and nature, and religion. This is, quite simply, the biggest financial story in the world.

Financial Review

See Opportunities

Sinclair Noe — December 1, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 168 = 17,888
SPX + 22 = 2102
NAS + 47 = 5156
10 YR YLD – .07 = 2.15%
OIL un 41.65
GOLD + 4.30 = 1069.80
SILV + .10 = 14.27

More than 180 nations are gathered in Paris to discuss a far-reaching agreement to reduce global carbon emissions. The emerging deal would require wealthy countries, including the U.S., to cut their own pollution while helping poorer countries shift from dependency on fossil fuels and mitigate the effects of climate change.

President Obama held a news conference today in Paris at the U.N. global climate summit; Obama said the world needs an enduring framework for addressing climate change and that he would seek an agreement that would boost economies as well as help the planet’s environment.

President Obama said the U.S. will meet commitments to help finance developing nations’ efforts to reduce carbon pollution, challenging congressional Republicans who have fought most of his environmental policies.

Some people look at the call for reducing carbon emissions and only see expenses, while others see opportunities. The number of annual patents for green energy has increased fivefold since 2002 and this year is on track to break another record after eight consecutive increases. Most patents in 2015 have been for solar technologies, 586 granted in the first half of the year; followed by fuel cells, electric vehicles, and wind power.

In Paris, countries and companies are pledging billions to fund even more research and development of new clean energy technologies. For the first time, more than half the world’s annual investment in clean energy is coming from emerging markets instead of from wealthier nations. The world recently passed a turning point and is adding more capacity for clean energy each year than for coal, natural gas, and oil combined.

For that trend to continue, rapidly developing economies are critical. Wind and solar are already competitive in price with grid electricity in some countries, and battery prices for large-scale electricity storage continue to fall.

As talks on climate change entered their second day in Paris, the Indian capital of New Delhi was buried under a thick smog, with visibility reduced to about 200 yards.

The Cyber Monday sales estimates are trickling in, and they’re looking good. Adobe Digital Index estimated that sales were up 12% year-on-year to $2.98 billion. It was enough to blow up the inter-webs. The websites of Target, PayPal, Walmart, and Victoria’s Secret, among a few others, experienced periodic outages or slow checkout times. Target had its biggest online-shopping day ever on Cyber Monday. Amazon said the holiday weekend was the best ever for its own devices.  Adobe says each of the first 18 days of December will tally $1 billion in sales.

If you were shopping over the holiday weekend, there is a good chance that you did not buy something with Apple Pay. According to Infoscout, nearly half as many eligible purchases were made using Apple Pay this Black Friday than last year, when the service was barely a month old. After the novelty wore off, well…

Vehicle sales maintained a strong sales pace in November: On a seasonally adjusted annualized basis, sales reached 18.2 million units for the third consecutive month. Ford pickups remain the top selling trucks and the Toyota Camry is the top selling passenger car. Fiat Chrysler said its U.S. auto sales rose 3 percent year-over-year in November. While Ford (+0.3%) and GM (+1.5%) missed estimates.

Hyundai, Toyota and Nissan all came in with better than expected sales. Volkswagen’s US sales in November fell almost 25%. Also today, Standard and Poor’s cut Volkswagen’s credit rating a notch, from A- to BBB+, on “a tarnished reputation and brand image, reduced business prospects, a more challenging competitive position, substantial costs, and weaker leverage metrics.”

The ISM manufacturing index fell to 48.6% last month from 50.1% in October; a reading below 50 indicates contraction. In a separate report, the private research firm Markit said its final PMI manufacturing index finished at a 25-month low of 52.8% in November.

Construction spending jumped a seasonally adjusted 1.0% in October, and was 13.0% higher for the year. During the first 10 months of this year construction spending amounted to $888 billion. For October, residential construction was 1.0% higher, while nonresidential construction rose 0.6%.

FOMC voting member Charles Evans said today that he is nervous about the December rate hike decision. His feeling is that the Fed needs to target 2% inflation, adding that the Fed Funds rate may be under 1% by the end of 2016. Fed funds futures now show that traders are assuming a 70% probability of a December rate hike, down from 76% yesterday. Keep in mind, FOMC Chair Janet Yellen will be speaking twice tomorrow.

Negotiators from both chambers of Congress reached agreement today on a 5 year highway plan. The highway measure also would revive the US Export-Import Bank, whose charter expired June 30. Lawmakers have until Friday to enact a highway plan or pass another temporary extension of transportation funding, and House Speaker Paul Ryan said his chamber will vote on the bill this week.

The legislation would provide $281 billion over six years for roads, bridges and mass transit. The measure would be financed in part by a one-time use of Federal Reserve surplus funds and by a reduction in the 6 percent dividend that national banks receive from the Fed.

Puerto Rico paid $354 million today on their Government Development Bank debt, avoiding default for now. A missed payment would have been the first default on the commonwealth’s direct debt. Over the past decade, Puerto Rico’s government has laid off 30,000 employees, closed nearly 200 schools, raised taxes and reformed pension funds. They still face $72 billion in debt, with the next payment of $1 billion due on January 1^st, and there is no indication they can pay. Governor Padilla is hoping to negotiate with creditors.

Morgan Stanley is planning to cut up to a quarter of its fixed income jobs over the next two weeks, resulting in the loss of hundreds of jobs. The cuts reflect a slowdown in client activity, pressure from investors to lift returns and new capital rules that penalize big banks for holding vast inventories of debt securities. In October, Morgan Stanley reported a 42% Y/Y drop in bond trading revenue in what CEO James Gorman called the bank’s worst quarter for fixed income since he took over in 2010.

Drug-benefit manager Express Scripts Holding said it is making arrangements with a drug compounder for patients to receive a lower-priced alternative to the expensive anti-parasitic pill Daraprim, whose price jumped more than 50-fold earlier this year. Turing Pharmaceuticals bought the rights to Daraprim and then jacked up the price from $13.50 a pill to $750 a pill. Express Scripts said it has arranged for patients to get the drug for $1 a capsule from San Diego-based drug compounder Imprimis Pharmaceuticals.

Meanwhile, Martin Shkreli, the CEO of Turing, is also the new CEO of a company called KaloBios Pharmaceuticals. KaloBios, which was at one point of time trading below a penny and was planning to wind down its operations after unsuccessfully finding a strategic alternative of staying afloat in the business, hit a 52-week high on Nov 23. The upsurge was due to the purchase of 70% of KaloBios’ shares by an investor group led by Shkreli.

After gaining control of the company, Shkreli assumed the position of the CEO and Chairman of the company’s board of directors. And then he stopped lending the company’s shares to people looking to short it. The shorts were squeezed and squeezed hard. The price jumped from about 90 cents to just over $45 in a matter of days.

Markit Economics said that its Purchasing Managers Index for the euro area rose to 52.8 in November from 52.3 the previous month. All euro area countries, with the exception of Greece, are seeing expansion in their manufacturing sectors. There was also good news on the employment front with Germany’s unemployment rate falling to a record low of 6.3 percent while in Italy unemployment dropped more than expected to reach 11.5 percent. However, it is unlikely that this improving data will do anything to hold back the European Central Bank’s easing plans on Thursday.

The Bank of England singled out two of Britain’s largest lenders for failing to meet certain capital thresholds in the latest round of stress tests examining the banking sector’s ability to withstand future global financial shocks. Despite the shortfalls, the central bank said that the two lenders, Standard Chartered and the Royal Bank of Scotland, passed the exercise, and that neither would be required to raise additional capital for now, but the tests will get tougher. So they say.

Brazil just dropped its latest batch of GDP numbers, and they point to a deepening recession. The country’s economy shrank 1.7% in the third quarter versus the second, on top of a 2.1% contraction the previous quarter and a 0.8% dip the quarter before that. That’s the first three-quarter streak of negative GDP growth since 1999, and it’s a far worse one at that.

Turkey Shoots

Sinclair Noe — November 24, 2015

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

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DOW + 19 = 17,812
SPX + 2 = 2089
NAS + 0.33 = 5102
10 YR YLD – .01 = 2.24%
OIL + .89 = 42.64
GOLD + 6.70 = 1076.40
SILV + .05 = 14.30

The US economy expanded at a faster pace in the third quarter than previously reported. Gross domestic product rose at a 2.1% annualized rate, up from an initial estimate of 1.5%. Nearly all of the improvement was because of revised data on inventories, which showed businesses restocking shelves at a faster pace than the government first estimated.

Still, company stockpiles remained elevated compared with sales, indicating that new orders and production will cool further to clear shelves and warehouses heading into 2016. Inventories grew at a $90 billion annualized rate from July through September, almost twice as much as previously estimated, but down from the second quarter.

The improvement in inventory levels was offset by a slight downward revision in consumer spending last quarter. Cheap gasoline is giving households a little extra money, and consumers are spending, just not quite as fast; consumer spending was revised down to 3% from 3.2% in the initial estimate for the third quarter. Consumption during the current fourth quarter, including the holiday shopping season, is expected to increase at an annualized rate of about 3%.

For all of 2015, the rate of economic growth is expected to be about 2.5%, not much different from the 2.4% rate in 2014. Not great but good enough. The GDP report was the one of the last big economic reports before the Fed FOMC meeting December 16^th; the other big report will be the November jobs report, which will be published on Friday, December 4^th. In reality, not much has changed since June or even October, when the Fed did not raise rates.

Corporate profits after tax, without inventory valuation and capital consumption adjustments, fell at a 3.2% pace from the second quarter, the biggest drop since the fourth quarter of 2014. On a year-over-year basis, corporate profit growth was 1.4%, compared with 8.5% year over year growth in the second quarter. That measure of corporate profits tracks most closely with what companies report in earnings statements. Profit data aren’t inflation adjusted.

The Conference Board reports that its index for consumer confidence fell to 90.4 from 99.1 in October. Despite a strong advance in hiring last month, consumers expressed more caution about the job market and future economic conditions in the most recent survey. The fall is in the expectations, not the current conditions, component. The decline in job expectations is dramatic and raises the question whether global effects, which have been negative for the US, are beginning to weigh on the American consumer, which would not be a positive for the holiday spending outlook.

Existing home prices rose in September. The S&P/Case-Shiller 20-city composite index gained 0.2%. Prices rose 5.5% for the year, up from a 5.1% yearly gain in August. The index is still about 12% lower than its 2006 peak. Phoenix home prices were up 0.2% in September, and up 5.3% over the past 12 months.

At the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 54% above January 2000 (54% nominal gain in almost 16 years).

These are nominal prices, and real prices (adjusted for inflation) are up about 40% since January 2000 – so the increase in Phoenix from January 2000 until now is about 14% above the change in overall prices due to inflation.

Turkey has shot down a Russian military jet near the Syrian border. Turkish officials said the jet was downed after it knowingly violated Turkish airspace. The two Russian pilots ejected before the plane crashed but they were shot in their parachutes as they floated to earth. And then Turkish tribesmen reportedly destroyed a Russian helicopter with a TOW antitank missile as it tried to rescue the airmen. The Russian Ministry of Defense confirmed that one fighter pilot had been killed by ground fire and that a marine deployed on the search-and-rescue helicopter died but that the rest of the crew had managed to escape.

Russia’s retaliation so far has been largely symbolic. Russia’s foreign minister canceled a Wednesday visit to Turkey, and a large Russian tour operator announced it was suspending sales to Turkey. The two countries are also significant trade partners, or at least they were. A reminder that Turkey is a member of NATO. Today, French president Francois Hollande was in Washington and conducted a joint press conference with President Obama. They vowed to intensify their nations’ military attacks on ISIS in Syria and Iraq. They also announced that next week’s climate change summit in Paris would be a “powerful rebuke” to terrorists.

In the immediate aftermath markets reacted nervously, with the lira selling off, Russian stocks sliding and global government bonds climbing as investors move to safe havens. Meanwhile, a car bomb exploded outside a hotel housing judges supervising parliamentary elections in Egypt’s North Sinai, killing at least three people and injuring 14. The region is the main area of operations for the Egyptian affiliate of ISIS.

Citing “increased terrorist threats” from militant groups in various regions of the world, the US State Department has issued a global travel alert ahead of a busy Thanksgiving week. The department did not advise people against travel but said US citizens should be vigilant, especially in crowded places. The announcement comes as Brussels remains on lockdown and follows the discovery of an explosive belt near Paris and the mobile phone of a fugitive believed to have taken part in the November 13 attacks.

Ford is the latest automaker to say it will not equip future cars with Takata air bag inflators that use ammonium nitrate, the chemical propellant that has been linked to eight deaths and more than 100 injuries worldwide. Ford’s auto recalls with Takata airbags have so far affected about 1.5 million vehicles, including certain older model-year Ford Mustangs, Ford GTs and North American-built Ford Rangers.

Costco has an E. Coli problem. Nineteen people have been infected with E. coli in California, Colorado, Missouri, Montana, Utah, Virginia, and Washington. They have tracked the source to Costco’s rotisserie chicken salad. You might want to stick with turkey for the next few days.

Skyworks Solutions has withdrawn its agreed takeover bid for PMC-Sierra after an increased offer of $2.3 billion from Microsemi gained the backing of the target’s board. Skyworks said it won’t modify its bid and that the company is entitled to an $88 million termination fee from PMC. Semiconductor makers have pursued mergers at a record pace this year.

China’s securities regulator has canceled a requirement that brokerages must hold a net positive purchase position on daily proprietary trading as the nation’s stock market stabilizes following a summer slump. With the Shanghai Composite now having gained more than 20% from its August low, regulators are withdrawing from a government campaign to prop up shares.

New York Attorney General Eric Schneiderman is clamping down on “spoofing,” issuing subpoenas to interdealer brokers BGC Partners, TFS-ICAP, GFI Group, and Tullett Prebon Financial Services. The investigation is focused on placing offers with the intent to cancel them before they trade in order to trick other investors by creating the illusion of demand. Earlier this month, high-frequency trader Michael Coscia became the first person to be found guilty of spoofing in a criminal case.

National Football League player Dwight Freeney can proceed with his lawsuit alleging that Bank of America was complicit in a fraud scheme that caused him to lose more than $20 million and forced his Rolling Stone restaurant to close. The Arizona Cardinals linebacker last Thursday defeated a bid by the parent company and its Merrill Lynch unit to dismiss, among others, fraud and negligent misrepresentation claims stemming from the bank’s recruitment of him in 2010 to manage his assets. US District Judge Margaret Morrow in Los Angeles didn’t rule on the merits of Mr. Freeney’s claims but agreed that he alleged enough facts to move forward with the case.

Just in time for the busiest shopping week of the year – iSight Partners, a privately held cyber intelligence firm is warning retailers about what they call “the most sophisticated point-of-sale malware seen to date.” The firm had shared information about the malware, dubbed ModPOS, with clients in October, and briefed dozens of companies about its dangers. Some retailers have found digital evidence that linked threat indicators they had previously seen to ModPOS, though that does not necessarily mean they were victims of breaches. Just a reminder that if you are concerned about cyber security while holiday shopping, cash still works.

CalPERS, the California Public Employees’ Retirement System said it paid $3.4 billion in performance fees to its private equity managers since 1990 while the controversial sector generated $24.2 billion in profits for retirees. CalPERS has been hard-pressed to keep up with looming obligations to its 1.7 million current and future retirees.

The CalPERS fund, the largest pension fund in the country now at about $295 billion, is considered about 74% funded, down from 77% as of June 30, 2014, mostly because of weak performance from its global stock portfolio. The global stock portfolio posted returns of 1% for the last fiscal year, ended June 30. Private equity, by contrast, returned 8.9% for the year but not without risk and hefty fees.

Jeff Bezos’s space exploration company Blue Origin achieved a key milestone: sending a rocket into space and then landing it safely back on Earth. Making reusable rockets is a central goal for a generation of companies that are trying to cut the cost of space travel and exploration. A Blue Origin vehicle called New Shepard flew to space on Monday, reaching an altitude of 100 kilometers, and then landed back at its launch site.

Financial Review

Nice Little Planet

Sinclair Noe — November 18, 2015

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

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DOW + 247 = 17,737
SPX + 33 = 2083
NAS + 89 = 5075
10 YR YLD + .01 = 2.27%
OIL + .03 = 40.70
GOLD + .20 = 1071.00
SILV – .01 = 14.28

Stocks rallied the most in four weeks, while Treasuries pared losses. The dollar traded near a seven-month high against the euro. Oil was little changed near a two-month low after dropping below $40 a barrel in New York for the first time since August as producers’ output swelled global inventories to a record. U.S. supplies climbed to the highest for the season in more than 80 years.

A predawn police raid on an apartment building in a Paris suburb led to the deaths of two extremists, including the alleged ringleader of last weekend’s attacks – although there is no official confirmation; the raid also resulted in seven arrests. Police also found plans in the apartment for more attacks on Paris. French President Hollande renewed his case for an extension to a state of emergency decreed after the attacks and for changes to the constitution that he said would make France safer. Meanwhile, a French aircraft carrier headed to the eastern Mediterranean to intensify the bombardment of ISIS positions in Syria.

Hacking collective Anonymous accessed and took down more than 5,500 social media accounts associated with ISIS. As part of its efforts, Anonymous published a guide for supporters of how to identify and clean out ISIS-linked accounts.

While we have all been following the news about the attacks in Paris it is important to remember that ISIS is not going to win; they will not establish a caliphate in Paris, nor will they take over New York, or LA, or Kansas City. The point is not to minimize the horror. It is, instead, to emphasize that the biggest danger terrorism poses to our society comes not from the direct harm inflicted, but from the wrong-headed responses it can inspire. The goal of terrorists is to inspire terror, because that’s all they’re capable of. And the most important thing we can do in response is to refuse to give in to fear.

The Federal Reserve published the minutes of the last FOMC meeting and earlier today, 3 more Fed policymakers said they support a rate hike in December.  Atlanta Fed President Dennis Lockhart said Wednesday he is comfortable moving rates higher “soon”; Cleveland Fed President Loretta Mester repeated that she thinks the economy can handle a small rate hike; Richmond Fed President Jeffrey Lacker, remember he voted for raising rates in September and October, said he has his “fingers crossed” that conditions will finally be right for a rates liftoff in December.” And that is pretty much what the Fed minutes revealed – the Fed is ready to raise interest rates at the next FOMC meeting on December 16.

Sovereign debt spreads are widening as investors look to Fed tightening and ECB easing in December. The extra yield on two-year Treasury notes over their G7 peers has widened to 76 basis points, the most since 2007. In the euro-area, meanwhile, Germany this morning sold two-year notes at a record-low yield of minus 0.38 percent.

New home construction declined by 11% in October to an annual rate of 1.06 million, marking the lowest level since the early spring.  Housing starts in September were also revised down to a 1.19 million annual rate from 1.21 million. Permits for single-family homes, which account for about three-quarters of the housing market, rose 2.4% in October to an annual rate of 711,000. That’s the highest level since the end of 2007. The decrease in starts last month was primarily due to a 25.1 percent slump in work on multifamily homes.

BlackRock, the world’s largest asset manager, is winding down a global macro hedge fund after losses and investor redemptions eroded assets. BlackRock Global Ascent lost 9.4 percent this year, according to an October investor document, on track for its worst year since inception in 2003. The fund, which had $4.6 billion in assets just two years ago, has shrunk to less than $1 billion as of November 1.

Members of the Organization for Economic Cooperation and Development have agreed to scale back public financing for coal-fired power plants. The policy would cut off financing for 85 percent of coal projects going forward. The new policy, which will take effect in a year, would provide subsidies only for so-called “ultra-supercritical” coal-fired power plants — those built to the most stringent environmental standards.

Square is due to price its NYSE IPO later today in an offering that’s being closely watched for what it means for the potential listings of other “unicorn” tech companies – those worth over $1 billion – such as Airbnb and Dropbox. Amid a difficult market for tech IPOs, Square set its price range at $11-13 a share, valuing the company at up to $4.2 billion, or 30% below its worth in a private fundraising round a year ago. Trading in the firm’s stock is scheduled to start on Thursday.

Canadian Pacific has laid out its proposal to acquire Norfolk Southern. Norfolk Southern said will “carefully evaluate” Canadian Pacific Railway’s $28.4 billion acquisition offer, but has described the bid as “low-premium” and warned that it would face significant regulatory obstacles. Canadian Pacific is offering around $94.94 in cash and stock, or a 9% premium to Norfolk Southern’s closing price of $87 yesterday. The combined rail network would be worth about $47 billion.

Air Liquide has agreed to buy Airgas in the largest takeover in the industrial-gases sector in nine years. Air Liquide is offering $143 a share for an enterprise value of $13.4 billion. The deal will make Air Liquide the world’s biggest supplier of industrial gases and give it a dominant position in the U.S.

The Justice Department has unconditionally approved Schlumberger’s $12.7 billion proposed purchase of Cameron International, putting the companies on track to close the deal early next year.

Federal prosecutors are actively pursuing criminal cases against executives from Royal Bank of Scotland and JPMorgan Chase for allegedly selling flawed mortgage securities. The Wall Street Journal reports investigators are working to establish that the bankers ignored warnings from associates that they were packaging too many shaky mortgages into investment offerings and are weighing whether they can prove that constituted fraud.

At RBS, prosecutors are scrutinizing a $2.2 billion deal that repackaged home mortgages into bonds in 2007. In a 2013 civil settlement with RBS, the Securities and Exchange Commission described the lead banker on that deal, whom it didn’t name, as trying to push it through over concerns of the diligence department.

The JPMorgan probe has long been stalled because officials have been divided over whether they have sufficient evidence to charge anyone with a crime but it has recently picked up steam. While major banks have had to pay billions of dollars in settlements over the financial crisis, there has been a notable lack of criminal convictions.

So, after about 8 years, the Department of Justice isn’t actually announcing indictments, but they are picking up steam.

New York Attorney General Eric Schneiderman has subpoenaed Yahoo in his investigation into the multibillion-dollar daily fantasy sports industry. Yesterday, Schneiderman filed for a temporary injunction to shut down industry leaders DraftKings and FanDuel, arguing that they facilitate illegal gambling.

Target posted third-quarter results that matched analysts’ estimates and raised the low end of its annual profit forecast, citing strength in health products and children’s apparel.

Lowe’s, the second-largest home-improvement chain, reported a 5% rise in quarterly sales, thanks to a robust housing recovery. Net income climbed to $736 million, or 80 cents a share, from $585 million, or 59 cents a share.

Reuters has published an excellent examination of stock buybacks and the results are pretty incredible. In fiscal 2014, among the 3,297 US companies examined, spending on buybacks and dividends surpassed the companies’ combined net income. In the most recent reporting year, share purchases reached a record $520 billion. Throw in the most recent year’s $365 billion in dividends, and the total amount returned to shareholders reaches $885 billion, more than the companies’ combined net income of $847 billion.

The phenomenon is the result of several converging forces: pressure from activist shareholders; executive compensation programs that tie pay to per-share earnings and share prices that buybacks can boost; increased global competition; and fear of making long-term bets on products and services that may not pay off.

Because buybacks increase demand and reduce supply for a company’s shares, they tend to increase the share price, at least in the short-term. By decreasing the number of shares outstanding, they also increase earnings per share, even when total net income is flat. If those buybacks come at the expense of innovation, short-term gains in shareholder wealth could harm long-term competitiveness.

Share repurchases have helped the stock market climb to records from the depths of the financial crisis, but many argue that the records have come at the expense of workers by cutting into the capital spending that supports long-term growth – and jobs. Further, because most most U.S. stock is held by the wealthiest Americans, workers haven’t benefited equally from rising share prices. The U.S. economy is now twice as rich in real terms as it was 40 years ago, but most people feel poorer.

This has been by far the hottest year on record. Last month was the hottest October in 136 years of data, making it the eighth record-breaking month so far in this record-breaking year. This week the El Nino weather pattern started setting records of its own, with some of the warmest weekly temperatures ever seen across large parts of the equatorial Pacific.

Last month wasn’t just the hottest October on record, it was the biggest departure from normal for any month in the past 136 years, according to data from the National Oceanic and Atmospheric Administration. Nice little planet you have here. Shame if something happened to it.

Financial Review

Knock On

Sinclair Noe — November 16, 2015

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

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DOW + 237 = 17,483
SPX + 30 = 2053
NAS + 56 = 4984
10 YR YLD – .01 = 2.27%
OIL + 1.32 = 42.06
GOLD – 1.80 = 1083.10
SILV – .03 = 14.35

World leaders wrapped up G-20 meetings in Turkey with a vow to boost intelligence-sharing, cut off terrorist funding and strengthen border security in Europe, as they sought to show resolve and unity following the deadly terror attacks in Paris. This year’s G-20 agenda also included efforts to hasten global economic growth, with a particular focus on addressing the effects of China’s economic slowdown. French warplanes launched an assault on ISIS targets in Raqqa, Syria. Meanwhile, the authorities in France announced that they had conducted sweeping police raids around the country overnight, detaining two dozen people.

ISIS released a video today saying they will strike Washington. The Department of Homeland Safety said it had no “specific credible information of an attack on the U.S. homeland.” CIA Director John Brennan said he would be surprised if the group doesn’t have additional attacks in preparation.

Markets across the globe are still processing the weekend’s coordinated terrorist attacks in Paris. Asian exchanges traded lower overnight. European shares reversed early losses and closed in positive territory. The euro dropped, as investors scrambled for safe-havens like the U.S. dollar.

French President Hollande declared that France is at war. Hollande urged lawmakers to approve a three-month extension of the nation’s state of emergency, new laws that would allow authorities to strip the citizenship from French-born terrorists, and provisions making it easier to deport suspected terrorists.

The attacks are also likely to hit France’s economy, which has the largest number of tourists in the world. The sector accounts for almost 7.5% of the country’s GDP. The specific wording by President Hollande is of note, because of course it opens up a can of worms about NATO, the EU, and various agreements for open borders in the EU. This means likely restrictions on import-export activity.

It is nearly impossible to calculate the side effects of the Paris attacks. A couple of quick thoughts include an increase in surveillance. UK Prime Minister David Cameron has already announced the Brits will hire 1,900 new spies to deal with ISIS. The CIA is surely going to place a few ads as well. This will drive the tech heads in San Jose even crazier.

Next, think about the role of Russia in Syria and then expand it out to the role of Russian oil and Saudi Arabian oil vying for global market share. The oil market has been bound up with geopolitics and the threat of conflict for a century, and today’s trading in the oil patch is far from the final word on the direction of those markets.

White House officials confirmed Putin and Obama met privately at the G-20 in Turkey and agreed to “a Syrian-led and Syrian-owned political transition.” These are delicate positions in the dangerous dance between Sunni and Shia playing out in the deserts of Syria and Iraq.

The major stock indices in the US started in negative territory, but then rallied. There were some interesting theories bandied about for the recovery. One story talked about the increase in oil stocks as investors looked for safe havens; although the story didn’t go so far as to suggest that increased military action in the Middle East threatens oil supply routes or even that cutting off ISIS black market oil trading removes a small chunk of supply.

Another story mentioned the travel and tourism industry had a bad day, but then explained that previous terror attacks have taught investors that it doesn’t make financial sense to panic. And then the idea that citizens steadfastly refuse to allow terrorists to dictate how we will live our lives because terrorism won’t succeed in the long run.

I missed a good discussion on whether traders felt the terror attacks might push the Fed to pass on a rate hike in December. Nor was there much discussion about the probability of the stock markets’ bullish affection to war. I don’t know why the markets moved higher. Maybe after a lousy week last week, the shorts closed out positions because it was just time for an up day.

The response in the US has been to fly French flags at football games. The NYSE and Nasdaq observed a minute of silence at 9:25 AM Eastern, before the opening bell. And already, nine states (at last count) have said they would shut their doors to Syrian refugees, in direct violation of the Pottery Barn Rule. The governors of Florida, Alabama, North Carolina, Texas, Arkansas, Louisiana, Indiana, Illinois, and Massachusetts all said they would not accept refugees fleeing the Syrian conflict; go ahead and connect the dots.

There has yet to be a single Syrian refugee resettled in Alabama to date, even though there is  a US State Department-approved refugee processing center in Mobile. And it is uncertain whether any governor would have the power to ban refugees from a given country, as resettlement is handled at the federal level. The State Department said this morning that the US still plans to try to admit 10,000 Syrian refugees into the country in the coming year; final destination to be determined.

Marriott International said that it had agreed to buy Starwood Hotels and Resorts Worldwide for $12.2 billion in cash and stock, creating the world’s largest hotel company. The timing of this acquisition was just exquisite. Under the terms of the deal, Marriott will pay $72.08 a share in cash and stock for Starwood, whose brands include Westin, the W, Sheraton and St. Regis. Starwood shareholders would own 37 percent of the combined company. Combined, the companies operate more than 5,500 hotels with 1.1 million rooms worldwide in 30 countries, with 300,000 employees.

For the first time in at least a decade, imports fell in both September and October at the three busiest seaports in the US. The three – Los Angeles, Long Beach, and New York harbor – handle more than half of the goods coming into the country, and saw imports fall just over 10% between August and October; typically known as peak shipping season. The slowdown in imports is likely an adjustment from a sizable inventory build-up earlier this year.

S&P 500 earnings are on track to close their first season of negative growth since 2009, with more than 90% of components having already reported results, S&P 500 earnings are down 0.9 percent in the third quarter. Estimates call for sub-zero growth in the current quarter as well setting up for a bona fide ‘earnings recession’ (two consecutive periods of declines). According to FactSet, this already occurred in the second and third quarters. All this comes as the Fed prepares to hike rates for the first time in almost a decade – a move that could weaken corporate earnings even further.

Japan has unofficially entered recession. Japan just booked two consecutive quarters of negative gross domestic product. GDP contracted at an annualized pace of 0.8% in the third after a 0.7% pace of contraction in second quarter. The Nikkei 225-share index dropped 1 percent.

The average price of crude sold by OPEC fell below $40 a barrel for the first time 2009. The daily OPEC Basket Price fell to $39.21 a barrel on Nov. 13. The basket, an average of export grades from each of the group’s 12 members, typically trades below international oil futures as some OPEC nations pump denser or higher-sulfur crude that’s less profitable to refine. OPEC’s annual revenues may be curbed to $550 billion at current prices from an average of more than $1 trillion in the last five years.

 The number of oil wells in North Dakota that have been drilled but not fracked has topped 1,000 for the first time in September, as producers wait for prices to recover before turning them on. As a result, more than 8% of oil wells in North Dakota are now sitting idle, harming the industry’s ability to grow production; daily output in the state fell 2% in September to about 1.16 million barrels a day.

The nation’s second largest for-profit college, Education Management Corporation, will forgive nearly $103 million worth of student loan debt to settle claims that it violated consumer protection laws; specifically, misleading students about the benefits of a degree from its schools, and misrepresenting job placement numbers.

In a separate action, the company agreed to pay an additional $95 million to settle four whistleblower lawsuits that claimed it misled the government about its recruiting strategy. EDMC operates a network of 110 under the names: Art Institute, Argosy University, Brown Mackie College, and South University. EDMC did not admit to any wrongdoing.

Constellation Brands, the maker of Robert Mondavi wines and Svedka vodka, agreed to acquire Ballast Point Brewing & Spirits for $1 billion to add to its beer portfolio. The deal is expected to be completed this year and will be financed with cash and debt.

Ericsson said it has not engaged in any merger talks with Cisco Systems, despite rumors Cisco was actively pursuing the Swedish maker of networking equipment.

Blackstone  has reportedly agreed to sell its facility management group GCA Services unit for about $1 billion to Goldman Sachs  and Thomas H. Lee Partners.

Canadian Pacific CEO Hunter Harrison met with Norfolk Southern CEO James Squires, proposing a possible merger, which was coolly received by the Norfolk boss.

The Supreme Court refused to be drawn into the debate over Planned Parenthood, rejecting an appeal by abortion opponents who said they had a right to see some of the group’s internal documents, including its medical-standards manual. The appeal by New Hampshire Right to Life sought the disclosure of information related to a 2011 federal grant made to the Planned Parenthood chapter in northern New England.