Financial Review

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Sinclair Noe — January 25, 2017

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DOW + 155 = 20,068
SPX + 18 = 2298
NAS + 55 = 5656
RUT + 13 = 1382
10 Y + .05 = 2.52%
OIL – .36 = 52.82
GOLD – 7.90 = 1201.60

The Dow Industrials topped 20,000 for the first time ever. The S&P 500 and the Nasdaq Composite closed at record highs yesterday. European markets traded higher, with many indexes up by about 1%. Most Asian markets ended the day with gains.

The Dow Industrials first hit 10,000 back in 1999 and for the next 10 years, the Dow went up and down multiple times before finally breaking out in 2009. The Dow topped 15,000 in 2013. It only took 43 days to go from 19,000 to 20k. Can it go higher? Sure, a trend in place is more likely to continue than it is to reverse – until it reverses.

The Dow Industrial Average first started in 1896 – only one company on that original list is still on the list: General Electric. And the 120-year old Dow hit 1,000 for the first time in 1972; then it crashed 40% and didn’t make it back to 1,000 until 1980. Go figure.

President Trump signed an executive action today directing federal resources toward building a border wall with Mexico. Trump said construction of the wall would begin within months, with planning starting immediately. Initially the US will pay for the wall, but Trump insists that Mexico will reimburse the costs later. Mexico’s President Enrique Peña Nieto is scheduled to visit Trump in Washington on Jan. 31.

The border wall is included in an executive action titled Border Security and Immigration Enforcement Improvements, which calls for hiring more Border Patrol agents, stricter enforcement, and expanding detention capacity, possibly with more private prisons. A second executive action, titled Enhancing Public Safety in the Interior of the United States calls for withholding federal funds from sanctuary cities.

Today’s executive actions also seek to force other nations to take back criminal aliens by using leverage such as withholding U.S. visas. And it will allow Immigration and Customs Enforcement to more aggressively arrest, detain and remove people from the US.

President Trump said today he would seek a major investigation of alleged voter fraud in the November election. Trump said on Twitter: “I will be asking for a major investigation into VOTER FRAUD, including those registered to vote in two states, those who are illegal and…even, those registered to vote who are dead (and many for a long time). Depending on results, we will strengthen up voting procedures!”

And it didn’t take long to find someone registered to vote in 2 states – Steve Mnuchin, Trump’s nominee for Treasury Secretary is registered in New York and California – which is legal – although he can only vote once. And Steve Bannon, Trump’s senior counselor was registered in New York and Florida – not that there’s anything wrong with that.

Trump also said he wants to “fight fire with fire” when it comes to stopping terrorism, suggesting that he could be open to bringing back torture because he “absolutely” believes it works. The Trump administration is also considering a 120-day suspension of refugee admissions and cutting the total number allowed into the U.S. in the current fiscal year from 110,000 to 50,000, actions that could be announced as soon as Thursday.

When will the gavel drop? According to WSJ, President Trump has culled the candidates to fill a vacancy on the Supreme Court to a handful of federal appellate judges. The list includes Neil Gorsuch, Thomas Hardiman, Raymond Kethledge and William Pryor. Trump said he would make his nomination next week, replacing the late Justice Antonin Scalia.

Trump on Tuesday signed executive actions to advance the approval of two controversial oil pipelines — Dakota Access and Keystone XL. Trump’s administration has instructed the Environmental Protection Agency to remove the climate change page from its website.

The Trump administration has also instituted a temporary gag order against government scientists at the Environmental Protection Agency and Department of Agriculture, barring the agencies from publishing any news releases, blog or social-media posts or otherwise communicating with the public about taxpayer-funded research.

The Twitter account of Badlands National Park posted a series of climate-change factoids on Tuesday, apparently, an act of defiance against President Trump, who has said he believes climate change is a hoax. The tweets were removed hours later.

Heavy pollution enveloping much of Europe has prompted emergency measures across the continent, as extreme cold, no wind and heavy burning of coal and wood for heating left many regions shrouded in smog. In several countries, including Britain, France and Belgium, officials have cautioned against physical exertion for children and the elderly. Hundreds of flights have also been canceled and heavy polluting vehicles have been ordered off the road.

Puerto Rico’s new governor wants to replace a law that allows the U.S. territory to redirect revenues earmarked for bondholders to pay for essential services. The government planned to introduce legislation on the so-called debt moratorium law today.

It’s another busy day for earnings reports. Before the opening bell, Boeing beat analysts’ profit estimates despite another charge for its military tanker aircraft and said it expects to deliver more planes and higher earnings in 2017, though revenue likely will fall. Boeing profit rose as the 787 Dreamliner emerged from a decade of losses.

United Technologies posted a fourth-quarter profit, compared with a year-ago loss, and reiterated its 2017 profit and sales forecasts. The company reported Wednesday income from continuing operations of $1.024 billion and net income, which includes results from discontinued operations, of $1.013 billion.

Under the diluted earnings (loss) per share of common stock heading, the line item for continuing operations showed $1.26, but the line for discontinued operations just showed a loss of 1 cent. For investors to get net earnings per share, they are required to subtract a penny from $1.26, to get $1.25. It’s simple math but not necessarily easy. The SEC is supposed to keep an eye on this kind of garbage accounting.

Freeport-McMoRan reported a lower-than-expected profit before the opening bell but said it would double gold sales to 2.2 million ounces this year, while selling less copper. Freeport is being helped by higher prices for both metals but its copper business has been dented recently by a ban on exports of copper concentrates in Indonesia. Since November 8, Phoenix-based Freeport has experienced an increase of just over 50%.

Alcoa Corporation logged a net loss of $125 million or 68 cents per share for the fourth quarter of 2016. Barring one-time items, adjusted earnings came in at 14 cents per share for the reported quarter, missing. Revenue topped estimates. This is the company’s first quarterly report as a standalone, publicly traded company.

Qualcomm slid after the chip maker issued a weak second-quarter outlook amid ongoing legal and regulatory challenges. Apple earlier this month filed a suit against Qualcomm for allegedly leveraging its monopoly position to demand onerous royalty rates. The Federal Trade Commission last week also filed a complaint against the company for anti-competitive practices.

AT&T reported fourth-quarter earnings in line with expectations and sales slightly below forecasts.

Cisco Systems has agreed to buy software maker AppDynamics for $3.7 billion. AppDynamics had been planning to price its IPO tonight.

Following activist investor pressure for a split, Bob Evans Farms has agreed to sell its restaurant business to PE firm Golden Gate Capital for $565 million. Bob Evans will now focus on packaged foods.

Amazon.com now has a market cap of $390 billion, and per research from Credit Suisse, the retail giant is now worth more than the top eight traditional brick-and-mortar retailers combined. For the record, that roster includes Best Buy, Macy’s, Target, JCPenney, Nordstrom, Walmart, Kohl’s and Sears.

Bottled water – not soda – is taking center stage in PepsiCo’s war against Coca-Cola. Pepsi has bought a 30-second Super Bowl ad to debut the company’s new premium bottled water brand, “LIFEWTR,” that is positioned to compete with its archrival’s “smartwater.” The product will be priced at around $2.70 for a 1-liter bottle.

Financial Review

Watching and Waiting

Sinclair Noe — October 13, 2015

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DOW – 49 = 17,081
SPX – 13 = 2003
NAS – 42 = 4796
10 YR YLD – .04 = 2.05%
OIL – .53 = 46.57
GOLD + 5.00 = 1169.90
SILV + .09 = 16.01

Anheuser-Busch InBev and SABMiller have agreed on terms for a takeover, with the world’s largest brewer set to pay $106 billion. The deal brings one out of every three beers sold worldwide under a single company. Under terms of the agreement, AB InBev would pay a $3 billion break-up fee to SABMiller should the transaction fail to clear regulatory hurdles or shareholders don’t approve of it.

If the deal goes through, it would be the biggest acquisition of the year, and the largest in British history. SABMiller’s two largest shareholders, Altria Group and Bevco Ltd., can receive cash and stock for their stakes, which account for 41 percent of the company. They won’t be able to sell the shares for five years; a move that might have tax benefits.

Dell’s $67 billion buyout of EMC appears to be a win for nearly everyone involved – except EMC bondholders. Investors in EMC’s $5.5 billion of bonds are down about $338 million since news of the deal first became public last week. Why’s that? Dell’s plan to raise about $50 billion in debt for the acquisition will push existing bondholders down the capital structure (the notes lack protections that would’ve allowed for early repayment in the event of an ownership change). Further, consider that Dell will now have to service that debt, to the tune of about $2.5 billion per year; money that won’t be going into capital expenditures or research and development.

Pepsi is competing against Coca-Cola for an investment in Chobani that could value the Greek yogurt maker at $3 billion including debt. Chobani is looking to sell a minority stake to someone who could help it with distribution and production. The company ran into liquidity issues last year before an investment from private-equity firm TPG.

Wells Fargo agreed to buy $32 billion in assets from General Electric and take on about 3,000 employees as GE retreats from financial services. The sale includes commercial-distribution and vendor-finance units, and a portion of the corporate-finance business from GE Capital.  The transaction is expected to be completed in the first quarter of 2016. Wells Fargo previously agreed to buy commercial real estate assets and GE’s railcar-leasing division.

This is part of a major shift for GE; from financial services to its manufacturing and industrial roots; to this end, GE has now divested $126 billion worth of financial operations. GE had previously said it would seek some time in 2016 to apply to remove its designation as a “systemically important” financial institution.

In the past 24 hours or so, we’ve seen more than $210 billion in acquisitions announced. Mergers and acquisitions are on track for a record year. So far in 2015, there have been nearly $3.5 trillion worth of transactions

China’s trade slump has extended into September, adding more evidence that the world’s second largest economy is stalling. Dollar-denominated imports plunged 20.4% Y/Y last month, while exports slipped 3.7%, translating into a trade surplus of $60.34B. In yuan terms, imports fell 17.7%, while exports dropped 1.1%. China’s official GDP data is due on October 19. Separate data shows auto sales expanding at the slowest pace in three years. Much of the import decline reflects this year’s commodity price slump. Miners and metals were coming under pressure again today, with Glencore dropping as much as 5.5 percent in London.

The U.K. inflation rate turned negative again last month, dropping 0.1% year-to-year due to a smaller than usual rise in clothing costs and falling gasoline prices. Although the Consumer Price Index rate has been at or close to zero for most of 2015, the last time it was in negative territory was April. The Bank of England said this past week it did not expect inflation to reach its 1% target until spring 2016.

The International Energy Agency, which represents some of the world’s largest oil consumers, is warning that oil markets would likely remain oversupplied next year, as oil demand growth slows and Iranian oil adds to supplies. The IEA cut its forecast for oil demand growth for next year by about 200,000 barrels a day compared to its previous assessment in September. The IEA said Iran’s production could ramp up towards 3.6 million barrels a day from 2.9 million barrels a day currently once international sanctions are terminated early next year.

Russia’s economy could shrink 3.8% this year on the back of lower oil prices and international sanctions. The country’s finance minister told CNBC that trade restrictions may not be removed any time soon. Despite a GDP contraction this year, the Russians expect their economy to turn to positive growth of 0.7% in 2016.

Investigators in the Netherlands have concluded that Malaysia Airlines Flight 17 was shot down by a Russian-made anti-aircraft missile, causing the jetliner to break apart in midair, killing all 298 people on board. The Boeing 777 was heading from Amsterdam to Malaysia when it was shot down on July 17, 2014, over Ukrainian territory controlled by pro-Russian separatists. The report does not say who fired the missile.

Small business optimism continues to be stagnant. The National Federation of Independent Business said its small business optimism index was little changed in September, edging up 0.2 points to 96.1. That’s still below the 42-year average of 98. Small business owners expect sales to decline and the highest share since 2007 say they cannot find qualified workers.

Switzerland’s finance ministry will require Swiss banks maintain capital reserves of 5% of total assets, in line with the U.S. leverage ratio for its biggest banks and above the 3 percent minimum set in a global agreement by the Basel Committee on Banking Supervision.

Since the summer, trading has been largely driven by negative reaction to growing evidence of a global slowdown. Last week, virtually every economically sensitive asset advanced despite a slew of evidence confirming everyone’s suspicions the global economy is indeed decelerating. Instead, investors looked past the soft data and focused on Fed reaction to that weak data, as expressed in the minutes from the September 17^th FOMC meeting. If the Fed obsession seems extreme, consider that fiscal policy is almost non-existent.

In a speech today at the National Association for Business Economics, Federal Reserve Governor Lael Brainard said that the risks to the U.S. economy are now to the downside and that it is important to “nurture” the recovery. Brainard said these risks “argue against prematurely taking away the support that has been so critical to [the U.S. economy’s] success.” Brainard said there was a risk-management argument in favor of a policy of “watching and waiting.”

Also today Federal Reserve Governor Daniel Tarullo said he doesn’t expect conditions to be appropriate to raise interest rates this year. We’ve heard several different Fed policymakers offering differing opinions on the state of the economy and the motivation to raise interest rates; and the only thing we know with any certainty is that Fed policymakers are not unanimous in their positions. And that means it is unlikely that we will see a rate hike at the October meeting.

Michael Novogratz, the CIO of Fortress Investment Group’s macro fund, will step down at the end of this year. His $2.3 billion fund will be closed down, and assets will be returned to investors. Investors redeemed $800 million from the fund at the end of fourth-quarter 2014, a quarter of its total assets. More redemptions followed throughout the year as key bets, like Novogratz’s long call on Brazil, went sour. Fortress’ macro fund was down about 17.5% through the end of September; still, Novogratz will leave with a $255 million golden parachute.

Earnings reporting season kicks into high gear this week, trying to avoid a second consecutive quarter of negatives. Earnings for S&P 500 companies are expected to have dropped nearly 5 percent year over year, which would be the worst quarter for earnings in six years.

Johnson & Johnson reported net income of $3.36 billion, or $1.20 per share, below $4.75 billion, or $1.66 per share, in the year-earlier period. Adjusted earnings per share beat estimates. The company said international sales decreased 13.7% and it had a negative currency impact of 15.8%. J&J also announced it would double its share buyback program to $10 billion. The company will finance the repurchases with debt.

CSX Corp., the third largest railroad in the country, reported third-quarter net income of $507 million or 52 cents per share, down from $509 million or 51 cents per share a year earlier. Results beat estimates, even as revenue declined on lower coal shipments; the company countered by cutting costs.

JPMorgan Chase said third-quarter profit rose 22% as the firm cut expenses and had $2.2 billion in tax benefits. Net income climbed to $6.8 billion, or $1.68 a share, from $5.57 billion, or $1.36, a year earlier. Adjusted earnings came in at $1.32 a share, six cents south of estimates. BofA and Wells Fargo report tomorrow; Citigroup and Goldman Sachs report Thursday.

Intel reported better than expected earnings and revenue, even though both profits and revenue declined. Net income fell to $3.11 billion, or 64 cents per share, from $3.32 billion, or 66 cents per share, a year earlier. Net revenue fell to $14.47 billion from $14.55 billion.