Financial Review

A Date That Will Live in Infamy

Sinclair Noe — December 7, 2016

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DOW + 297 = 19,549
SPX + 29 = 2241
NAS + 60 = 5393
RUT + 11 = 1364
10 Y – .05 = 2.35%
OIL – 1.04 = 49.89
GOLD + 4.00 = 1174.30

Another record high close for the Dow Industrial Average – 3 in a row. The Dow is up in 18 of 22 sessions, but today was the first triple-digit gain since Nov. 10. Plus, records for the S&P 500 index and the Russell 2000 index of small cap stocks. The Dow Transportation Average gained 231 to close at a record high of 9371, taking out the old record high of 9217 set December 19, 2014.

For Dow Theorists, this is confirmation of the bull. Dow Theory holds that strength in the shipping and rail stocks needed to transport goods — a sign of healthy demand and production — is a prerequisite to strength in the broader market.

The transportation average often is a leading indicator for the economy. If we get everything in gear, it suggests everything is in harmony to the upside. From a recent low of 7885 on October 26, the Transports have jumped about 19%, which is just freakish strength. If you caught the planes, trains and shipping containers early, congratulations. The Transports are pricing in a high success rate for infrastructure not only passing, but happening right away and that should give you pause.

A lot is at stake this today as  Time Warner chief executive, Jeff Bewkes, and his AT&T counterpart, Randall Stephenson, answered questions at the Senate antitrust committee hearing about conflicts that might arise from the merger of a major media producer and a major distributor.

AT&T’s $108 billion acquisition would join America’s largest pay TV provider with a media and entertainment company that has a massive catalog of movies and TV shows. Critics charge it could give the telecom giant a huge advantage in the marketplace.

At issue is something called “zero-rate.” That means the ISP, in this case AT&T, won’t count a customer’s viewing of AT&T-owned content against his or her data allowance. Currently, AT&T has such a promotion with DIRECTV. AT&T wireless customers who also subscribe to DIRECTV can watch that content on their mobile devices without it counting against their data allowance.

If you are both an AT&T and DIRECTV customer, that’s a great deal. But if you are a small ISP trying to compete against AT&T, you may think the playing field has suddenly become a lot less even. So far, AT&T is batting one for two on proposed mega-mergers. Last year its deal to acquire DIRECTV got a green light from regulators. Before that, its deal to acquire rival T-Mobile did not.

President-elect Donald Trump continued to show the power of his fully operational Twitter feed yesterday as one tweet brought an offer of talks from Boeing on the cost of a plane order, while another saw shares in SoftBank Group rally to their highest level since August 2015.

While there is disagreement over whether Trump’s tactics will prove effective over the long term, and even if the investments he flags are possible, this Twitter feed seems likely to continue to be one of the most important in markets.

Meanwhile, Trump has picked Scott Pruitt, the Oklahoma attorney general to run the Environmental Protection Agency. Pruitt has been a close ally of the fossil fuel industry and a staunch opponent to environmental regulations. So, it’s kind of like picking an atheist to be the next Pope.

Time magazine has named its Person of the Year – Donald Trump. Trump is the magazine’s 90th person of the year. The runner-up is Hillary Clinton. Trump, in an interview with the Time magazine, said he would bring down drug prices. The S&P 500 healthcare index swiftly lost 1.6 percent, while the Nasdaq Biotechnology index dropped 3.8 percent – set for its worst day in nearly two months.

Pfizer was hit with a $107 million fine by British officials for an epilepsy drug price increase of as much as 2,600 percent. In the UK, branded drug prices are regulated. Pfizer figured out a way to raise the price – sort of through the back door. Pfizer sold the UK distribution rights to Flynn Pharma, debranding the drug and making it generic.

Because generic drugs are generally available to customers at cheaper prices than branded products. The drug was no longer subject to price regulation, leaving Pfizer free to sharply increase the price it charged Flynn, which in turn further raised the price it charged the National Health System. Pfizer jacked up the price from £2.83 to £67.50. Pfizer says it will appeal the fine.

The European Commission has fined three banks for manipulating a key interest rate, known as the Euribor, or European Interbank Offered Rate. The commission levied $520 million in fines against JPMorgan, Credit Agricole, and HSBC. JPMorgan faced the largest fine at $360 million. Euribor is used to set rates on everything from home loans to complex derivatives. Major banks submitted information daily to set the rate. The regulator said the banks had acted as a “cartel.”

Citi is being investigated for its role in the pound’s “flash crash. “Citi’s Japanese trading operation is being investigated by the Bank of England for exacerbating the pound’s October flash crash by placing many sell orders after the initial fall began

Shares in Italian banks continued their recovery after falling sharply on Monday in response to Prime Minister Matteo Renzi’s referendum defeat. La Stampa newspaper had reported that Rome would be asking for €15-billion-euro from the European Stability Mechanism to help the Italian banking system.

At the same time, Reuters quoted unnamed sources as saying that the government would take a €2-billion-euro controlling stake in Monte dei Paschi. The Italian government plans to buy junior bonds to boost its stake to 40%, although there are concerns this might amount to state aid, in violation or Eurozone regulations.

Traffic at U.S. fast-food restaurants fell 1% in the third quarter to mark the sector’s first traffic decline in five years. The industry tracker NPD Group said total restaurant visits were also down 1%, hurt by the now familiar list of factors that have weighed this year, ranging from the higher costs of eating out, changing consumer behavior and higher bills for items such as rent and prescriptions.

Eating out has become more expensive even as the cost of at-home dining has fallen. The cost of food purchased for home use — that is, groceries — has fallen 2.4% in the past year, according to the October consumer price index. That’s the biggest decline over a 12-month period since the end of the Great Recession in 2009

Sometimes it seems there is a Starbucks on every corner, but not every intersection has been caffeinated. Starbucks hopes to change that. The coffee retailer plans to open 12,000 new stores in the next five years.  The company also said it would open an outlet of its high-end coffee chain, Reserve Roastery and Tasting Room – for the real coffee connoisseurs, or at least someone crazy enough to pay $10 for a cup of Joe, or should we say Josephus.

Today, is of course, December 7^th, a date which will live in infamy; 75 years ago, today the United States was suddenly and deliberately attacked by the naval and air forces of the Empire of Japan.

It is a hallowed site. About 15 minutes into the attack at Pearl Harbor, the Arizona was destroyed, killing 1,177 sailors and Marines on board. And there the Arizona remains to this day.  On December 6, 1941, Arizona took on a full load of fuel – nearly 1.5 million gallons – in preparation for its scheduled trip to the mainland later that month. The next day, much of it fed the explosion and subsequent fires that destroyed the ship following its attack by Japanese bombers.

However, despite the raging fire and ravages of time, some 500,000 gallons are still slowly seeping out of the ship’s submerged wreckage: 75 years after its demise, Arizona continues to spill up to 9 quarts of oil into the harbor each day. They call the leaking oil, the “tears of the Arizona.”

Some people believe the oil will continue to leak until the last Pearl Harbor survivor dies. We will know if that is true soon.

Financial Review

Transitioning

Sinclair Noe — November 10, 2016

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DOW + 218 = 18,807
SPX + 4 = 2167
NAS – 42 – 5208
10 Y + .04 = 2.12%
OIL – .91 = 44.36
GOLD – 19.20 = 1260.00

The Dow Jones industrial average hit a new all-time intraday high and a record high close. The Dow took out the old high from mid-August. Nearly every major tech stock was down. Apple, Google, Microsoft, and Amazon are all in the red, despite the broader market being up. Banks moved higher.

The Trump Transition website posted a statement: “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

Treasury yields haven’t been this high since the beginning of the year. Aggressive selling on yesterday ran Treasury yields up by more than 20 basis points at the long end of the curve and to their highest levels since January. That selling has carried over into today’s session with the 10-year yield up another 4 basis points at 2.12%. If Trump delivers on his pledge to give the U.S. economy a growth and inflationary shot in the arm from a multi-trillion-dollar package of tax cuts and infrastructure spending, the impact will likely be felt far beyond American borders. Bonds hate inflation.

The rise in the 30-year yield has been remarkable. It is up more than 30 basis points this week, on course for its biggest weekly rise since 2009 and among the biggest of the last three decades. This has led to a so-called “steepening” of the yield curve, where the gap between short and longer-dated yields widens. These shifts across global interest rate markets in response to the changing inflation outlook are being mirrored in commodity and equity markets too. Copper surged more than 5 percent to a 16-month high. Europe’s constructions and materials index hit a nine-year high.

St. Louis Federal Reserve President James Bullard today repeated his call that a single interest rate increase would be adequate for the foreseeable future. Bullard did not mention the U.S. election results or any possible effect on volatility or the economic outlook. In the current environment of low growth and low inflation, Bullard now feels a single rate increase would be appropriate, and the Fed could then remain on hold until growth, inflation, productivity and other aspects of the economy switch to a new “regime.”

The dollar index, which measures the U.S. currency’s performance against a basket of currencies, rose 0.3 percent to 98.8. The Mexican peso plunged 13% to the lowest levels in 2 decades, then pared losses, but officials held back from acting to support the currency. While Mexico’s Foreign Minister reiterated that Mexico will not pay for Trump’s proposed border wall, President Enrique Pena Nieto did call to congratulate him and agreed to meet before he takes office.

The election results sparked protests in several cities; marchers took to the streets in Philadelphia, New York, Chicago, Seattle, Oakland, and even Tempe; a dozen cities in total. More protests are planned.

Nevertheless, the transition has begun. Donald Trump met Barack Obama at the White House this morning to discuss the transition of power. The two men were scheduled to talk for about 10 minutes but ended up speaking, cordially, with each other for an hour and a half.  Both were vague on details about what was discussed.

After the meeting, Obama said, “My number one priority in the coming two months is trying to facilitate a transition that ensures our president-elect is successful.” At the end of the meeting, Trump called Obama a “very good man.” Also, as part of the transition, Pence met with Biden; Melania met with Michelle. Trump also met with Vice President-elect Mike Pence and Speaker Paul Ryan to discuss how they can hit the ground running in a Trump administration. Kris Kobach, the Kansas secretary of state and an ardent opponent of immigration, has been added to Mr. Trump’s transition team.

Republican congressional leaders have confirmed what might seem obvious – Obama’s far-reaching trade agreement with 11 Pacific Rim nations is dead. The Senate majority leader, Senator Mitch McConnell of Kentucky, said flat-out “No” when reporters asked if the pending Trans-Pacific Partnership,  the largest regional trade deal in history, would be considered in the lame duck Congress that convenes next week.

Speaking at a conference in New York, Mark Bertolini, Aetna’s chairman and chief executive said, “We started with a fresh piece of paper yesterday — we had no idea how to approach it.” When Aetna ran through post-election expectations, the idea that Trump would win the presidency and that Republicans would control both chambers of Congress seemed so implausible that it was not even in play. Bertolini says the health care firm is now working on the assumption that Obamacare will be repealed.

Still, he thinks a wipeout of the Affordable Care Act is unlikely. Twenty million people gained health care coverage through the law, and Bertolini said, “You can’t put them out on the street without insurance.” You may remember that this is the same Aetna insurance company that earlier this year sharply reduced its participation in the public marketplaces, pulling out of two-thirds of the counties in which it sold individual insurance. If only there was some way to make the system less reliant on corporations’ natural altruistic tendencies.

Obamacare enrollment had its best day yet on Wednesday with more than 100,000 enrollments. More than half a million people applied for coverage over the first four days, but not all of them followed through and selected a plan. Open enrollment started Nov. 1 and lasts until the end of January, or at least until January 20.

Pfizer is evaluating a potential sale or spinoff of its consumer health division that could value the unit at as much as $14 billion. Reuters reports an exit from the business, which includes Chapstick and Advil, would be one of the company’s biggest corporate moves since abandoning a $160 billion deal to buy Allergan earlier this year.

More spinoffs? Siemens is planning a public listing of its $15 billion healthcare business to refocus on its core strengths of electrification, automation and digitization. The German group announced the move as it reported fourth-quarter profits that comfortably beat expectations, but issued a cautious outlook for the current fiscal year as orders dropped amid geopolitical uncertainty.

ConocoPhillips, the largest U.S. independent oil producer, will sell up to $8 billion in natural gas assets and trim its capital budget by 4 percent next year. Conoco carries a $28.7 billion debt load.

Photoshop software maker Adobe Systems said it would buy advertising company TubeMogul for about $540 million, net of debt and cash, giving it a bigger presence in the rapidly growing online video market. Adobe’s $14 per share cash offer represents an 82.5 percent premium to TubeMogul’s Wednesday close.

Goldman Sachs is considering shifting some of its assets and operations from London to Frankfurt, according to Reuters, as it tries to secure access to the EU market when Britain leaves the bloc. Coming under the European Central Bank’s jurisdiction should allow it to continue selling its services to clients across the Eurozone and wider EU post-Brexit.

Navinder Sarao, the British financial trader accused of causing the 2010 “Flash Crash,” has become the second person convicted of criminally spoofing after pleading guilty in a Chicago court. Spoofing is rapidly placing orders with the intent to cancel them before they trade to trick other investors by creating the illusion of demand.

Shake Shack beats. The burger chain earned $0.15 a share on revenue of $74 million and said it expected full-year same-shack sales growth of 2% to 3%.

Shares of Taser up 13% on shockingly good earnings. Taser reported record revenue — up 43 percent from last year.  Scottsdale based Taser reported net income of $3.8 million, or 7 cents per share, up from $1.5 million or 3 cents in the year ago period.

Mylan whiffs. The maker of the EpiPen announced a net loss of $119 million for the third quarter because of a proposed $465 million settlement with the US Department of Justice and other government agencies.

Some Yahoo employees were aware that a state-sponsored hacker had breached its network shortly after a massive hack in 2014, casting a larger shadow over Verizon’s $4.8 billion deal to acquire the company. Yahoo said in September that an investigation had uncovered the theft of personal information associated with at least a half billion accounts, the largest data breach in history.

The oil market risks running another surplus in 2017 without an output cut from OPEC, according to the IEA’s monthly oil market report, which warned of “another year of relentless global supply growth like that seen in 2016.” Global supply rose by 800,000 barrels per day in October, led by record OPEC production and rising output from non-OPEC members like Russia, Brazil, Canada and Kazakhstan. The IEA also raised its forecast for non-OPEC supply by 111,000 barrels a day, with the increase led by Russian production.

The number of Americans filing for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 254,000 for the week ended Nov. 5. It was the 88th consecutive week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970.

Financial Review

Let’s Do the Limbo

Sinclair Noe — August 22, 2016

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DOW – 23 = 18,529
SPX – 1 = 2182
NAS + 6 = 5244
10 Y – .04 = 1.54%
OIL – 1.71 = 46.81
GOLD – 2.50 = 1339.60

At the open this morning, the S&P 500 dipped and the VIX spiked, which had many market observers hoping that we’d finally see some volatility, some sign of movement. Of course that didn’t happen. For the past 32 days of trading, the S&P 500 index has not had a day where prices moved more than 1% up or down.  Back in 2007 we reached 38 days, then in July 2014 we reached a 20-year record of 62 days. A little bit of a pause in the market can be a good thing, and the markets respond positively; the market catches its breath and keeps on running.

However, when this kind of tight trading range extends beyond 20 days, (typically a month’s worth of trading sessions) the subsequent returns get worse; and after two months’ worth of trading, the following month is likely to show a decline. An extended tight trading range might indicate that the bulls just don’t have the power to push the market higher. We’re not there yet, but eventually this market is going to have to make a move; until then the markets are in limbo. One thing that might move the markets is the Fed.

Federal Reserve Vice Chairman Stanley Fischer helped the dollar to begin the week trading stronger against all of its major peers, after he said US economic conditions are close to hitting the central bank’s targets in a speech in Aspen on Sunday. This upbeat assessment pushed the currency to a one-week high, as traders beef up bets that a rate hike may happen this year. The Federal Reserve’s annual Jackson Hole symposium begins on Thursday. This year’s theme is “designing resilient monetary policy frameworks for the future.” Janet Yellen speaks there on Friday.

What she says will be combed for clues about whether the Federal Open Market Committee will raise interest rates at its next meeting, in September. Goldman Sachs economists, writing in a research note to clients, said: “We currently see a subjective 30 percent probability that the next move is a hike at the September meeting, and a 45 percent probability that it is a hike in December, for a 75 percent cumulative probability of at least one rate increase this year.”

Pfizer has agreed to acquire Medivation for $14 billion, Pfizer, which is the second-largest bio-pharmaceutical company with a market cap of $212 billion, would pay about a one-third premium to the drug maker’s Friday closing price of $67.16. This is a notable premium to the $9.3 billion offer the pharma giant Sanofi had made earlier this year. By acquiring Medivation, Pfizer would gain a blockbuster prostate-cancer treatment that’s already approved for sale in the U.S. and elsewhere, and that analysts project will generate $1.33 billion in annual sales by 2020.

Medivation also comes with two experimental products: a drug for breast cancer and another for the blood cancer lymphoma. Still, it seems like a larger price to pay for a company with only one approved drug. Of course Medivation charges a high price for that one drug, Xtandi costs $129,000 – 4 times more than in other countries. Xtandi was developed at the University of California, Los Angeles, through taxpayer-supported research grants from the U.S. Army and the National Institute for Health. Reuters had reported that several other players, including Gilead and Merck considered buying Medivation, so presumably, these suitors will seek other targets now that Pfizer has sealed the deal here.

The global gas-station operator that controls Circle K outlets reached a deal to acquire San Antonio, Texas-based gas station and convenience store chain CST Brands for about $4.4 billion. Quebec-based Alimentation Couche-Tard said it would pay $48.53 per share for CST, which operates more than 2,000 stores in North America; that represents a 42% premium above the price at which CST shares were trading before the company announced March 3 that it was considering a sale. Couche-Tard’s approximately 12,000 stores worldwide includes nearly 7,900 in North America operating under the Couche-Tard, Circle K and Ingo brands. It has about 80,000 employees at its stores, fuel businesses and administrative offices in North America.

One of the country’s largest newspaper chains is offering buyouts to its employees and said most of those workers would have their last day in mid-September. GateHouse Media, which is based near Rochester, N.Y., and publishes 125 daily newspapers and more than 600 weekly and business papers in 35 states, made the announcement last week in a memo to employees. In Arizona, GateHouse publishes the Arizona Capitol Times – no immediate word on the fate of that publication.

Meanwhile, the Arizona Capitol Times reports a judge has thrown out a bid to keep voters from deciding whether to legalize the recreational use of marijuana. The measure would permit any adult to have up to one ounce of the drug or six plants without fear of prosecution under state law. It also sets up a new state agency to regulate sales, imposes new taxes and enacts various provisions.

In a ruling Friday, Maricopa County Superior Court Judge Jo Lynn Gentry said when state lawmakers altered the election code last year they eliminated — perhaps inadvertently — the ability of individual citizens to sue to keep initiative measures off the ballot. And she said lawmakers failed to restore that right anywhere else. Gentry wrote, “whether wittingly or not, the legislatures eliminated a means by which initiative petitions can be challenged.”

The parent company for Arizona Public Service, Pinnacle West Capital, in its latest filing with the SEC, reported it had received two subpoenas over the summer as part of federal investigations into the 2014 elections. The FBI and federal prosecutors are investigating campaign donations and financing of the 2014 Arizona Secretary of State’s race and Arizona Corporation Commission contests. The subpoenas related to those campaigns and Arizona and Pinnacle West/APS executives’ communications. APS has been at the center of debates over solar energy policies, and critics contend the utility has funneled undisclosed, so-called “dark money” to some Corporation Commission candidates.

You’ve heard the stories about high rents in Silicon Valley, well it might be good news for Arizona. The New York Times reports at the end of last year in the Bay Area mega-region — including both the San Francisco and San Jose metropolitan areas — there were 530,000 tech and engineering jobs, a 7 percent increase from a year earlier. Phoenix has about one-fifth as many tech jobs, but the total grew 8 percent from a year ago, and many of those jobs are coming from the Bay area.

Wages, taxes and energy cost about 25 percent less in Phoenix than they do in San Francisco. Housing is much cheaper. The median home price in the Phoenix metropolitan area is $221,000, according to Zillow. In San Francisco, it is $812,000. A few examples of recent transplants include Weebly, Double Dutch, Allbound and Gainsight.

Of course, these aren’t the first companies to migrate from San Francisco to the desert; Intel has been here for quite some time. Still, it bodes well for the local economy. Chris Camacho, chief executive of the Greater Phoenix Economic Council, says better-paying jobs will follow, since companies prefer to expand in cities where they already have offices.

The leaders of Germany, France and Italy were due to meet on an island off the coast of Naples today to discuss how to keep the European project together in the second set of talks between the Eurozone’s three largest economies since Britain’s vote to leave the EU. Merkel wants to cement “a better Europe” rather than forge ahead with “more Europe,” Renzi wants Italy to have a strong voice in how the bloc’s future is shaped post-Brexit, and Hollande wants an EU-wide investment plan to be doubled.

The Bank of Japan will not rule out lowering negative interest rates even lower. The BOJ introduced negative rates in February and the controversial policy has failed to spur inflation or economic growth. “The degree of negative rates introduced by European central banks is bigger than Japan. Technically there definitely is room for a further cut,” Governor Haruhiko Kuroda told the Sankei newspaper.

Iraq, OPEC’s second-largest oil producer, plans to boost exports 5%, or 150,000 barrels a day, in the next few days following a deal to restart shipments from three fields in Kirkuk. Exports were suspended in March due to a payment dispute with Kurdistan, which controls the relevant pipeline. The news doesn’t quite square with speculation that OPEC is set for discussions about freezing output. Crude prices were lower today.

It’s like the Hatfields swapping recipes with the McCoys. Or ASU and the University of Arizona drawing up plays together. Starting next year, the Chevrolet Camaro will share a transmission with the Ford Mustang. Crosstown collaboration between General Motors and Ford was once unfathomable. But cost-cutting, engineer shortages and increasing regulations made it inevitable.

Last Thursday the Federal Reserve launched its own Facebook page. The Fed said the idea was to increase the accessibility and availability of the Fed. What could go wrong? Even though the Fed Facebook page picked up almost 10,000 likes, hundreds upon hundreds of rants piled up over the weekend, and perhaps in the spirit of transparency, the Fed has allowed them to remain. For now.

Financial Review

7 Straight

Sinclair Noe — August 2, 2016

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

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DOW – 90 = 18,313
SPX – 13 = 2157
NAS – 46 = 5137
10 Y + .03 = 1.53%
OIL – .43 = 39.67
GOLD + 10.40 = 1363.80

The Dow logged its seventh straight drop, while the Nasdaq snapped its five sessions winning streak. The S&P 500 broke out of a very tight consolidation pattern, but still managed to close with a loss of less than 1%.  WTI crude oil erased an early gain and closed down 1.1% at a four-month low.

Consumers boosted spending by 0.4% in June — the third straight strong increase — but they’ve also been saving less to fund their purchases.  Income growth has not been keeping pace with spending. Incomes rose 0.2% in June for the second straight month.

As a result, the personal-savings rate dropped to 5.3% and matched a 15-month low. Savings had hit a four-year high earlier in the year. Inflation as measured by the PCE index edged up 0.1% in June. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 0.9% in the 12 months ended in June. That’s unchanged from in the prior month.

The annual rate of core inflation was also flat at 1.6%.  Although inflation has been creeping higher lately, there still are no signs of widespread price pressures in the U.S. economy.

CoreLogic reports home prices were 5.7% higher in June compared to a year ago, and prices were up 1.1% from May to June. They forecast a 5.3% increase in home prices over the next year. Including distressed sales, national single family home prices remain 6.7% below peak values recorded in April 2006. Mortgage rates dipped in June to their lowest level in more than 3 years. Among major metro areas, Denver had the lowest unemployment rate and the strongest home price appreciation. Arizona saw a 5.5% increase in home prices over the past 12 months.

Japanese Prime Minister Shinzo Abe’s cabinet approved a $274 billion stimulus package. The Bank of Japan last week only tweaked its monetary stimulus. By total size, the stimulus package ranks among Japan’s biggest since the global financial crisis, but three quarters of the stated value comprises targeted low-interest loans from the government and state-owned companies. The program will include money for infrastructure projects, including a magnetic-levitation train line connecting Tokyo and Osaka, as well as reconstruction projects in the southern region hit by earthquakes in April.  It also will pay for cash handouts to 22 million low-income people.

The Federal Reserve reports loan standards to commercial and industrial firms and commercial real estate tightened for the fourth straight quarter in the three months ended in June. The survey also found standards on all categories of residential real estate mortgage loans were little changed, except some easing for loans that can be bought or guaranteed by Fannie Mae and Freddie Mac. The report also showed that demand for most types of residential real estate loans strengthened over the second quarter.

Major automakers in the U.S. market reported July vehicle sales slightly below expectations as the pent-up demand that has helped drive sales since 2009 plays itself out. In a continuing trend, consumers shunned passenger cars in favor of SUVs and pickup trucks. GM sales dropped 2%. Ford sales slipped 3%. Fiat Chrysler sales rose 0.3%. Nissan reported a 1.2% increase. Honda surprised with a 4.4% increase. Ford shares dropped 4.3% today and are down 14% in the last 4 sessions.

Shares in Biogen jumped almost 10% today, after the Wall Street Journal reported that Merck and Allergan have each informally expressed interest in a possible acquisition. A takeover of Biogen would be the biggest of a biotech company since 2008, and one of the largest takeovers by a drug company on record. Biogen makes drugs that treat multiple sclerosis and hemophilia, and its main focus overall is on neurological and autoimmune diseases, as well as rare diseases.

Pfizer said it has reached a $486 million settlement of shareholder litigation accusing it of causing big losses for shareholders by concealing safety risks associated with its Celebrex and Bextra pain-relieving drugs. Pfizer pulled Bextra from the U.S. market in April 2005, and agreed in September 2009 to pay $2.3 billion to settle a U.S. government probe into the marketing of Bextra and other drugs. The accord is subject to negotiation of a final settlement agreement and court approval, and would end more than 11 years of litigation against the drug maker.

Also, Pfizer reported better-than-expected quarterly results, driven by lower taxes and sales of generic medicines, but revenue from its array of branded patent-protected medicines brought disappointment. Pfizer did not offer any hints on whether it plans to split into two separate companies, a long-mulled potential decision that has kept investors in suspense.

Of the 353 companies in the S&P 500 that have reported earnings through Tuesday morning, 71 percent have topped analyst expectations, according to Thomson Reuters data. Earnings for the second quarter are expected to show a decline of 2.6 percent, an improvement from the expected 4.5 percent decline on July 1.

Emerson Electric, which makes factory automation equipment, said it would sell two units for a total of $5.2 billion as the company focuses on its high-growth businesses. Emerson will sell its network power unit to investment firm Platinum Equity in a deal worth $4 billion, while Japan’s Nidec Corp will buy its motors and electric power division for $1.2 billion.

Australia cut rates to a record low. The Reserve Bank of Australia lowered its benchmark interest rate to a record-low 1.50%, as expected. The central bank’s board noted “that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

European bank stocks were crushed again today. The sector remains under pressure after the results of the European Banking Association stress tests were released after markets closed on Friday. Europe’s STOXX Banking Index traded lower by 2.8%, taking this year’s total losses to more than 30%; with Germany’s Commerzbank pacing today’s decline among individual names, down 8.2% after reporting a 32% drop in quarterly profits.

Credit Suisse and Deutsche Bank – will be dropped from the STOXX 50, an index of Europe’s top 50 blue-chip companies next week. Credit Suisse and Deutsche Bank shares have lost half their value this year. Exclusion from a benchmark generally means that exchange-traded funds and other passive investors that track the index will be forced to sell the shares.

Deutsche’s plight should be of particular concern. Its shares are now worth barely a quarter of its book value. That is a twofold bind: proof that investors distrust the bank; and a practical block on being able to raise the equity needed to boost regulatory capital and absorb the cost of fines; and Deutsche faces considerable fines.  Investors are again pricing in a risk that the bank’s coco (or contingent convertible) bonds will be bailed in. Last month, the International Monetary Fund issued a report that concluded Deutsche is probably “the most important net contributor to systemic risks in the global banking system”.

And as bad as that is, the worst of the lot, is Italy’s Banca Monte dei Paschi, which utterly failed the stress test last week and now requires recapitalization. The Financial Times reports: “The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalization with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalization fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.”

The only good news is that Monte dei Paschi is nowhere near as big as Deutsche Bank. Italy is turning into the next Greece. Non-performing bank loans have risen to 18% in Italy. Monte dei Pachi has non-performing loans around one-third of its assets. I’m not sure how this plays out but it will probably be messy.

The Centers for Disease Control and Prevention advised pregnant women not to go to a Miami neighborhood where new, confirmed cases of Zika virus that appeared to be locally transmitted were reported. It was the first time the government health agency tasked with preventing the spread of disease has issued such an advisory for the Zika virus within the 48 contiguous US states, and it appeared to be the first time the CDC has warned against visiting any part of the continental United States for health reasons.

The warning applied to a one-square-mile area north of downtown Miami. Despite the narrowness of the warning, it may be problematic for Florida’s important tourism industry. The state drew in more than 100 million visitors and generated more than $89 billion of economic activity last year

At the end of last year, the FAA mandated—arguably as a stopgap against potentially stricter regulations from Congress about how citizens can use drones—that anyone wishing to fly a consumer drone weighing more than a half pound needed to get a registration number from the FAA for $5.

At a conference at the White House today on the future uses of drones in US airspace, Federal Aviation Administration director Michael Huerta told the gathered crowd that more than consumer 500,000 drones had been registered with the agency since December. According to the FAA, it took 100 years for about 320,000 regular aircraft to be registered with US officials—a feat that drones have surpassed in a matter of months.

Financial Review

The Re-balancing

Sinclair Noe — May 16, 2016

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

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DOW + 175 = 17,710
SPZ + 20 = 2066
NAS + 57 =4775
10 Y + .05 = 1.75%
OIL + 1.66 = 47.87
GOLD + .70 = 1274.50

The National Association of Home Builders’ index of home builder sentiment was 58 for the fourth month in a row. Readings over 50 signal improvement.

A reading of New York-area manufacturing conditions fell sharply in May. The Empire State general business conditions index dropped to a reading of negative 9, from positive 9.6 in April.

This week’s economic calendar includes the April CPI tomorrow, a look at inflation on the retail level and minutes from the Fed’s FOMC meeting last month. And there is a connection between the two reports. In the March 16 FOMC meeting, the Fed stated, “Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”

In other words, when the dollar drops and oil prices go up, we should be at 2% inflation; well, we are pretty much there, or at least closer. The weaker dollar makes imports, including oil, more expensive, and the higher prices tend to spread through the broader economy. A sluggish April jobs report still leaves a June rate hike on the table.

Before we see an interest rate hike, the Fed needs to prepare the markets, and so far, the markets don’t think a hike will happen in June.  The CME’s Fed Watch tool, which uses fed fund futures trading levels to determine the likelihood of a hike at each meeting, indicates that a better than 50 percent chance of a move doesn’t happen until the December FOMC session. It is a bad idea to surprise market participants with a rate hike, so the Fed needs to start jawboning, otherwise we can expect a September or December hike.

Goldman Sachs says the crude oil supply glut is over and the market has moved from a state of oversupply to a deficit, and believes major supply disruptions in markets such as Nigeria, Venezuela and China will sharply lower production levels. Goldman raised its price forecast for crude to $50 a barrel for the second half of 2016, saying: “the physical rebalancing of the oil market has finally started.”

Goldman Sachs has quietly overtaken Chevron and Exxon Mobil to become one of the biggest natural gas merchants in North America, expanding in physical commodities trading even as other banks pull back. Last year, Goldman bought and sold 1.2 trillion cubic feet of physical gas in the U.S. – equal to a quarter of the country’s residential consumption and more than twice its volumes in 2013. According to Natural Gas Intelligence, Goldman is now the seventh-largest gas marketer in North America.

Back to the Goldman thesis that we’ll have $50 a barrel oil for the second half; it really isn’t much of a stretch because oil is just a couple of dollars shy of $50 right now. But can that level hold? In the past there has been a strong correlation between the dollar and oil: dollar down – oil up, dollar up – oil down. Now, if the Federal Reserve sees inflation hit its target of 2%, we might reasonably expect an interest rate hike, or even multiple hikes, which would make the dollar stronger and push the price of oil lower.

If you think the Fed will hike rates two or three times, you might think $30 a barrel oil is where we are headed. And that would certainly be the case if the US imported oil the way we did in the past, but over the past 8 years we have cut our imported oil by more than half, to about 5 million barrels a day; thanks to the production from the shale oil patch. So let’s look at the shale fields.

Energy bankruptcies continue to pile up. Breitburn Energy Partners and some of its units have filed for restructuring under Chapter 11. The oil & gas MLP said it secured a $75M debtor-in-possession financing to help fund its operations during the bankruptcy process. Also Sandridge Energy reached a pre-packaged bankruptcy pact with lenders. It has agreed on a reserve-based lending facility and a swap of about $3.7 billion of other funded debt for equity. Recent asset sales have been terrible and that’s why you’re seeing this wave of restructuring of debt rather than sales.

Few struggling energy companies have been able to find buyers, although there was a rare exception today. Range Resources agreed to buy Memorial Resource Development Corp. in a $3.3 billion all-stock deal to take advantage of growing demand from natural gas exports and chemical manufacturers. Despite this anomaly, we know that investment in the oil patch has slowed dramatically. C&I, or commercial and industrial loan activity continues to drop on a weekly basis. Still, mostly we are seeing Chapter 11, and that means higher oil prices will lead to all out pumping to get out from under reorganization.

Then consider what is happening with Saudi Arabia, which suffered another cut to its credit rating on Saturday as Moody’s Investors Service downgraded the country along with Bahrain and Oman because of the past slump in oil prices.  The credit rating agency said: “A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks.”

As a side bar, the US Treasury today said the Saudis hold about $116 billion in US government debt, far less than the $750 billion the Saudis threatened to cash in if Congress enacts a bill allowing the monarchy to be held responsible in American courts for any role in the Sept. 11, 2001, terror attacks. It also shows the Saudis have been burning through their foreign exchange reserves. How can the Saudis improve their financial situation? Easy – they pump more oil. Goldman might be right that the supply glut is over for the time being, but the higher the price, the more supply comes to market. And that brings us to…

Royal Dutch Shell is eyeing a possible $40 billion spinoff of non-core assets around the globe as it grapples with $70 billion in debt following its takeover of BG Group earlier this year. Shell is establishing a separate division, New Energies, to invest in renewable and low-carbon power. Even if we see more supply in the oil market, we still have to consider demand; and there we are seeing a definitive shift away from oil to renewables, which should put a permanent ceiling on demand.

Pfizer announced it would buy Anacor Pharmaceuticals in an all-cash deal worth about $4.5 billion, as it turns to smaller deals after walking away from its scuttled acquisition of Allergan. The deal values Anacor at $99.25 per share or a premium of 55% over Friday’s close. Anacor has no products on the market, but it does have a treatment for eczema under review at the Food and Drug Administration.

Gannett said it raised its all-cash offer for Tribune Publishing to about $475 million, just two weeks after Tribune’s board rejected a lower bid. The revised offer represents a 22% increase over its prior bid and a nearly 100% premium over Tribune Publishing’s share price on April 22.

Warren Buffett’s Berkshire Hathaway revealed a new stake in Apple. Berkshire now holds 9.81 million Apple shares worth just over $1 billion. For the record, Warren has never been a big fan of tech, so the Apple bet probably came from one of his portfolio managers, Todd Combs and Ted Weschler.

European antitrust authorities will impose a record fine on Google in the coming weeks for abusing its dominance of the online search market in the region, according to the U.K.’s Telegraph newspaper. The European Commission is planning to fine the tech giant about €3-billion-euro, surpassing the toughest antitrust punishment to date. Google will also be banned from continuing to manipulate search results to favor itself and harm rivals.

Following a meeting with the U.S. Labor Secretary Thomas Perez, Verizon management and the unions representing the company’s 39,000 East Coast workers on strike have agreed to resume negotiations tomorrow. The employees walked out on April 13, after having failed to reach an agreement on a new labor contract over issues including healthcare, moving positions offshore and temporary job relocations.

Amazon is getting ready to roll out new lines of private-label brands; the strategy is aimed at boosting margins as well as gaining insights into what goods consumers purchase. The new brands will include items such as nuts, spices, tea, coffee, baby food, vitamins, diapers and laundry detergents. Amazon will only offer these labels to its Prime subscribers, and the first of the brands could start appearing at the end of May or early June.

Philips is seeking to raise as much as $1.1 billion from the initial public offering of its lighting unit as it pushes ahead with a plan to list on Amsterdam’s stock exchange after a private sale didn’t result in a buyer. Final pricing is set for May 26, with the listing commencing the following day.

Hawaii has become the first state in the nation to sue Takata over its air bags, seeking $10K per violation for more than 70,000 cars sold across its islands. According to the Hawaii Office of Consumer Protection, Takata switched to ammonium nitrate – a cheaper inflator component – despite the fact that it was widely known to be an unstable and dangerous chemical. The lawsuit also names Honda, the automaker most affected by the continuing mass recalls of Takata airbags.

The world’s largest sovereign wealth fund is going to sue Volkswagen. Norway’s sovereign wealth fund is set to sue Volkswagen over the huge losses it suffered as a result of Volkswagen’s emissions scandal. VW shares are down over 23% since the scandal erupted in October 2015.

The Supreme Court handed down a decision on Zubik v. Burwell, the religious challenge to the contraception mandate Obamacare. The Affordable Care Act requires most employers to offer health insurance to their employees, including contraceptive coverage. Religious nonprofits were offered a work-around that allows them to file a one-page form with the federal government, so that the insurance company can step in and provide the coverage directly to their employees. But the plaintiffs claimed that infringed on their religious freedom.  The Supremes decision today was a no-decision; they kicked it back to the lower court and said, essentially, work it out.

Financial Review

Bad Medicine

Sinclair Noe — April 6, 2016

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

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DOW + 112 = 17,716
SPX + 21 = 2066
NAS + 76 = 4920
10 Y + .03 = 1.75%
OIL + 1.84 = 37.73
GOLD – 8.90 = 1223.30

The FOMC issued the minutes from its last meeting, where the Fed left rates unchanged and lowered its forecast for hikes this year from four to two. Policymakers debated whether to raise rates but a consensus emerged that risks from a global economic slowdown warranted a cautious approach. According to the minutes, many Fed members said they were concerned that interest rates were still so low that the central bank had limited firepower to respond to shocks from abroad.

The proposed $160 billion merger between US-based Pfizer and Ireland-based Allergan is dead. Changes in U.S. tax codes dealt a blow to the largest-ever heath sector deal. New regulations issued Monday by the Treasury Department targeted so-called inversions, under which a U.S. company moves its base to a country with a more favorable taxation environment. Pfizer is expected to pay Allergan a $150 million breakup fee.

With the deal behind it, Pfizer said it would decide this year about whether to split off its hundreds of generic medicines into a separate business. Allergan said it would move ahead with plans for its $40.5 billion sale of its generic drug business to Israel’s Teva Pharmaceutical Industries. It expects the transaction to close by June.

The chairman of the U.S. House Transportation and Infrastructure Committee has come out against Canadian Pacific’s proposed railroad merger with Norfolk Southern, dealing another blow to the likelihood of a deal. Bill Shuster noted that CP Rail had actively pursued some sort of merger in the U.S. since 2014, which he said “has done nothing but create uncertainty in the rail industry.”

The Justice Department has filed a lawsuit aimed at stopping Halliburton from merging with Baker Hughes, a deal that would combine the No. 2 and No. 3 oil services companies. The DOJ says the deal threatens to eliminate head-to-head competition in 23 products and services used in oil exploration and create a duopoly with market leader Schlumberger. A merger might still happen if they divest assets or make other accommodations, but more than likely, this kills the deal.

Oil prices are rallying on hopes that both OPEC and non-OPEC members will agree to an output freeze at upcoming talks in Doha on April 17. Fresh comments from Kuwait and Russia suggest that global producers could reach a supply agreement deal despite conflicting statements by participants Saudi Arabia and Iran. Crude is also getting a boost from API industry data that showed U.S. crude inventories falling by 4.3 million barrels last week.

Clean energy investment broke new records in 2015 and is now seeing twice as much global funding as fossil fuels. One reason is that renewable energy is becoming ever cheaper to produce. Government subsidies have helped wind and solar get a foothold in global power markets, but economies of scale are the true driver of falling prices.

Just since 2000, the amount of global electricity produced by solar power has doubled seven times over. Even wind power, which was already established, doubled four times over the same period. For the first time, the two forms of renewable energy are beginning to compete head-to-head on price and annual investment.  The reason for the strong growth in clean energy is that it’s a technology, not a fuel. As such, efficiency increases and prices fall as time goes on. What’s more, the price of batteries to store solar power when the sun isn’t shining is falling in a similarly stunning arc.

Global bond yields fell to a record, a warning sign for the worldwide economy. The yield on the Bank of America Global Broad Market Index dropped to 1.3%, the lowest in almost 20 years of data. A third of the world’s developed-market sovereign debt now has negative yields, after Europe and Japan cut interest rates below zero to counter deflation.

Investors rushed to higher-yielding debt, fueling the global rally. Japan’s economy contracted in the last quarter of 2015, while the Eurozone’s barely grew. China this month cut its growth target. Bond yields indicate investors expect inflation worldwide to be about 1.1 percent. The figure dropped to 0.89 percent in February, the lowest level in more than five years.

The “Panama Papers” have claimed their first casualty: Iceland’s Prime Minister, Sigmundur Gunnlaugsson said he stepped down from his post, insisting it was a resignation, after the leak revealed his wife’s ownership of a shell company set up in the British Virgin Islands.

Today, comes word that at least three of the seven people on the Chinese Communist Party’s most powerful committee, including President Xi Jinping, have relatives who have controlled secretive offshore companies. It is uncertain what will happen in China, where most people aren’t even aware of the leaked documents. Chinese government officials have blocked internet searches and online discussion that involve the words “Panama Papers”.

Apparently information about the leaked documents and the players involved will be dished out on a near daily basis. Names of US citizens are expected in about one month. It will take some time to devour 11.5 million documents and connect the dots between 14,000 clients of Mossack Fonseca and the 214,000 offshore entities they created.

Here is what we do know; the system is rigged, and unless you are part of the one percent, it is rigged against you. Legislatures don’t write laws for you, courts don’t secure justice for you. The taxes you pay are not paid by people who are much wealthier than you; they cheat the system and they get away with it.

It is hard to muster righteous indignation because rational thought and recent history tells us it is nothing more than an exercise in futility. We might reasonably expect a few indictments of minor players, sacrificial lambs for the slaughter.  We know the system is rigged and the elites are cheating the rest of us; the only surprise would be if they weren’t cheating us. The big question that’s circling around the Panama Papers scandal at the moment is why more Americans haven’t been implicated.

Rumors are swirling in the comments section that wealthy Americans have bribed their way out of mention in the documents. It might just be that Mossack Fonseca’s client base is largely Europeans, Asians, and Latin Americans, because US citizens can just set up an anonymous shell company in Nevada, or Delaware, or South Dakota; no need to deal with a Panamanian law firm. As the details from the Panama Papers are dribbled out for consumption, we will see more Americans named.

Puerto Rico’s financial crisis is escalating. The island has taken steps toward a unilateral moratorium on all government debt payments, a sudden move that surprised both Washington and Wall Street. The Puerto Rican legislature passed an emergency declaration authorizing the governor to suspend payments on $72 billion in public debt—setting up a dramatic showdown between Puerto Rico and hedge funds amid the island’s historic debt crisis.

The bill authorizes the Puerto Rican governor to “protect the health, security and public welfare … by using government funds first and foremost for public services.” The emergency measure was in response to a suit filed by hedge funds attempting to freeze the assets of Puerto Rico’s Government Development Bank in efforts to stop the bank from spending money on the island that the hedge funds want to go toward upcoming debt payments.

San Francisco has become the first U.S. city to mandate six weeks of fully paid parental leave (in companies with 20 or more workers), requiring employers to shoulder much of the cost and exceeding federal and state rules for private-sector employees. California’s governor Jerry Brown on Monday signed into law a bill raising the state’s minimum wage from $10 to $15 an hour by the year 2023.

A big change for investors today, as the Labor Department unveiled the final version of its long-awaited fiduciary rule, requiring financial professionals to put their customers’ interests ahead of their own. The language is tougher than an existing rule that only requires brokers to ensure products are “suitable.” The Labor Department made some concessions to the financial industry in the final version of its highly-anticipated fiduciary rule.

In one of the biggest changes from the initial proposal, the final rule simplifies the “best interest contract,” a provision that allows brokers to continue to get paid commissions so long as they make a variety of disclosures to customers.  Unlike the draft proposal, the final rule does not restrict brokers from pushing proprietary products, splitting revenue with creators of funds they promote, or recommending risky, high-fee investments in alternative assets and certain annuities.

Additionally, the final rule includes a “grandfather” provision that won’t require brokers to adhere to a fiduciary standard for their previous recommendations to customers. The rule also loosens previously proposed disclosure requirements for fees. While the initial rule required annual disclosure of fees, the final rule removes that requirement. The final rule also eliminates a requirement to provide clients with one-, five- and ten-year projections of fees at the point of sale.

BP will be able to deduct a big chunk of its $20 billion Gulf of Mexico oil spill settlement for tax purposes. Under U.S. law, companies are not allowed to deduct penalties they pay as part of a settlement, but only $5.5 billion of the $20 billion cost of the settlement is a fine. BP can classify the remainder as “ordinary business expenses,” which are deductible.

Forget Apple vs. the FBI, WhatsApp just switched on encryption for over a billion people. Every conversation on the messaging service, whether it be a private or group chat, will now have full end-to-end encryption, thus making the recipient the only person who can see the message. WhatsApp was bought by Facebook for $19 billion in 2014.

Financial Review

Inversion Dysfunction

Sinclair Noe — November 23, 2015

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

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DOW – 31 = 17,792
SPX – 2 = 2086
NAS – 2 = 5102
10 YR YLD – .01 = 2.25%
OIL + .09 = 41.99
GOLD – 8.50 = 1069.70
SILV – .04 = 14.25

Belgian authorities have extended a lockdown of Brussels for a fourth straight day after police raids searching for those behind last week’s Paris attacks failed to find a prime suspect. The Belgians say they have credible threats of imminent attacks against public gathering places like shopping malls and public transportation. The lockdown will see Brussels’ subway and many shops closed, as well as schools, offices, and mosques; although it is doubtful the terrorists are in mosques.

France’s economy slowed following the Nov. 13 terror attacks in Paris. However, that slowdown in the eurozone’s second-largest member wasn’t sharp enough to slow the Eurozone as a whole.

Economic activity in the eurozone grew at the fastest pace since May 2011 in November, giving some optimism over the health of the region’s economy. Markit’s flash composite Purchasing Managers’ Index climbed to 54.4 from 53.9 last month, as a recovery continued to be led by the service sector. Growth meanwhile accelerated to a three-month high in Germany, where Markit’s flash composite PMI rose to 54.9 from 54.2, fueled by a big improvement in new business.

A reading of manufacturing sentiment in the US fell in November to its lowest level in 25 months. The flash manufacturing purchasing managers index from Markit fell to a reading of 52.6 from 54.1 in October, with all five of the PMI components deteriorating. Any reading above 50 indicates the manufacturing sector is still expanding.

Sales of previously owned homes in the U.S. fell 3.4% in October to an annual rate of 5.36 million. Despite the decline last month, existing home sales are still 3.9% higher compared to the same period a year ago. The National Association of Realtors reports the median price of homes sold in October, meanwhile, was 5.8% higher vs. a year ago at $219,600.

Foreclosures and short sales dropped to 6% in October, down from 9% a year ago, and the lowest level since the National Association of Realtors stared tracking distressed sales in October 2008. By region, existing home sales in the West fell 8.7% in October, but are still 2.7% above a year ago.

The economic data continues to show steady, although sluggish growth; in other words, good enough for a rate hike in about 3 weeks when the FOMC meets. And we have been hearing from the Fed policymakers that they generally think it is time for a rate hike, with the caveat that they are data dependent.

Their intentions have been well telegraphed, and the data would have to be pretty nasty to avoid a rate hike. The Fed has pretty much run out of reasons to keep rates at zero, and leaving rates unchanged would raise a red flag that something evil is lurking. So we can figure that a rate hike has now been priced into the market, and then the question is how much more they will tighten and over what period of time. And the most likely answer is small and slow; again, this has been priced into the markets.

By about the middle of next year we should learn more about how the Fed will handle its balance sheet. And the big question is whether the Fed can pull it off. Other central banks have been less-than-successful in their efforts to pull off of the zero bound, not exactly a hopeful precedent.

Profits from S&P 500 companies have fallen by about $25 billion in the first three quarters of this year, and a further drop is expected before the end of 2015 as energy companies battle with lower oil prices and a sharp rally in the dollar hits exporters. About 96% of S&P 500 companies have reported third quarter results so far, and their aggregate net income from continuing operations for the first three quarters is $804 billion, compared with $828 billion for the first three quarters last year.

The aggregate revenue for S&P 500 companies has fallen by $287 billion over the same period last year. On a share-weighted basis, S&P 500 profits were down 3.3 percent on year in the third quarter, making this earnings season the worst since 2009, and marking a second consecutive quarter of negative earnings growth.

Oil futures were volatile in early trade today, failing to hold on to a sharp but brief bounce higher after Saudi Arabia said it would work with global oil producers toward stable prices. Oil futures spiked higher after the announcement from the Saudi Press Agency. The rebound soon lost steam, because the remarks were in line with previous Saudi statements. So far, there’s little indication Saudi Arabia is prepared to begin cutting production.

Copper lost 2% to the lowest level since 2009. Nickel touched the lowest in more than a decade; there is a supply glut right now. The London Metal Exchange’s index of six industrial metals is having its worst year since the global financial crisis in 2008.

Charts of the commodity indices are the definition of a downtrend since 2011. Two factors in the energy and materials sectors: a supply glut and a stronger dollar. That means some downward pressure on stocks, but generally good news for consumers. The average nationwide price of unleaded gasoline is expected to hit $1.99 on Thanksgiving; that’s down about 82 cents from Thanksgiving last year. I’ve seen prices around $1.85 a gallon here in Phoenix.

Pfizer and Allergan will merge in a tax inversion deal worth about $160 billion that would create the world’s biggest drug maker by sales. The takeover would be the largest inversion ever, moving one of the top names in corporate America to a foreign country. Such deals enable a U.S. company to move abroad and take advantage of a lower corporate tax rate; in this case, the new Pfizer will have corporate headquarters in Dublin Ireland, even though their administrative headquarters will be in New York.

A Pfizer-Allergan combo would still face anti-trust scrutiny, but the US Treasury, concerned about losing tax revenue, has been taking steps to clamp down on tax inversion deals, but it doesn’t look like the existing rules are enough to stop this deal. Pfizer is confident the deal will pay off in lower taxes and cost cutting, unless…, unless Medicaid and Medicare changed their rules and started negotiating drug prices; in which case they could require that administrative headquarters match corporate headquarters, or else.

Looking to create the world’s largest ATM maker, Diebold has launched a $1.8 billion bid in stock and cash for German rival Wincor Nixdorf. A deal would see the two companies land about 35% of the ATM market, leaving NCR, the global number two, with an estimated share of 25%. Wincor expects the transaction to yield at least $160M in annual cost savings.

Petco agreed to be acquired by CVC Capital and the Canadian Pension Plan Investment Board for $4.6 billion. Petco, the No.2 U.S. pet supplies retailer, had been put up for sale by a group of investors led by private equity firms TPG Capital LP and Leonard Green & Partners. It’s not the first time. The two buyout firms took the company private in 2000 for $600 million, and then took it public again in 2002. Then they bought it back again in 2006 in a $1.7 billion deal, taking it private again.

AstraZeneca has finalized plans to divest its Crohn’s disease drug Entocort by selling U.S. rights to the medicine to Perrigo for $380 million. The move is part of AstraZeneca’s “externalization” drive, which aims to sell non-core products to help it fill a short-term revenue gap caused by older drugs, while investing in a pipeline of new medicines.

Walmart can’t wait for Cyber Monday. So, they are starting a day early, launching all its Cyber Monday deals on the Sunday after Thanksgiving rather than the early hours of Monday morning as in previous years. Actually, the starting line is already blurred. A number of retailers are promoting deals for ‘Black Friday’ – the day after Thanksgiving and traditionally one of the busiest shopping days – weeks in advance.

A jury in West Virginia has been struggling with the idea of sending a CEO to jail. The CEO is Don Blankenship; the company is Massey Energy. The trial was to determine whether Blankenship is guilty of conspiring to break safety laws, defrauding mine regulators and lying to both investors and regulators about mine safety. Massey’s Big Branch mine in West Virginia turned out to be anything but safe; an explosion in 2010 killed 29 people. In the year leading up to that catastrophe, mine inspectors had cited it nearly 500 times, often for “significant and substantial” violations. Blankenship faces 30 years in jail if convicted.

The prosecutors seem to have laid out a damning pattern of facts. Blankenship clearly raked in millions in compensation. He was a micromanager, with a staff of individuals whom prosecutors derided as “yes men”, who seems – based on some documents and tape recordings he himself made of his own phone calls – to have been concerned about the costs of safety regulations and their impact on production levels. Orders reached the miners to cover up safety violations, and it seemed clear to many from who they had originated, according to testimony. But for now, the jury is deadlocked.

Facebook’s Mark Zuckerberg has announced he will take two months of paternity leave after his daughter’s birth, though he did not say when she is due, or who would be his interim successor. Facebook allows its U.S. employees to take up to four months of paid maternity or paternity leave, which they can use all at once or throughout the year.

Financial Review

What Puzzle?

Sinclair Noe — November 20, 2015

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

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DOW + 91 = 17,823
SPX + 7 = 2089
NAS + 31 = 5104
10 YR YLD + .01 = 2.26%
OIL – .15 = 40.39
GOLD – 4.80 = 1078.00
SILV – .16 = 14.23 

The S&P gained 3.3% for the week, its best showing since December. The Dow rose 3.4% for the week and the Nasdaq added 3.6%. And now we begin the Santa Claus rally on Wall Street, which kicks off with the Turkey Shoot. For 35 years prior to 1987, the Wednesday before and the Friday after Thanksgiving combined were up 33 times.

The only declines were in 1964 and 1965. Subsequently, this trend changed. In the 28 years since 1987, there have been 12 declines and 16 advances. As Thanksgiving bullishness lost steam in 1987, the rally afterwards occurred more frequently.

Since 1987, DJIA has logged gains in 22 of 28 years from the close on Friday after Thanksgiving to year-end. The S&P 500 is up 0.5% in November and 1.5% thus far in 2015. There are 28 trading days remaining in 2015.

And going back to 1950, December is the best month of the year for the S&P 500 with the final 30 days of a year producing a mean gain of 2.36%. There could still be a black swan or some other exogenous event. This does not mean that we are guaranteed a rally, only that the probabilities are good.

ECB President Mario Draghi says the European Central Bank is prepared to deploy its full range of stimulus measures to fight low inflation. The comments from Draghi, echoed by other top ECB officials, suggest support among the highest ranks of the central bank for expanding its quantitative easing program and cutting the deposit rate further. 

Under the ECB’s bond buying program which was launched in March, the central bank is buying $64 billion a month in mostly government bonds. It is slated to run at least through September 2016, but many analysts expect the ECB to extend the program beyond this date.

Federal Reserve Vice Chairman Stanley Fischer says the Fed has done everything we can to avoid surprising the markets and governments” about the first hike in interest rates in nine years. It’s looking more and more like a December rate hike is a done deal, but Fischer said no final decisions have been made and officials continue to scrutinize the data. Fischer said it remains to be seen whether the emerging market countries in Asia and the world are sufficiently prepared for the potential capital flows and market adjustments so that there are no major macroeconomic consequences.

Today, St. Louis Fed President James Bullard said “The economy is going to go into a boom period,” citing the unemployment rate, which is currently 5%. Bullard added that the U.S. labor market was “basically back to normal” after the 2007-2009 financial crisis. But the Fed should not repeat what it did during the 2004-2006 tightening cycle, when it raised rates at 17 consecutive meetings, and Bullard emphasized that policymakers should be more “flexible and reactive” to data this time. 

Bullard also said the persistence of low real interest rates was “a puzzle,” echoing comments he made last week in a speech titled “Permazero”, where he entertained the possibility the United States is entering an era of permanently low rates.

It probably isn’t that big a puzzle. Demand has remained at low levels as fiscal policy contracted. Even where monetary policy produced some stimulus, it was counterbalanced with austerity. Corporate America has been on a stock buyback and financial engineering binge which cut investment in R&D and innovation and capital expenditures. The Great Recession was a knife in the back of workers and even though jobs have come back, wages have not.

As the global economy contracted, investors looked to the safe haven of the dollar and Treasuries, which pushed down exports and also kept a ceiling on rates. The financial industry has grown even larger than before the financial crisis, and it continues to be a giant black hole of derivatives and shadow banking that swallows’ productivity. I could go on, but it isn’t a puzzle.

The House of Representatives passed legislation to increase oversight over the Federal Reserve that includes a provision that would require the central bank to follow a mathematical rule to set interest rates. In May, the Senate Banking Committee already passed Republican-backed legislation to increase oversight of the Fed, but that measure doesn’t require the Fed to follow a mathematical rule.

China’s yuan may enter the IMF’s benchmark currency basket at a lower weighting than previously estimated as the institution considers making weights less related to export volumes and more dependent on financial flows. Such a change would give the renminbi a lower share in the basket than under the current formula. IMF policymakers are expected to vote on the currency’s inclusion to the Special Drawing Rights basket on November 30.

The leading economic index jumped 0.6% in October after falling in the two prior months, signaling a pickup in growth after a soft patch during the late summer and early fall. The leading economic index is a weighted gauge of 10 indicators designed to signal peaks and valleys in the business cycle.

Greece’s parliament has backed additional reforms needed to unlock €12-billion-euro from its latest bailout which will help recapitalize the country’s struggling banks and pay off overdue government debts.

Gunmen attacked a hotel in Mali in Western Africa and killed dozens of hostages. The attackers held 140 guests and 30 staff members before a counter-assault by Malian security forces, assisted by the US military, freed the hostages. The death toll is unclear but at least 27 bodies have been found in the hotel. A jihadist group based in northern Mali affiliated with Al-Qaeda, claimed responsibility.

In the past few days, clear signs have emerged showing that the terrorist attacks have had a big economic impact on Paris – one of the most visited cities in the world. A survey by a French hotel and restaurant operators’ union, suggests that sales in the city’s cafes and bars during the past week are down 44% on the same period last year, while hotels have suffered a 57% drop in business. Air France has so far refused to comment on passenger numbers and cancellations bound for Paris, but low-cost airline EasyJet said that travel to the French capital has plummeted.

The U.S. Treasury Department on Thursday took new steps designed to discourage corporate inversions, or deals that allow companies to move their legal address abroad to avoid taxes. Treasury Secretary Jacob Lew said additional steps were planned but also called on Congress to address the issue.

Will the new rules derail a Pfizer-Allergan deal? Maybe not. Allergan and Pfizer are considering structuring a merger of the drug companies so that it is an acquisition of the much bigger Pfizer by the much smaller Allergan.

Nike is buying back $12 billion worth of itself. After the market closed on Thursday, Nike announced a $12 billion stock-repurchase authorization, a 14% dividend hike, and a 2-for-1 stock split, which will go into effect on December 24.

Gap slashed its outlook. Gap announced that sales fell 3% year-over-year to $3.86 billion. Comparable-store sales across the company’s brands — Gap, Banana Republic, and Old Navy — fell 2%. Earnings came in at $0.63 per share, which was right in line with expectations.

Abercrombie & Fitch crushed expectations on profits, revenues, and same-store sales, sending the shares up by as much as 20% in early trading. Ross Stores shares moved higher, after the off-price retailer also reported better-than-expected earnings.

Tyson Foods plans to close two aging prepared-food plants, affecting 880 jobs, in the face of prohibitive renovation costs and changing demand. The closures come as Tyson continues to remake itself after its 2014 acquisition of Hillshire Brands. The company expects to cease operations at a pepperoni plant in Wisconsin and a prepared foods facility in Illinois during the second half of the year ending October 1.

Chipotle is having problems again. A new round of E. Coli infections has hit 45 people in 6 states: Washington, Oregon, California, Minnesota, New York, and Ohio. Sixteen of those people had to be hospitalized and no deaths have been reported. This follows an outbreak at the beginning of November when 22 people in Washington state and Oregon fell ill.

Massachusetts is barring people under the age of 21 from playing daily fantasy sports. While the decision limits a large demographic within the fantasy sports industry, it stops short of following the lead of NY Attorney general Eric Schneiderman, who recently declared daily fantasy “illegal gambling.” The proposals would also ban fantasy competitions based on college sports, prohibit promotions on high school and college campuses and bar anyone connected to professional sports, including athletes and agents.

Tesla Motors is voluntarily recalling all of its 90,000 Model S sedans to check for a potential problem with seat belts. An owner in Europe had an issue with a bolt holding the seat belt system in place coming loose. Tesla said the owner wasn’t involved in an accident and has determined the flaw was an installation issue.

Tesla shares dropped today, but they should have gone up; this was a voluntary recall, unlike GM which fought a recall for faulty ignition switches even as people died, or all the models using Takata airbags which exploded in a shower of shrapnel while car companies denied the problem, or VW which cheated on emissions. Tesla was proactive. No one was injured. The real question is why other car companies can get away with murder.