Financial Review

Record Setting

Sinclair Noe — August 15, 2016

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DOW + 59 = 18,636
SPX + 6 = 2190
NAS + 29 = 5262
10 Y + .04 = 1.56%
OIL + 1.19 = 45.68
GOLD + 2.90 = 1339.60

The Dow Industrial Average, the S&P 500 index, and the Nasdaq Composite index all set new record highs. If you’ve been trading markets for any time, you know that when there is price movement out of the normal range and out of the established valuations – it can get scary.

We had just a couple of economic reports to start the day. Investors appeared to shrug off weaker-than-expected reading on manufacturing conditions in the New York region.  The National Association of Home Builders confidence index rose 2 points to 60.

Energy producing stocks were higher as crude oil rallied after Russian Energy Minister Novak said that Russia is open to cooperation with OPEC to help stabilize the oil market. Oil prices recently fell 20% from the June highs, largely because there is a glut of oil.

Russia and Saudi Arabia are probably the two most important oil producers on the planet, with Saudi Arabia the de facto leader of the OPEC cartel of oil-producing nations. Russia, alongside the US, is one of the two biggest non-OPEC producers. What the two nations do regarding oil policy has profound effects on the markets. For example, at April’s massively anticipated OPEC meeting about a freeze in production, Saudi Arabia refused to cooperate unless Iran joined in any production freeze; the meeting promptly ended and the proposal fell flat on its face.

Rosneft, Russia’s state-owned oil company, reported a massive fall in profits for the second quarter of 2016, with net income down from 134 billion rubles over the same period in 2015 to 89 billion rubles. If Russia can strike an agreement with Saudi Arabia that can help boost oil prices, or at least keep them stable, that will likely allow Rosneft return to stronger profitability. Rosneft’s results come just three days after a report from the highly respected International Energy Agency argued that the supply-and-demand imbalance plaguing oil was only going to get worse in 2017, something that would further depress prices.

M&A activity is kicking off the headlines this week with an array of deals. The technology sector is still leading the global M&A market this year, but the real estate segment is not far behind. The Wall Street Journal reports Honeywell is nearing a deal to acquire privately-held, JDA Software Group for about $3 billion, including debt.

Scottsdale, Arizona -based JDA, with more than 4,300 employees, provides integrated retail and supply chain planning and execution solutions. It sells software that helps retailers, including Walgreens and Advance Auto Parts, optimize their supply chains and merchandising. The company also provides warehouse management software to manufacturers and consumer products companies.

Real-estate investment trust Mid-America Apartment will buy Post Properties for about $4 billion in an all stock deal, bringing together two major apartment owners who have benefited from a boom in rental demand. Memphis-headquartered Mid-America currently owns or has ownership interest in more than 80,000 apartment units in 15 states in the Southeast and Southwest.  Atlanta-based Post Properties has more than 24,000 apartment units in 61 communities in Georgia, Texas, Florida, North Carolina, Maryland, Virginia and Washington.

Looking to become a major player in the smart meter market, Xylem agreed to acquire Sensus USA for around $1.7 billion, including debt, according to Reuters. The acquisition comes at a time when regulatory requirements and a drive for savings are pushing both companies and consumers to tightly control their water and energy consumption.

KKR is expected to bid for television distributor Entertainment One after the owner of the preschool cartoon character “Peppa Pig” rejected an offer from ITV Plc, Bloomberg reports. Last week, eOne rebuffed a $1.3 billion takeover offer from the British broadcaster, saying it undervalued the production and distribution company.

American International Group is nearing a deal to sell its mortgage-guaranty unit to Arch Capital Group for about $3.4 billion. The Wall Street Journal reported the companies could strike a deal as soon as early this week, although it added that the talks could still fall apart.

San Francisco Federal Reserve President John Williams says central bankers and governments must come up with new policies to buffer their economies against persistently low interest rates that threaten to make future recessions deeper and more difficult to avoid.

Williams said setting higher inflation targets, tying monetary policy directly to economic output, instituting government spending programs that automatically kick in during economic downturns, and boosting investment in education and research are all policies that should be considered.

Williams also called for changes to fiscal policy, perhaps tying tax rates or government spending to unemployment rates. Doing so, he said, would allow “predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries.”

Google’s high-speed-internet business is slowing down. Alphabet’s Google Fiber unit is rethinking how to deliver internet connections in about a dozen metro areas, including Los Angeles, Chicago and Dallas, after its initial rollouts proved more time-consuming and expensive than anticipated. In San Jose, Calif., and Portland, Ore., Alphabet has suspended projects while investigating alternate technologies.

Google Fiber is now considering wireless technology to connect homes rather than underground fiber-optic cables. Elsewhere, Google is leasing existing fiber or asking cities or power companies to build the networks. The strategy shift comes after Google Fiber reached just six metro areas in four years, illustrating the difficulty and expense of digging up streets and laying thousands of miles of cables.

About 40 companies have signed on to the so-called Privacy Shield agreement, the new data-protection pact that allows American firms to transfer information on European citizens to servers in the U.S. Among them: Microsoft, Workday and Salesforce.com. According to the Commerce Department, “there are nearly 200 applications currently involved in our rigorous review process” and the list will be updated on a rolling basis.

Volkswagen has won German regulatory approval for technical fixes on another 460,000 diesel cars fitted with software that cheats emissions tests, raising the number of vehicles cleared for repair to over 5 million. Approval by Germany’s motor vehicle authority KBA is valid for countries throughout Europe where 8.5 million diesel cars are affected by VW’s scandal. About 11 million autos are implicated globally.

Meanwhile, German carmaker Audi is rolling out technology that will allow its vehicles in the United States to communicate with traffic signals. It’s called vehicle-to-infrastructure technology, or V-to-I. The technology allows traffic signals and other infrastructure to exchange safety and other operational data wirelessly to vehicles over the cloud.

For example, the system allows the vehicle to display a countdown before a red light turns to green. The countdown will also appear on the dashboard if the vehicle determines it will not be able to make an approaching light before it turns red, to allow the driver to begin to brake. Audi plans to roll out the capability in five to seven U.S. cities this year.

Nissan Motor has come up with a new type of gasoline engine it says may make some of today’s advanced diesel engines obsolete. The new engine uses variable compression technology, which Nissan engineers say allows it at any given moment to choose an optimal compression ratio for combustion – a key factor in the trade-off between power and efficiency in all gasoline-fueled engines. The technology comes at a time when diesel engine technology has been tarnished by Volkswagen’s emissions cheating scandal.

The new Variable Compression-Turbo (VC-T) powertrain, expected to be officially unveiled at next month’s Paris motor show, will initially be showcased in an Infiniti car to be unveiled next year. The turbo-charged, 2-liter, four-cylinder VC-T engine averages 27 percent better fuel economy than the 3.5-liter V6 engine it replaces, with comparable power and torque. Nissan says the new engine matches the diesel engine in torque – the amount of thrust that helps determine the car’s acceleration. The engine is also cheaper than today’s advanced turbo-charged diesel engines.

Celebration: New Highs for the DJIA and the S&P 500

Financial Review

Milk and Cookies: New Highs for the DJIA and the S&P 500

Sinclair Noe — July 12, 2016

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DOW + 120 = 18,347
SPX + 14 = 2152
NAS + 34 = 5022
10 Y + .09 = 1.52%
OIL + 2.04 = 46.80
GOLD – 21.90 = 1333.70

It was a record high close for Dow industrials and S&P 500 today. Dow Jones Industrial was up 120 points to 18,347, taking out the old record from May of 2015. S&P 500 up 14 to 2152, second consecutive record high close for the S&P 500. Nasdaq up 34 to 5022.

Japan’s Nikkei extended gains overnight,  rising 2.5% to almost recapture its pre-Brexit level, after Prime Minister Shinzo Abe ordered a new round of fiscal stimulus. The yen had its biggest two-day slide since 2014. Former Federal Reserve Chairman Ben Bernanke met with Prime Minister Shinzo Abe Tuesday. Bernanke noted during the face-to-face meeting that Japan’s central bank still has a range of monetary easing measures at its disposal. Brushing aside a view among Japanese economists that BOJ policy has reached its limit, Bernanke’s assessment added to speculation that Tokyo will unleash new rounds of fiscal and monetary stimulus to reboot Abenomics, Abe’s growth plan. It sounds like Bernanke is giving instructions on how to use the helicopter to make it rain yen.

The European Commission has slashed its U.K. and Eurozone growth forecasts following the Brexit vote, stating the cumulative negative impact for British GDP would be about 1%-2.5%, and the euro area between 0.2%-0.5%, by 2017. For the first time in more than seven years, analysts are finally expecting some action on UK interest rates from the Bank of England when it meets for its first post-Brexit policy decision on Thursday. The central bank is widely seen as reducing its key interest rate to 0.25% from a current record low of 0.5%, where it has stood since March 2009.

So, a fresh round of stimulus from Japan, plus lower interest rates in the UK, plus decent economic news from the EU and a high probability of stimulus from the ECB. Also, China performed a stealth devaluation of the yuan to support its economy. Around the world, there is a push for more stimulus or QE, and in the US, the Fed seems to have abandoned the idea of rate hikes, even as last Friday’s jobs report showed a strong rebound. Central bank policy, essentially throwing money at the markets, works – at least it works to lift the financial markets. Just in case you missed what was happening the last 8 years.

Global stocks erased losses sparked by the UK’s Brexit vote. The MSCI All-Country World Index capped a 7.6 percent rally from its post-Brexit low to reach the highest level in a month. The pound rose the most since the vote. US crude oil surged the most in three months. Treasuries fell in the biggest 2-day sell-off this year.

The IMF said in its formal annual review of the U.S. economy and policies that the June 23 “Brexit” vote has prompted a rise in the dollar that has been less than feared, up about 1% in nominal effective terms, while stock markets have recovered losses incurred right after the vote. Meanwhile, a safe-haven rush into U.S. Treasuries has lowered yields, and home and business financing costs, considerably. The IMF’s conclusion: “The net effect on growth is pretty negligible.” The IMF kept unchanged its previous U.S. economic growth forecasts of 2.2 percent for 2016 and 2.5 percent in 2017.

However, the IMF said a “more complex and harmful” downside risk is that the potential growth rate may be lower than previously estimated, with a smaller output gap. The United States faces a confluence of forces that will weigh on future gains, including a rising share of the U.S. labor force shifting into retirement, aging basic infrastructure, low productivity gains and labor markets and businesses that appear less adept at reallocating human and physical capital. It said growth in future years under this scenario could settle at well below 2 percent.

U.S. wholesale inventories barely rose in May as automobile stocks recorded their biggest drop in more than 2-1/2 years, suggesting inventory investment likely remained a drag on economic growth in the second quarter.  The Atlanta Federal Reserve’s GDPNow forecast model shows the US economy likely expanded at a 2.3 percent annualized rate in the second quarter following the latest data on wholesale trade. The latest GDP estimate was slightly lower than the 2.4 percent figure calculated on July 6

Job openings in the U.S. fell in May to the lowest of the year. The Labor Department’s JOLT survey shows job openings fell to a seasonally adjusted 5.5 million in May from a record 5.85 million in April. That’s the biggest decline in openings since last August. The fewer number of jobs available could be a blip that gets reversed in June. The economy added a whopping 287,000 jobs last month after just a meager 11,000 gain in May.

What is clear is that hiring has slowed in 2016. The hiring rate among private sector companies slipped to 3.8% in May to mark the lowest level in more than two years. The quit rate was unchanged at 2%, which is actually a negative; people quit their jobs in order to take new jobs, so more quits are seen as more mobility in the labor force.

Small-business sentiment rose for the third straight month in June, but remained muted compared to its long-term average. The optimism index from the National Federation of Independent Business rose 0.7 to 94.5. Only three of ten components declined in June, and the biggest jump was in the number of people who expect the economy to improve. Still, the index has spent most of the economic expansion well below its long-term average of 98.

A new commercial data pact between the European Union and the United States has been approved and companies such as Google and Facebook can sign up by the end of the month. The new agreement that will allow the transfer of online data across the Atlantic; this includes everything from social media posts and search queries to information about workers’ pensions and payroll. The pact, known as the EU-U.S. Privacy Shield will underpin over $250 billion dollars of transatlantic trade in digital services annually. The previous such framework, Safe Harbor, was struck down by the EU’s top court in October on the grounds that it allowed U.S. agents too much access to Europeans’ data.

An arbitration court ruled that China has no historic title over the waters of the South China Sea and has breached the Philippines’ sovereign rights with its actions. China boycotted the hearings at the Permanent Court of Arbitration in The Hague and vowed to ignore the ruling and said its armed forces would defend its sovereignty and maritime interests. China claims most of the energy-rich waters through which about $5 trillion in ship-borne trade passes every year. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

Amazon.com said this morning that some customers were reporting difficulty with checkout after making purchases in its highly publicized “Prime Day” shopping event. The glitches seem to have been worked out. The one-day sale, for members of Amazon’s $99 per year Prime subscription service, is expected to generate up to $1 billion in sales, more than double the amount last year.

Amazon devices such as Echo, Fire TV, Fire TV Stick and Fire tablet are available at big discounts as are a host of other products from high-end televisions to shoes and toys. Big U.S. retailers such as Wal-Mart and Gap are also offering midsummer promotions online to cash in on the hype around Amazon’s Prime Day sale. For Amazon, it is a chance to grow its base of prime customers; who then end up spending more than twice as much each year compared to non-subscribed customers. Users who subscribe to Amazon Prime membership are promised 100,000 special bargains by the e-commerce platform, launching the kind of purchasing frenzy that saw more than 34.4 million items sold last year.

To move all that stuff, Amazon has a sprawling logistics network, designed to deliver most Prime products in just 48 hours. In some warehouses, known as “Fulfillment Centers,” robots have even been introduced to shorten the “click-to-ship” gap to just 15 minutes.