Financial Review

More Drift

Sinclair Noe — June 6, 2017

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DOW – 47 = 21,136
SPX – 6 = 2429
NAS – 20 = 6275
RUT – 1 = 1394
10 Y – .03 = 2.15%
OIL + .58 = 47.98
GOLD + 14.30 = 1294.60
BITCOIN – 0.15% = 2909.82
ETHEREUM + 6.26% = 264.16

Once again stocks drifted aimlessly. We are not seeing a risk off trade, but nobody is going full hog, risk on. We are waiting for Thursday. It could be a big day.

First, we have the European Central Bank, which has remained committed to its ultra-loose monetary policy since March 2016, when it cut its key interest rate, the main refinancing operations, to zero per cent, meaning it does not charge interest to banks borrowing money.

The bank has come under sustained pressure to raise interest rates as inflation has recovered, with some economists expecting the ECB’s governing council to remove a reference to “lower” interest rates in the future.

Then there is a parliamentary election in the UK. Prime minister Theresa May squares off against Jeremy Corbin. The major issues in the election are the National Health Service (NHS), Brexit, terrorism and national security, income inequality, how much money Britain has and what it should be spent on…

I’m joking of course; the major issues are why Theresa May hates appearing in public and whether Jeremy Corbyn loves the IRA. May leads the Conservative party. Corbin leads the Labor Party. But wait, there’s more – parties that is; including: The Scottish National Party, UKIP and Liberal Democrats.

And even though Labor has closed the gap on Conservatives, there is a possibility nobody wins outright – and that might mean a coalition. Hopefully, we’ve all learned not to bet on British elections.

Back in the US, Thursday morning brings the James Comey testimony on Capitol Hill. The White House confirmed that Trump would not seek executive privilege to stop Comey from appearing before the Senate Intelligence Committee.

Comey is expected to face questions about whether Trump pressured him to cancel an investigation into former national security adviser Michael Flynn, whose links to Russia are under scrutiny. The former FBI chief will reportedly stop short of saying that Trump interfered with the agency’s probe into Flynn. Yet he is also likely to face questions about a loyalty pledge reportedly requested by Trump.

Elected on pledges to overhaul the healthcare system and slash taxes, Trump has yet to achieve a major legislative win, and time is running out before lawmakers leave Washington for the August break.

Today, he met with senior Republicans. Senate Majority Leader Mitch McConnell said Senate Republicans are “getting close” to a healthcare plan after he presented an outline at a lunchtime meeting but he declined to say when he might bring it up for a vote. Other senior Republicans, such as Senator Orrin Hatch, said they may vote by early July.

Anthem, one of the nation’s largest health insurers, announced that it will stop offering policies in the Ohio marketplace next year. While Anthem, which operates for profit Blue Cross plans in more than a dozen states, said it has not made any decision about its participation in other state’s exchanges.

Anthem has previously warned that it might leave the marketplaces because of the uncertainty over the future of the individual market and the struggle over federal law. The company said, “an increasing lack of overall predictability does not provide a sustainable path forward to provide affordable plan choices for consumers.”

The Pentagon renewed praise of Qatar for hosting a vital US air base and for its “enduring commitment to regional security,” sticking to a message of reassurance even as President Trump, via Twitter, applauded a decision by Arab powers to cut ties to the Gulf ally, calling the diplomatic isolation was just punishment for the country’s support of Islamic extremists.

He also said the action is proof that his meeting with Persian Gulf Arab leaders in Saudi Arabia earlier this month was “already paying off.” More than 11,000 US and coalition forces are deployed to or assigned to al Udeid Air Base, from which more than 100 aircraft operate.

The latest job openings and labor turnover survey — known as the JOLTS report — released by the Bureau of Labor Statistics on Tuesday showed there were 6.04 million jobs open in the US in April. In the same month, last year there were 5.64 million jobs open. This is the most ever for the series dating back to its inception in 2001.

The jump in job openings also came as hiring and firing declined slight in April. The number of unemployed workers who are new entrants to the workforce continues to fall, indicating that people like college grads who go from being out of the workforce altogether are quickly getting jobs.

The number of unemployed workers per job opening in the U.S. was at a record low of 1.2. This compares to there being more than six unemployed workers per job opening in the wake of the financial crisis.

Additionally, almost twice as many people are quitting jobs as getting laid off, a sign that workers are confident they’ll find another job. In April, the quits rate fell slightly to 2.1%, with the 3.03 million folks who quit jobs during the month coming in only slightly lower than 16-year high for total quits we saw back in January.

Scott Pruitt, administrator of the US Environmental Protection Agency, has a new favorite statistic. Pruitt claims that 50,000 coal jobs, or coal and mining jobs, had been created in the US since the fourth quarter of last year. He’s off by about 49,000.

There has been an increase of about 50,000 mining jobs since October, but that number includes oil and gas exploration and drilling, and metal mining jobs, and only about 30,000 of those were during the Trump administration, and only about 1,000 of those jobs are in coal mining.

The US coal-industry employs about 51,000 workers total. Last month, 400 coal jobs were added—not 7,000. Kansas City Power & Light announced it will shut down several generating units that burn coal. And since Octoberr of 2016, the general merchandise retail sector has lost just over 95,000 jobs, nearly twice as many jobs lost in retail as in the entire coal industry.

Meanwhile, one company – Tesla,  has about 30,000 employees and they are hiring more all the time – 1,861 job openings in the US. And the company isn’t just looking for coders. These positions are blue-collar, white-collar, skilled, unskilled. And while they are generally concentrated in Tesla’s home state of California, there are openings all over the country.

The national home price index from data provider CoreLogic was 6.9% higher than a year ago, and 1.6% higher than in March. Washington was the hottest state for prices, notching a 12% annual gain. Arizona posted a 6% annual gain in home prices. CoreLogic forecasts national home price growth of 5.1% in the coming 12 months.

Stocks hit records on Friday but have been drifting lower this week. Meanwhile the bond market has been in rally mode, up about 4.7% year-to-date. If the year ended today, it would be the best annual performance since 2011. If the pace continues through December, it would be the best performance since 2003.

When we started the year, most people were expecting the Trump administration’s pro-growth policies would spark inflation and lead to higher rates. That hasn’t happened. Meanwhile, China is buying US Treasuries again, after halting purchases last year – a move that might help cushion the blow if the Federal Reserve starts unwinding its massive bond portfolio.

The Fed is expected to raise borrowing costs next week, narrowing the rate gap between the US and China and making American debt more attractive.

The S&P 500 just posted a third straight quarter of year-over-year earnings growth, but there is a trend of more and more companies that are not posting profits. About 10% of the companies in the S&P 500 have posted losses in the last 12 months, something we haven’t seen since 2010.

No surprise that energy companies made the list of losers. A small surprise is that tech and consumer stocks are also showing up on the list. Overall, the 51 companies lost $55 billion over the last year. Trailing 12-month earnings in the S&P total about $986 billion, or $113 per share, just below an all-time high reached in 2014.

Take out the companies losing money and the total hits $1.04 trillion, or $117 per share, the highest ever. The $4-a-share gap is the widest since 2011, a year when the S&P did nothing in terms of returns.

If you are trying to figure out where in the world to invest, well ... The Korean peninsula is dealing with political uncertainty; tensions in the Middle East; South Africa’s economy has dipped into recession; Brazil is up to its chin in political corruption.

But let’s follow the money. The Institute of International Finance reports emerging markets are enjoying steady growth in capital inflows that should top $1 trillion next year, for the first time since 2014. The group expects nonresident inflows to top $970 billion this years, up from$718 billion last year, led by China, India and Brazil.

The Amazon vs. Walmart battle continues with Amazon offering its Prime subscription at a discount for US customers on government aid. Both stocks were down today.

Macy’s warned its margins could shrink further. Shares dropped over 8%. The news hit other department stores: JC Penney down 4%, Sears down 2.5%, Nordstrom down 3.6%.

Uber has fired 20 employees following an investigation by a law firm into sexual harassment and other claims. The law firm investigated 215 harassment claims going back to 2012, acted in 58 cases and took no action in 100 more cases.

Financial Review

Drifting

Sinclair Noe — June 5, 2017

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

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DOW – 22 = 21,184
SPX – 2 = 2436
NAS – 10 = 6295
RUT – 8 = 1396
10 Y + .02 = 2.18%
OIL – .27 = 47.39
GOLD + .80 = 1280.30
BITCOIN + 4.68% = 2864.70
ETHEREUM +.91% = 247.50

The markets were drifting today. After hitting record highs Friday on a very weak May Jobs Report, there just wasn’t any good news to push the markets higher. There was a bit of negative or sideways news.

On the economic data side, the Institute for Supply Management reported that their non-manufacturing index slipped to 56.9% in May, down slightly from April but still in positive territory.

The government said productivity was unchanged in the first three months of 2017 instead of declining at a 0.6% annual rate. The biggest change: The increase in output, or how many goods and services companies produce, was raised to 1.7% from 1%. The number of hours employees worked, meanwhile, was revised to a slightly higher 1.7% gain instead of 1.6%.

The updated figures show that labor costs rose more slowly than initially reported, a sign companies continue to keep costs down despite a steadily expanding economy and growing shortages of skilled labor.

Hourly compensation — pay and benefits — rose a revised 2.2% in the first quarter, but after adjusting for inflation workers lost ground. Real compensation fell 0.9%.

The upward revision in the first quarter doesn’t change the underlying weakness in productivity, the key to a higher standard of living.

Factory orders dipped 0.2% in April. For the year to date, orders are 4.4% higher than in the same period a year ago. Excluding transportation, which can be volatile, orders rose 0.1% during the month, and are 5.5% higher compared to the same period in 2016.

Activity is ticking up, but so are inventories. Stockpiles rose a seasonally adjusted 0.1% during the month and are 2.5% higher than a year ago.

Markets shrugged off the news of a series of attacks which killed several people and injured dozens in the heart of London on Saturday. The UK has a parliamentary election scheduled for Thursday, pitting the Conservative Incumbent Prime Minister Theresa May against Labor leader Jeremy Corbyn.

With the London attack dominating attention, a reduction in the number of police officers in England and Wales by almost 20,000 during May’s six years as interior minister from 2010 to 2016 shot to the top of the election agenda. Whatever the outcome of the election, the UK still must deal with Brexit.

The UK has slipped to become least attractive developed market for sovereign wealth funds one year after the 2016 Brexit referendum, according to a survey by asset manager Invesco. A survey of 97 sovereign wealth funds, pension funds and central banks with a combined $12 trillion in assets rated the UK 5.5 out of 10 for investor attractiveness, down from 7.5 in 2016.

Germany was the most attractive market in Europe, with a score of 7.8, while Italy and France followed with 6.1. The US was the most attractive place in the world to invest, earning a rating of 8 out 10.

Also on Thursday, former FBI Director James Comey is scheduled to testify before the Senate Intelligence Committee as part of the committee’s Russia-related investigation.

Saudi Arabia, Bahrain, Egypt and the United Arab Emirates have cut diplomatic relations with Qatar, having accused Qatar of supporting terrorism and destabilizing the region. The US’ biggest concentration of military personnel in the Middle East are located at an Air Force base near the Qatari capital of Doha, and is home to some 11,000 US military personnel.

The rift could cause problems for OPEC’s plans to cut oil production. With production capacity of about 600,000 barrels per day (bpd), Qatar’s crude output ranks as one of the smallest among the Organization of the Petroleum Exporting Countries, but tension within the cartel could weaken the supply deal aimed at supporting prices.

President Trump outlined a plan to privatize the US air traffic control system. The FAA spends nearly $10 billion a year on air traffic control funded largely through passenger user fees, and has spent more than $7.5 billion on next-generation air traffic control reforms in recent years.

The Aircraft Owners and Pilots Association said it will not support a plan that imposes fees on small plane owners. The major airlines generally favor the idea but Delta is opposed, saying that privatization would not save money, and would drive up ticket costs and could create a national security risk.

The proposal would require congressional approval. The president will hold a rally in Ohio on Wednesday to make a case for his $1 trillion infrastructure proposal.

The Supreme Court ruled 9-0 today that the SEC’s recovery remedy known as “disgorgement” is subject to a five-year statute of limitations. The justices sided with New Mexico-based investment adviser Charles Kokesh, who previously was ordered by a judge to pay $2.4 million in penalties plus $34.9 million in disgorgement of illegal profits after the SEC sued him.

Kokesh was sued by the SEC in 2009 for misappropriating investors’ money. His penalties covered conduct within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that time frame. The ruling represented a major victory for Wall Street firms, whose Securities Industry and Financial Markets Association trade group had urged the justices to curb the SEC’s powers.

The Supreme Court agreed to hear a major case on privacy rights in the digital age that will determine whether police officers need warrants to access past cellphone location information kept by wireless carriers, or whether that information is protected by Fourth Amendment rights to be free from unreasonable search and seizure.

The legal fight has raised questions about how much companies protect the privacy rights of their customers. The major wireless carriers receive tens of thousands of requests a year from law enforcement for what is known as “cell site location information”

The justices agreed to hear an appeal brought by a man who was arrested in 2011 as part of an investigation into a string of armed robberies in the Detroit area over the preceding months. Police helped establish that the suspect was near the scene of the crimes by securing cell site location information from his cellphone carrier.

The Supreme Court has twice in recent years ruled on major cases concerning how criminal law applies to new technology, on each occasion ruling against law enforcement. In 2012, the court held that a warrant is required to place a GPS tracking device on a vehicle. Two years later, the court said police need a warrant to search a cellphone that is seized during an arrest.

While the S&P 500 is up 9 percent this year, three of its 11 sectors — energy, telecommunications services and financials — are down by an average of 7.7 percent. The common factor in these 3 sectors is that they were all up big in the fourth quarter, perhaps too much, too fast; and now they have fallen back to earth.

Where has the big money been flowing in this market? It’s been a great year for big tech stocks, and a meager one for the small caps; the Nasdaq 100 index is up 20 percent this year, while the Russell 2000 has risen by less than 3 percent.

Markets worldwide are being propped up by a secret weapon of sorts: robust cash holdings that are at their highest in almost three decades. While stocks globally have benefited from rebounding earnings growth, bonds have also rallied amid declining inflation expectations and uncertainty around the pace of Federal Reserve interest-rate hikes.

Underpinning gains in both asset classes is $5 trillion of capital that is sitting on the sidelines and serving as a reservoir for buying on weakness. This excess cash acts as a backstop for financial assets, both bonds and equities, because any correction is quickly reversed by investors deploying their excess cash to buy the dip.

Goldman Sachs has issued a report looking at where hedge funds are investing and noted that technology is the favorite sector by far of professional investors. Hedge funds and large-cap mutual funds disagree about the prospects of the financial sector, which has been a shining spot of the Trump trade since the presidential election.

Hedge funds particularly love the “FAANG” stocks: Facebook, Apple, Amazon, Netflix and Google parent Alphabet. Last week, Amazon topped $1,000 per share. Today, Alphabet topped $1,000 per share. So, really, it has been easy to see where the big money has been flowing.

Today, Apple dropped about 1%, even as they presented their annual developers’ conference.

Apple unveiled a Siri-powered smart speaker, the HomePod. It runs $349, which is far more expensive than competing products. Apple is a bit late to the party. Amazon launched its Echo, priced at $179. Six months ago, Google introduced the Google Home speaker priced at $109.

They all use voice commands to play music, tell you the weather, read news, and answer questions. Apple ran through all the big improvements it's made to the software that runs on iPhones, iPads, and Macs. And they announced various tweaks to watches, computers, etc., etc., blah, blah.

Sorry, but these Apple conferences just don’t carry to “wow” factor they used to. It really looked like Apple was behind the curve when it comes to AI, and other big things that might get investors excited.

Separately, Foxconn’s CEO said that Apple and Amazon will join in Foxconn’s bid for Toshiba’s chip business. Representatives for Apple and Amazon declined to comment. The Japanese government has said it will block any deal that would risk the transfer of Toshiba’s key chip technology out of the country.

Financial Review

Relatively Soon

Sinclair Noe — October 12, 2016

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

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DOW + 15 = 18,144
SPX + 2 = 2139
NAS – 7 = 5239
10 Y + .02 = 1.79%
OIL – .24 = 49.94
GOLD + 2.50 = 1255.90

September’s Federal Open Market Committee meeting featured something not often seen since Janet Yellen took over as chair: honest-to-goodness dissent. Three of the FOMC’s 10 voting members opposed the final statement, even as the majority of central bank officials voted to keep its interest rate target anchored at 0.25 percent to 0.5 percent.

The Fed said in a statement after its September meeting that the case for a rate increase had “strengthened.” Today we saw the minutes of the FOMC meeting and it looks like a rate hike could come “relatively soon” if the economy continues to advance at a reasonable pace.

The account, released after a standard three-week delay, said some of the officials who voted to wait viewed the decision as a “close call.” Here’s a key quote from the minutes:
“It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation.

A couple of members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the committee had more scope to increase policy rates, if necessary, than to reduce them.”

Today, New York Fed President William Dudley said, “I think we can be quite gentle as we go in terms of gradually removing monetary policy accommodation.” So, not much urgency there, but really it looks like rates will move higher.

Wells Fargo CEO John Stumpf will retire, effective immediately; which sounds more like he was fired than retired; or at least the writing was on the wall. The problem – Wells Fargo set up 2 million fake accounts to meet sales targets.

Predictably, Wells Fargo directors deflected the blame from themselves and instead blamed rampaging hordes of renegade junior staff for opening up the unauthorized accounts to meet cross selling sales goals. Stumpf claimed 5,300 unscrupulous employees were fired for opening false accounts and he encouraged the good remaining employees to call an Ethics Hotline to report problems.

One problem is that when employees called the hotline – they were fired. Wells Fargo got hit with a $185 million fine but more significantly investors are now worried that its business model is broken. WFC has pledged to the regulator that it will now scrap all product sales goals for its retail banking staff. The bank reports its third-quarter results on Friday.

The Bureau of Labor Stats monthly JOLT survey shows monthly jobs openings decreased in August to 5.4 million. The number of quits was essentially unchanged at 3.0 million in August. The quits rate was 2.1%. The numbers of hires was 5.2 million in August, also little changed from July. The hiring rate was 3.6%, unchanged from the prior month.

Total mortgage application volume fell 6 percent for the week ended Oct. 7. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 3.68 percent, from 3.62 percent.

Many Americans are dangerously at risk of being victims of credit card fraud and as many as 41 million U.S. adults have already had their identity stolen, according to a Bankrate survey. Another 49 million know someone who has been affected. Hacked credit card fraud will reach a record $4 billion this year.

A U.S. Navy destroyer was targeted on Wednesday in a failed missile attack from territory in Yemen controlled by Iran-aligned Houthi rebels, the second such incident in four days. The USS Mason fired defensive salvos in response to at least one missile which did not hit the ship.

The White House recently allowed the sale of F-15 fighter jets to Qatar; it’s a 36 jet deal valued at up to $4 billion, with options for up to 72 fighters. Now comes word Qatar Airways will buy 100 Boeing Jetliners in a deal worth $18.6 billion. The airliner deal includes the purchase of 30 787-9 Dreamliners and 10 777-ER aircraft, valued at $11.7 billion. Boeing builds the F-15 in St. Louis. Boeing builds commercial aircraft in Seattle. The deal could affect 104,000 jobs across America.

OPEC reported an increase in its oil production in September to the highest in at least eight years and raised its forecast for 2017 non-OPEC supply growth, pointing to a larger surplus next year despite the group’s deal to cut output.

Steel demand will improve in 2017. The World Steel Association says stronger-than-expected demand from China and emerging markets will boost global demand by 0.5% in 2017.

U.K. Prime Minister Theresa May accepted that Parliament should be allowed to vote on her strategy for taking Britain out of the European Union as lawmakers who want to keep closer ties to the bloc began to assert themselves. The pound climbed against all of its 31 major peers as May’s move was seen as a conciliatory gesture, calming investor concern that she was taking a gung-ho approach to negotiations with the EU.

The growing product safety crisis at Samsung prompted the company to cut its third quarter operating guidance by 33% to $4.6 billion. The South Korean company is also contending with a new report on an exploding washing machine in the US. So, if you were wondering how much the exploding Galaxy Note 7 problem was going to cost Samsung, the answer is $2.3 billion. But that’s just a starting point. The company’s market capitalization has plunged recently, and then there is the reputational damage.

Apple had a rough back-to-school season in personal-computer sales, while Alphabet’s low-price Chromebooks were a big hit for students. International Data Corp. and Gartner reported tabulations of PC sales for the third quarter, and both analyses showed huge drops for Apple’s Mac sales in the important back-to-school quarter – down about 13%. While Lenovo maintained its crown as the top PC manufacturer, its lead over HP narrowed in the third quarter, both studies found.

IDC reported a near-tie between the two companies, with Lenovo holding 21.3% of the market and HP at 21.2%, up from 19.7% in the same quarter last year. Both studies also showed continuing consolidation of the PC market as those top manufacturers grow more dominant. IDC said the top three vendors controlled 58% of the market in the third quarter, up from 55% a year ago and 51% in 2014; Gartner noted the top six vendors in its survey enjoyed a record 78% of the market.

Deutsche Bank is raising more cash. Yesterday, the bank raised $1.5 billion through the sale of five-year notes. That comes after Friday’s offering that raised $3 billion. It sold the debt at a premium of 290 basis points, or slightly lower than the 300 bps seen at the Oct. 7 sale, but still twice that demanded in a public issue of similar notes back in August 2015. Elsewhere in the world of embattled European financials, Lloyds Banking Group is cutting 1,340 jobs.

Stanley Black & Decker announced a deal to buy Newell Brands’ tools business for $1.95 billion in cash. Stanley said it expects the acquisition, which is expected to close in first half of 2017, to add an adjusted 15 cents a share to earnings in the first year.

Wal-mart, the country’s biggest private employer hiked its minimum salary for store managers in anticipation of the Labor Department’s overtime rule, set to take effect December 1. The rule will double (to $47,476) the salary threshold under which virtually all workers are guaranteed time-and-a-half pay whenever they work more than 40 hours in a given week. Entry-level managers at Walmart were making $45,000 when the rule came out in May, but starting in September they made $48,500.

Jack Ma has ambitious plans to create a group trading platform for small businesses and farmers. The Alibaba chairman envisions an open e-commerce system that would include cross-nation agricultural trading. Ma says the long-term goal for Alibaba is to quintuple its user base to 2 billion by 2036.

For 4 days in September, Facebook posted a 17-word reminder for users to register to vote. It worked. In California, 123,279 people registered to vote or updated their registrations on Friday, Sept. 23, the first day that Facebook users were presented with the reminder. That was the fourth-highest daily total in the history of the state’s online registration site.

Indiana recorded its third-highest daily online registration total ever. Minnesota broke its record for the most online voter registrations in a single week. In Connecticut, 14,883 people registered to vote in the first three days of the Facebook campaign, a more than 12-fold increase over the same period a week earlier.

Now, let’s play a little game? We’ll try to guess your age and sex. Did you see the reminder from Facebook? If you answer “no”, you are probably an older male. If you answer “yes” you are probably between probably younger (ages 18-35) and female.