Financial Review

Follow the Money

Sinclair Noe — December 5, 2017

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DOW – 109 = 24,180
SPX – 9 = 2629
NAS – 13 = 6762
RUT – 20 = 1516
10 Y – .02 = 2.36%
OIL – .88 = 57.48
GOLD – 9.70 = 1266.90

• Number of Currencies: 1,362
• Total Market Cap: $358,989,749,532
• Volume (24h): $15,655,689,224

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Volume (24h)	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	11,668.0	$199.82B	$6.95B	44.42%	1	+0.63%	+17.05%
	Ethereum	ETH	453.66	$44.65B	$1.21B	7.71%	0.0395611	-2.44%	-2.83%
	Bitcoin Cash	BCH	1,431.10	$25.53B	$1.03B	6.56%	0.128851	-7.02%	-2.10%
	IOTA	MIOTA	3.94900	$10.95B	$1.43B	9.13%	0.00033564	+49.30%	+180.91%
	Ripple	XRP	0.23477	$9.58B	$169.47M	1.08%	0.00002106	-4.18%	-14.06%
	Dash	DASH	741.77	$5.88B	$201.44M	1.29%	0.0647502	-2.78%	+20.17%
	Litecoin	LTC	101.700	$5.56B	$332.54M	2.12%	0.00874786	-2.26%	+5.92%
	Bitcoin Gold	BTG	284.42	$5.15B	$112.20M	0.72%	0.0262096	-8.56%	-5.44%
	Monero	XMR	246.00	$4.04B	$331.67M	2.12%	0.0223129	+19.11%	+33.20%
	Cardano	ADA	0.127907	$3.30B	$49.71M	0.32%	0.00001083	-1.16%	+12.24%

The Dow slipped after posting its 64^th record high close yesterday. Not a surprise given the weak finish in the markets yesterday. Today was another example of stocks closing near the lows for the day. And for the broader market, the S&P and Nasdaq have now posted three consecutive losing sessions – we haven’t seen that since August.

A Tuesday pause aside, it’s been a rough week or so for technology shares, which have been the victim of a violent rotation that’s seen investors flee what’s been by far the hottest sector of 2017 for companies expected to get a bigger boost from tax legislation working its way through Congress.

Meanwhile, telecom shares, which have been the worst-performing sector of the year, were world beaters last week. And financials, which were also laggards, have also enjoyed a shot in the arm. In case you were wondering – yes, it is very rare for the tech sector to fall at least 2% while the S&P or Dow posts gains.

Risks “are high and rising” from the potential for a sudden drop in the stock and bond markets, according to the Office of Financial Research, the government agency tasked with looking for threats to the economy from the financial sector.

The report highlighted vulnerabilities to cybersecurity incidents, obstacles to resolving failing systemically important financial institutions and structural changes in markets and industry as three key threats to the financial system. Stock valuations are high by historical standards. The report noted that the cyclically adjusted price-to-earnings ratio of the S&P 500 is at its 97th percentile relative to the last 130 years.

In the bond market, sensitivity of bond prices to interest rate moves has steadily increased since the crisis. At current levels of duration, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index; and that doesn’t include high yield, or fixed-rate mortgages and fixed income derivatives. Some investors have been financing long-term asset with short-term loans and therefore a correction could trigger financial instability, according to the OFR annual report.

It looks like the bond market is worried that the Federal Reserve, which is due to raise interest rates for a third time this year next week, is being overly cautious and may end up curbing growth too much, especially since there’s few signs that inflation is accelerating. The fundamental story among bond investors is one of a central bank committed to the removal of accommodation late in a very long economic expansion.

The Senate Banking Committee backed the nomination of Jerome Powell to lead the Federal Reserve, in a vote that basically cements the likelihood he’ll run the central bank. Powell was backed by all the panel’s Republicans and Democrats except for Sen. Elizabeth Warren. Warren said she disagreed with Powell’s statement in his nomination hearing there was no danger of banks that are “too big to fail.”

Good point, the big banks are bigger now than in 2008. At some point you might think too big to fail might not be the best policy, but it will likely be policy for the next several years under the Powell Fed.

The Institute for Supply Management’s index of service-oriented companies fell to 57.4% in November from a 12-year high of 60.1% in October. Numbers over 50% are viewed as positive for the economy, however, and anything over 55% is considered exceptional.

The US trade deficit increased to a nine-month high in October due to rising oil prices and the widening of America’s long-standing deficits with China and Mexico. The Commerce Department said the trade gap widened 8.6 percent to $48.7 billion, the highest level since January. The politically sensitive U.S.-China trade deficit increased 1.7 percent to $35.2 billion and the deficit with Mexico surged 15.9 percent to $6.6 billion.

The worsening trade deficit came even as exports to China and Mexico were the strongest in more than three years, which challenges the argument that the United States was being disadvantaged in its dealings with trade partners.

Deutsche Bank AG has reportedly been told to hand over information about its dealings with President Donald Trump, as part of the U.S. investigation into suspected Russian meddling in the 2016 election. The German bank received a subpoena from Special Counsel Robert Mueller several weeks ago, asking for data on client accounts held by the president and his family, according to reports from Bloomberg and German newspaper Handelsblatt.

Trump owed Deutsche Bank about $360 million in real-estate loans before he became president. In June, the lender — Germany’s largest — rejected demands by House Democrats to share information on its dealings with Trump, citing privacy laws. The bank said at the time that it would hand over details if it received a formal request to do so.

Trump’s lawyer Jay Sekulow and White House press secretary Sarah Sanders say it’s not true that Special Counsel Robert Mueller has subpoenaed Deutsche Bank, as Handelsblatt and other media outlets have reported. “No subpoena has been issued or received,” Sekulow said in a statement. “We have confirmed this with the bank and other sources.”

This summer, Trump said he considered his family’s personal finances a “red line” that Mueller should not cross. But by targeting Deutsche Bank with a subpoena for more information about Trump’s accounts, Mueller may well be crossing that line.

More important perhaps, he is digging into a massive Trump conflict of interest and one of the biggest questions regarding Trump’s business empire: Why would this German bank lend him so much money when US banks wouldn’t?

Trump’s history with Deutsche Bank dates back to the 1990s, when his personal finances were at an all-time low. Trump’s reputation with major lenders was in tatters. So when he set out to relaunch his empire, he turned to Deutsche Bank for the financing he couldn’t find elsewhere. Deutsche Bank went on to back several lucrative deals.

In the summer of 2016, The New Yorker detailed how Deutsche Bank was involved with a complex scheme to move as much as $10 billion out of Russia on behalf of powerful individuals facing sanctions in the West.

Since Trump came to office, the Justice Department investigation into the Russian money-laundering scandal had gone dormant. It is not clear why. There is no public indication of precisely why Mueller subpoenaed the bank.

American voters say the Republican tax plan that both chambers of Congress have passed benefits the wealthy the most, a new poll finds. Quinnipiac University found that 64% of Americans — including 61% of independents and 94% of Democrats — say the plan benefits the wealthy the most.

An analysis of the final Senate bill by the Tax Policy Center shows that the voter assessment is correct. While the bill will not pay for itself, the Joint Committee on Taxation found an earlier version of the Senate tax bill would lift GDP by about 0.8% over a decade.

The Quinnipiac poll finds Americans disapprove of the bill by a 53% to 29% margin. A Gallup poll found that 29% of people surveyed approved of the tax bill, while 56% disapproved. The data-journalism site FiveThirtyEight found that the current legislation was one of the least popular tax-related bills dating to 1981 — even less so than two bills that hiked taxes in the 1990s.

Disney and Twenty-First Century Fox are closing in on a deal, and it could come as soon as next week. CNBC has been reporting that Disney has held talks with the Rupert Murdoch-controlled media company to acquire its studio and television production assets, leaving Fox with its news and sports assets. Fox is also talking with CNBC parent company Comcast, but the talks with Disney have progressed more significantly.

Nestle is buying Canadian vitamin maker Atrium Innovations for $2.3 billion.

Bitcoin powered to a record high of $11,850 It started the year at less than $1,000. CBOE plans to start trading bitcoin futures on Dec. 10 while CME Group has set Dec. 18 as its start date. Bitcoin itself is currently bought and sold on platforms that are virtually unregulated.

Russia’s team has been barred from the 2018 Winter Olympics in South Korea. Government officials will be forbidden from attending, the flag will not be part of the opening ceremony, and records will show that Russia didn’t win any medals. Some qualifying Russian athletes who have passed several drug tests will be allowed to compete at the IOC’s discretion, but they will do so in neutral uniforms.

The decision comes after a 17-month investigation by the IOC into what was deemed to be state-supported doping. It confirmed other findings that Russian officials had tampered with samples to conceal evidence of its systematic doping of top athletes.

California has already suffered a brutal season of massive fires. Now tens of thousands of people are being evacuated as a Ventura wildfire rages over 45,500 acres. Fire fighters in Ventura County say the prospects for containment are not good.

The blaze, dubbed the Thomas Fire, broke out on Monday evening in the foothills above Ventura. Winds quickly drove it west into the city some 50 miles northwest of Los Angeles. More than 250,000 homes were without power. All schools in the Ventura Unified School District were closed.

Financial Review

Seven Straight

Sinclair Noe — August 3, 2017

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DOW + 9 = 22,026
SPX – 5 = 2472
NAS – 22 = 6340
RUT – 7 = 1405
10 Y – .03 = 2.23%
OIL – .64 = 48.95
GOLD + 1.70 = 1267.90
BITCOIN – 0.03% = 2813.43 USD
ETHEREUM – 0.98% = 223.10

Another record close for the down – the seventh consecutive record high close. Back in February we had a string of 12 record highs, which broke a record going back about 30 years. A drop in oil prices dragged on the energy sector. Apple and Amazon were down about 1% each; that was a drag on the Nasdaq and the S&P.

And while the Dow Industrial Average hit a record high of 22-thousand yesterday, that is not necessarily a good barometer of a strong economy. First, the Dow Industrials are only 30 stocks. Whether it’s good for you individually depends on whether you own lots of shares or not. Most people do not own very many shares at all.

About half of all equity is owned by the richest 1 million or so families, and another 41% is owned by the rest of the top 10%. The bottom 90% of families own about 9% of outstanding shares. We joke about celebrating record highs on the Dow, and while that is better than seeing the market crash, it really isn’t much of a cause for celebration.

If you can walk into your backyard and pick a fresh tomato that tastes like a tomato instead of cardboard – be happy; if somebody in your family gets a good job – celebrate; if there’s a new baby in the family – rejoice.

And if you do have money in stocks, Dow 22-thousand means it is time to be nervous. There are two big reasons why stock market surges like this end: Either because the economic foundation they are based on changes, usually when a recession hits, or because investors temporarily bid prices up too high.

There’s no recession on the horizon. But stocks probably are too high. We’ve bet too much on an expansion that is too tepid to warrant it. The S&P 500 is trading at 19 times this year’s expected profits — by some measures 40% higher than traditional norms. Earnings news has been good, but much of that is due to serious weakness in the dollar rather than strong domestic growth.

The economy is growing, but probably around 2% on an annualized basis; not enough to justify valuations. Sure, the markets can go higher from here; markets can be irrationally exuberant for extended periods but they can also drop.

And individual securities or specific sectors could still deliver stellar returns. Apple hit a record high yesterday. Some people might think it is pricey. The price-to-earnings ratio for Apple is just 17.7, so it is a better value than the market. That is not intended as a buy or sell recommendation, rather it is a recommendation to plan.

Labor Department data showed weekly jobless claims fell last week, pointing to a tightening labor market, while a report from the Institute for Supply Management showed its non-manufacturing index fell to 53.9 last month from 57.4 in June.

The big economic report is tomorrow morning’s read on non-farm payrolls. The economy probably added about 175,000 new jobs in July, roughly the same amount the U.S. has created each month since the start of 2017; that’s the average and that’s the estimate from economists.

The U.S. only needs to create around 100,000 jobs to accommodate all the new people looking for work each month. The unemployment rate, now at 4.4%, is likely to retouch a 16-year low of 4.3% very shortly. Companies haven’t had such a hard time hiring since the late 1990s — and they constantly complain about it, but so far, they don’t seem willing to pay more.

Wage growth is sluggish at 2.5%, with little or no improvement expected in July. Typically wages rise 3% to 4% a year when the economy is at full throttle.

Generic drug-maker Teva Pharmaceutical Industries Ltd. was the latest casualty this earnings season. Shares plunged 21%. Teva cited accelerated price erosion, decreased volume and more Food and Drug Administration generics approvals as among the factors that hurt its generics business performance. The sector also took a hit. Mylan dropped 5.2%. Teligent down 5.1%. A generic drug ETF dropped 4.7%

AmerisourceBergen reported a third-quarter profit beat and revenue miss, claiming generic deflation is a big headwind. AmerisourceBergen down about 7%. Cardinal Health said that it expects price deflation to continue through 2017, though to a less extreme extent than in the first half of the year. Cardinal down 3% today.

Kraft Heinz reported a 50 percent rise in quarterly profit, with net income of $1.16 billion, or 94 cents per share, in the second quarter, from $770 million, or 63 cents per share, a year earlier. Net sales fell 1.7 percent to $6.68 billion.

Shares in Tesla rose 6.5% after the electric-car maker posted a smaller-than-anticipated quarterly loss late Wednesday. That increase translates to a mark-to-market loss of roughly $600 million for traders who were shorting Tesla. Tesla shorts have lost about $3.6 billion in the last year and a half.

Microchip Technology reports its bottom line came in at $319 million, or $1.31 per share, beating estimates of $1.23 per share, and up 64% from a year earlier.  Revenue for the quarter rose 21% to $972 million.

Special counsel Robert Mueller has convened a grand jury in Washington to investigate allegations of Russian interference in the 2016 U.S. election. The Wall Street Journal reports the grand jury began its work in recent weeks and is a sign that Mueller’s inquiry into Russia’s efforts to influence the election and whether it colluded with President Donald Trump’s campaign is ramping up. Stocks fell to session lows after the report was announced.

Two high-profile insurers said they would make changes to their Obamacare-related business next year. Molina Healthcare said it would exit the Obamacare individual insurance exchanges in Utah and Wisconsin due to lagging financial performance. Aetna said it would not offer 2018 exchange plans in Nevada.

Weak financial performance has led to many major insurers to pull out of the exchanges over the past two years, raising doubts over the future of the marketplace. However, a recent study by the Kaiser Family Foundation, a nonpartisan healthy policy think tank, found that for the insurers that remain the markets are stabilizing and that profits should begin to materialize.

The National Oceanic and Atmospheric Administration (NOAA) announced that this year’s “dead zone” in the Gulf of Mexico is the largest ever measured. Stretching from the coast of Louisiana at the Mississippi River Delta westward to the shores of Texas, the area of severe hypoxia — when the water is so depleted of oxygen that it can’t sustain fish and marine life — encompasses 8,776 square miles. That’s roughly the size of New Jersey (or more than 4 million football fields, if that’s any easier to grasp).

The average size of the dead zones in the past five years is 5,806 square miles, according to NOAA. The dead zone in the Gulf has become a worrisome annual phenomenon mainly due to excess nitrogen and other nutrients that run off from rivers like the Mississippi into the Gulf and feed the growth of algae.

When the massive blooms of algae and phytoplankton die, their decomposition consumes all the oxygen in the ocean, creating a hypoxic area, or dead zone. Fish that can swim away do, but the organisms that can’t, including the plants that fish feed on, die.

These “biological deserts” are bad for fish and fish eaters alike. Hypoxia hurts the Gulf of Mexico’s commercial and recreational fishing industries, which are still recovering from recent hurricanes and oil spills. The Gulf produces more than 40 percent of the nation’s domestic seafood supply and generates billions of dollars a year in wages for the fishing and tourism industries across five states.

Almost every summer since 1985, NOAA has sponsored research and monitoring of hypoxia off the coast of Louisiana. It says the record-breaker this year is a result of higher rainfall in the Midwest and heavier river flows than usual.

The most problematic nutrients that end up in the Gulf and feed the algae are nitrogen and phosphorous. Farmers use the nutrients as fertilizers on their fields, but rain can then wash that fertilizer into nearby streams and rivers, and eventually into the mighty Mississippi.

Financial Review

Black Hole Sun

Sinclair Noe — May 18, 2017

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

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DOW + 56 = 20,663
SPX + 8 = 2365
NAS + 43 = 6055
RUT + 5 = 1361
10 Y + .02 = 2.23%
OIL – .01 = 49.34
GOLD – 14.10 = 1247.80

Yesterday the stock market had a little panic attack. As is often the case, these things pass. Therefore, it is important to see confirmation of a major move.

Today we did not see confirmation. Equities did not take kindly to news of Trump influencing or impeding an FBI investigation. The S&P 500 closed at the lows, down 1.8%, and the Nasdaq wiped out 18 days of gains in one session.

So, yesterday was not insignificant, but looking back over the last half year, it is not enough, in and of itself to change the trend, which is still up.

The news of the week is important, and it was a catalyst for the big sell-off yesterday, but while the term ‘impeachment’ may appear more frequently in the press today, the process is initiated by a vote in the House, where Republicans hold a 45-seat majority.

A House impeachment of President Trump would look unlikely. But that doesn’t mean Trump’s problems have been resolved, just slow-tracked. Late yesterday, a special prosecutor was named – former FBI Director Robert Mueller – and whatever the outcome of his investigation, nothing will happen immediately.

Meanwhile, Rep. Jason Chaffetz said today that he will resign from Congress next month, a move that calls into question the future of the House Oversight Committee’s investigation of President Donald Trump and his campaign’s ties with Russia.

Washington can make a slug look like a speed demon. Nothing is imminent and so the markets rebooted. Traders bought the dips. That said, this is proving a distraction from the president’s agenda, including what should be a more detailed budget released next week.

After months of major stock markets posting record highs and historically low volatility across a range of asset classes, something was bound to snap and nobody knows whether it was a one-off or an omen. We’ll get clues in the days and weeks ahead, but a day like yesterday should jolt us from our lethargy and remind us that volatility hasn’t died.

The VIX index was jolted from its slumber yesterday and chalked up its seventh-biggest rise in percentage terms since its launch in 1990. This is an appropriate time to look at risk levels and reassess where we are as investors.

The dollar, two- to 10-year Treasury yield curve and yields on 10-year Treasury Inflation-Protected Securities (TIPS) are all back where they were before Trump was elected in November. The spread between two- and 10-year Treasury yields is its smallest since before the presidential election.

This so-called yield curve flattening suggests investors are losing faith in the economy’s ability to withstand higher interest rates. Money markets have slashed the probability of the Federal Reserve raising rates next month to less than 60 percent from over 90 percent last week.

The U.S. economy is already into its third-longest expansion ever, and a recent fall in the U.S. economic surprises index suggests it is running out of steam. That does not mean a recession is in the offing but it might point to slightly slower growth.

Any time we see a shift, the fast money will look for fresh opportunities. The gap between the U.S. and European surprises indexes is the widest in two years, U.S. corporate earnings growth is double-digit but still lagging the euro zone, and the political turmoil that was supposed to beset Europe this year is concentrated in the United States.

Yesterday was not enough to push investors to cash or run scared but today many investors reconsidered their tactical positions, and rethink their appetite for risk.

Earlier in the day the Philadelphia Federal Reserve said business activity index rose in May after declining for two months. Weekly unemployment data also pointed to strength in the labor market.

Brazilian markets took a big hit, the benchmark Bovespa dropped about 9%. One of the country’s largest newspapers reported that a secret recording exists of President Michele Temer approving a payment to Eduardo Cunha, the former House speaker and mastermind behind last year’s impeachment of former President Dilma Rousseff.

The tape was submitted to the Supreme Court by two senior executives from meat-packing giant JBS as part of a plea bargain deal, according to O Globo newspaper, in which information is offered in exchange for reduced sentences. Though the president’s office confirmed the meeting between Temer and a JBS executive took place in March, it denied Temer asked for payments to silence Cunha.

Temer is far from the only politician to be tied to the corruption scandal, dubbed “Operation Car Wash,” which has implicated nearly all of Brazil’s political class, including every senior member of the ruling party.

Earnings reports from major brick and mortar retailers have been a long list of disappointments, with the occasional exception of Home Depot or Target, and today Walmart reported. Wal-Mart said sales at U.S. stores open at least a year rose 1.4 percent, better than estimates. Investments to bring more customers into the discount retailer paid off and a bigger push into e-commerce boosted online purchases.

Online sales rose 63 percent in the first quarter, which was higher than 29 percent growth in the fourth quarter and 20 percent in the third quarter. Walmart said it is benefiting from a $2.7 billion investment to increase entry-level wages and enhance the training of its workforce, which has led to better stocked shelves and cleaner stores.

Walmart earned $1 per share, topping estimates of 96 cents. Consolidated net income fell to $3.04 billion from $3.08 billion due to a higher tax rate. Revenue rose 1.4 percent to $117.5 billion, slightly lower than analysts’ expectations of $117.7 billion due to a stronger dollar, which reduces the value of overseas sales. Revenue grew 2.8 percent on a currency neutral basis.

Walmart shares flirted with 52-week highs.

Alibaba Group beat first-quarter revenue forecasts but fell short of earnings estimates. The Chinese company, which is targeting new business lines such as cloud computing, big data, entertainment and offline retail as it expands beyond e-commerce, also announcing it will buy back $6 billion shares over the next 2 years.

Salesforce.com reported better-than-expected earnings and raised its full-year revenue guidance. The cloud-software company reported a net loss of $9.2 million on revenue of $2.39 billion for its fiscal first quarter. After adjustments for stock-based compensation and other effects, the company claimed a profit of 28 cents a share, which topped estimates.

Facebook celebrates its fifth anniversary as a publicly traded company. The IPO was 5 years ago today, and it was a mess, but since then the stock is up 279%.

The Telecommunications Services sector was the S&P’s biggest percentage gainer with a 1.2-percent rise. The Federal Communications Commission has officially begun undoing net neutrality rules the agency passed two years ago. The FCC voted 2-1, along political party lines to begin a rule-making process to replace the Open Internet order, or net neutrality rules, adopted in 2015.

The rules won’t disappear overnight but FCC chair Ajit Pai has made it clear that, barring a successful legal challenge, the agency will give up its authority to enforce net neutrality regulations. The rules, first passed in 2015, ban internet service providers from blocking, slowing down, or otherwise discriminating against lawful content.

Without these rules in place, your home internet provider would be free to slow down your Netflix connection to try to keep you paying for cable TV. Your mobile carrier would be allowed to block Skype to promote its own voice plan. Naturally, the country’s largest broadband providers say you have nothing to worry about.

In fact, the industry now claims to love net neutrality. But what the industry is calling “net neutrality” doesn’t really fit the full definition. It’s a version of net neutrality that doesn’t cover the loopholes internet providers have already discovered. If the FCC decides to drop its own protections, you probably won’t wake up one day to find YouTube or Slack blocked. But the principles that made the internet what it is today could still erode over time.

We are already seeing a “toll road’ version of internet service. AT&T, for example, allows users to watch as much video as they want from its own DirecTV Live streaming service without having it count toward their data caps. Competing services like Dish’s Sling, on the other hand, will count against those caps unless the companies behind them pay AT&T to “sponsor” that data.

Verizon has a similar system in place. These data exemptions, known as “zero rating,” may sound innocent enough. Everyone loves getting free stuff. But critics argue that they will end up harming competition.

Although the telecommunications industry group US Telecom sued the FCC to try to reverse its net neutrality protections, most big internet providers say they support net neutrality in principle. Their beef, they say, is just that the FCC went too far in reclassifying broadband access as a “Title II” common carrier service, much like telephone services.

The telecoms say they don’t mind a little regulation if there are great big loopholes. The problem is that without Title II, the FCC won’t be able to enforce net neutrality. And that means that the big, beautiful, collaborative mosaic of the internet could soon be missing many of the smaller tiles that add so much color to the overall picture.