Financial Review

Life Comes at You Fast

Sinclair Noe — July 28, 2017

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

DOW + 33 = 21,830
SPX – 3 = 2472
NAS – 7 = 6374
RUT – 4 = 1429
10 Y – .02 – 2.29%
OIL + .63 = 49.67
GOLD + 10.50 = 1270.10
BITCOIN – 2.16% = 2744.59 USD
ETHEREUM – 2.92% = 187.70

The Dow Industrial average closed at another record high.

Real gross domestic product increased at an annual rate of 2.6 percent in the second quarter of 2017; that’s up from a revised 1.2 percent rate in the first quarter, but short of expectations. In recent years, the U.S. economy has often started off slowly, improved in the middle of the year, only to sag again toward the end.

The economy grew 3.5 percent in the third quarter of 2016 before slowing down. It grew at 5 percent in the third quarter of 2014 before sputtering out. The result each year has been a return to what some economists call the “new normal” of plodding annual growth of about 2 percent. Today was the first estimate of second quarter GDP growth – other estimates will follow and it is typical to see downward revision.

You should never read too much into any one quarter’s GDP data, especially the first estimate. The GDP report showed balanced economic growth with increases in personal consumption, nonresidential fixed investment, exports and federal government spending.

These were offset by negative contributions from private residential fixed investment, private inventory investment and state and local government spending.

Imports, which subtract from GDP, also increased.

You have probably heard that efforts to repeal Obamacare have failed. It happened late last night. Three GOP senators – Susan Collins of Maine, Lisa Murkowski of Alaska, and John McCain of Arizona – voted against the skinny repeal and the final vote was 49-51 against.

Senator Lindsey Graham of South Carolina called the skinny repeal a fraud but he voted for it anyway. McCain argued in a statement today that the bill would not lower costs, increase competition or improve care for Americans.

So, repeal and replace failed. Repeal only failed. And last night, skinny repeal failed. So, the fight is over. Not so fast. Trump responded with a tweet – “Let Obamacare implode. Then deal.” Meaning the administration should continue undermining the law, to force Democrats to the table to … well, it’s not clear what he wants from them.

There is no actual Trumpcare plan, just anti-Obamacare rhetoric. There are plenty of tools that the administration can employ to keep sabotaging the individual markets and the ACA. The administration can do too little to promote enrollment or scale back enforcement of the mandate or give states more leeway to experiment with Medicaid in destructive ways.

The administration can continue to refuse to guarantee cost-sharing reductions, which has already caused insurers to exit the markets and hike premiums, something that could continue or get worse, leaving many more people without coverage options. Insurers are already warning of such an outcome.

The ACA exchanges, for all their problems, have helped extend coverage to millions more, particularly people with preexisting conditions. While premiums are up and insurer choice is down in several states, the vast majority of Americans will be able to pick between multiple insurers on the individual market next year.

The idea of repeal was widely hated, just 17% approval for any type of repeal. Congress will not repeal. The ACA is not in a death spiral, unless it is sabotaged. If the ACA implodes now, it will be Trump’s doing. But, honestly, the debate is over.

The American people want health care, and they don’t think they should die just because they weren’t lucky enough to get insurance through work, or just because their money ran out before the cancer was cured. Every other developed country in the world has this figured out, and given enough time, so will the United States, after having exhausted all the other possibilities.

President Trump has replaced his White House chief of staff, Reince Priebus, installing retired General John Kelly in his place in a major shakeup of his top team. Trump announced the move in a tweet a day after his new communications director, Anthony Scaramucci, accused Priebus of leaking information to reporters in a profanity-laced tirade.

Now you might think Scaramucci would be having a great day watching Priebus walk out the door, but he just got word that his wife of 3 years filed for divorce today. Hey, life comes at you fast, Mooch.  John Kelly is a retired 4-star General and a Marine and had been running the Department of Homeland Security, so he should be able to bring some order to the White House, but he does not have legislative experience, and the next issue on the table is tax reform.

Trump has yet to advance a specific tax proposal. Whatever the plan, it will have to be much more transparent than his health care plans, or lack thereof. House Speaker Paul Ryan struck an optimistic tone on Republicans’ ability to reach a tax reform deal. Ryan’s comments came a day after the Republican leaders working on tax reform released a joint statement saying they will abandon the controversial border adjustment provision and outlining the broad goals for tax reform.

Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, House Ways and Means Committee Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch have been meeting regularly to strike a plan that the GOP wants to push through Congress this year. But many unknowns remain.

The joint statement released Thursday by the six leaders did not offer new details on possible corporate or income tax rates, revenue neutrality or other specifics that could be included in the tax plan.

Crude oil prices tacked on about $4 a barrel this week, or 8.6%. Saudi Arabia’s vow on Monday to cut exports in August helped kicked off the rally, while a sharp drop in U.S. crude and fuel stockpiles kept the rebound going.

Royal Dutch Shell laid out a pessimistic vision for the future of oil on Thursday, even as the company reported success in generating cash during a prolonged downturn. Shell Chief Executive Ben van Beurden said the company has a mind-set that oil prices would remain “lower forever”–a riff on the “lower for longer” mantra the industry adopted for a price slump that proved unexpectedly lasting.

He sees the demand for oil topping out sometime in the early 2030s as consumers make the same switch to electric vehicles, something Van Beurden plans to do in the next couple of months. When the boss of Europe’s biggest listed oil company says his next car will be electric, it says a lot about the future of fossil fuels.

Airline seats are shrinking. Over the past couple of decades, the pitch (or distance from your seat to the same position of the seat in front of you, so this is the legroom) – the pitch has declined from 35 inches to 31 inches or less. The width of the seat has shrunk from 18 inches to 15 inches. So, if you think it’s difficult to squeeze into the seat, it might also mean it is tough to get out of the seat in the event of an emergency.

Aviation authorities were ordered back to the drawing board to solve what a federal appeals judge called “The Case of the Incredible Shrinking Airline Seat.” Judge Patricia Millett told the Federal Aviation Administration to take another look at an advocacy group’s assertion that shrinking airline seats are imperiling passenger safety.

The judge rejected the FAA’s argument that seat size was unimportant to getting off the plane in an emergency.

And now, it’s time for another edition of Banks Behaving Badly. Today’s edition features Wells Fargo, this is a bank that is already in the Hall of Infamy. Fraudulent bank accounts, bogus credit cards, compromised customer data and, now, unwanted car insurance.

A 2016 internal review of the bank’s auto lending found more than 500,000 clients may have been improperly charged for protection against vehicle loss or damage while making monthly loan payments, even though many drivers already had their own policies.

Wells Fargo may pay as much as $80 million to affected clients – with extra money for as many as 20,000 who lost cars. Wells Fargo shut down the program in September and was in “regular conversations” with regulators while it worked on a remediation plan. So, why did they wait so long to make this information public? Well, that’s a good question.

I think they just can’t help themselves.

Financial Review

Quiet, Almost Too Quiet

Sinclair Noe — March 9, 2017

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

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DOW + 2 = 20,858
SPX + 1 = 2364
NAS + 1 = 5838
RUT – 5 = 1360
10 Y + .05 = 2.60%
OIL – .53 = 49.75
GOLD – 7.20 = 1201.80

Stocks dipped in afternoon trade but held on for minor gains, next to nothing really. Another quiet day. The S&P 500 and the Dow Industrials have not suffered a 1% decline in 102 trading sessions, dating back to October 11.

The longest stretch of trading days without a 1% decline since Dec. 18, 1995 for the S&P 500 and the longest since Sept. 20, 1993, for the Dow. It’s quiet, almost too quiet.

Another drop in oil prices weighed on energy shares while financial shares pared some of their early gains. When asked during a briefing whether President Donald Trump still backs his campaign pledge to restore the Glass-Steagall Act, White House spokesman Sean Spicer said that he did.

The law, which separated commercial and investment banking, was repealed in 1999 and, if reinstated, would mainly apply to larger banks, which have been market leaders in the past few months. Much of the gain for financials has been built on the idea of deregulation.

The European Central Bank left interest rates unchanged. The Governing Council left the main refinancing rate at 0%, while the rate on deposits parked overnight at the bank remains at minus 0.4%. The rate on the bank’s marginal lending facility remains at 0.25%.

In a statement, the bank repeated that it expects rates to remain “at present or lower levels for an extended period and well past the horizon” of its bond-buying program, which is scheduled to run through at least December. The ECB also repeated that it stands ready to extend the size or the duration of the bond-buying program if the outlook deteriorates.

The Labor Department reports imports rose 0.2 percent in February, above the expected gain of 0.1 percent, after climbing 0.4 percent a month earlier. Export prices, meanwhile, rose 0.3 percent.

Outplacement consultancy Challenger, Gray & Christmas reported employers announced plans in February to cut 36,957 jobs, a 19 percent decline from January. Per Challenger, employers said they would hire 166,266 workers in the first two months of 2017, the highest January-February on record.

The retail sector once again planned the most cuts as companies closed brick-and-mortar locations and steered business online. Retailers said they would cut 11,889 jobs in February. The energy sector saw a massive year-over-year drop in job cuts, announcing only 5,930 compared with 45,154 in February 2016.

The number of Americans who applied for unemployment benefits jumped by 20,000 to 243,000 in early March, but layoffs remained near a 45-year low. The four-week average of initial claims, meanwhile, rose by 2,250 to 236,500. Continuing jobless claims dropped by 6,000 to 2.06 million. Tomorrow, the government is expected to report a gain of about 210,000 new jobs in February.

Meanwhile, the Arizona Department of Labor published the state jobs report for January and it shows the Arizona unemployment rate unchanged at 5%, however the state lost 53,600 jobs in January. The biggest job losses per sector were in Trade, Transportation, and Utilities (-18,000 jobs); Professional and Business Services (-16,400 jobs); and Government (-13,700 jobs). Arizona Non-farm employment grew by 2.0% (53,700 jobs) over the year in January.

If you are looking for entertaining analysis of the markets, it’s tough to beat Bill Gross’ monthly investment letter. Gross, who runs the Janus Global Unconstrained Bond Fund, characterized the run-up as the “Trump bull market and the current ‘animal spirits’ that encourage risk.”

Details on Trump’s plans remain scarce, however, and equity gains have moderated on growing concerns that stock valuations may be high. The S&P 500 is trading at about 18 times forward earnings estimates against the long-term average of about 15 times.

Gross said the global economy has created more credit relative to GDP than that at the beginning of 2008’s great credit recession. Gross said: “In the U.S., credit of $65 trillion is roughly 350 percent of annual GDP and the ratio is rising,” adding, “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road.

One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.” It happened in 2008, Gross said, noting central banks could drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. “Today, central bank flexibility is not what it was back then.”

You may recall that back in January, Bill Gross said that if the yield on the 10-year Treasury note crossed 2.60%, that would be the critical level both to the bond market and to stock prices. “If 2.6 percent is broken on the upside … a secular bear bond market has begun,” Gross said.

“Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017.”

Gross said the 10-year yield has been in a downward trend line since 1987. If that channel is broken, look out. Today, the 10-year note closed at 2.60%.

House Democrats on the Energy and Commerce Committee staged a marathon fight to slow down the GOP’s Obamacare replacement, but ultimately failed to stop the bill. After a 27-hour delay, the Energy and Commerce committee approved the American Health Care Act in a party line vote. The bill will next be considered by the House Budget committee. The Congressional Budget Office is expected to score the bill next week.

As part of a plan to reshape its business, Royal Dutch Shell is selling its oil sands interests in Canada in a two-part deal worth $7.25 billion. It will offload stakes and reduce its share in the Athabasca Oil Sands Project for $8.5 billion in shares and cash, while jointly purchasing Marathon Oil Canada Corporation with Canadian Natural Resources for $1.25 billion.

Oil drops below $50. West Texas Intermediate crude oil plunged more than 5% on Wednesday after Department of Energy data showed US inventories swelled to a record-high 528 million barrels. That selling has continued day, with WTI dropping below $50 a barrel, its lowest since the end of November.

PPG’s bid to buy Dutch paints and chemicals rival Akzo Nobel was rejected. A deal would have created a global behemoth in specialty chemicals that would have made ingredients for products including skin creams, car paint and iPhone coatings. Akzo said the unsolicited $22.1 billion cash and stock offer undervalues the company and isn’t in the best interests of shareholders.

The French waste and water company Suez Environnement said it has partnered with a Canadian pension fund manager to acquire General Electric’s water treatment technology business in an all-cash deal that valued the business at about $3.4 billion.

GE put its Water and Process Technologies unit on the sales block in October after it agreed to merge its oil and gas division with a fellow services provider, Baker Hughes. The GE business provides water treatment and process services to industrial clients and reported revenue of $2.1 billion last year, with about half of that in North America.

Sears reported a narrower loss in the fiscal fourth quarter than the period a year earlier, but revenues continued to fall, as they continue to close stores and sales continue to decline at its remaining stores. The company’s long-term debt obligations nearly doubled from the prior year, despite the chain’s efforts to raise cash by selling off assets.

Sears took a $381 million charge during the quarter to write down the value of its trade name. Sears completed the sale of its Craftsman brand to Stanley Black & Decker for an initial upfront cash payment of $525 million with additional payments over time.

The Great Recession and the housing bubble left many homeowners underwater, with negative equity in their homes, they were stuck – under house arrest; they couldn’t sell, they couldn’t move, and many homeowners could not keep up important maintenance, much less upgrades. That’s good news for home flippers.

In 2016, the median age of a flipped home was 37 years, per a report out from Attom Data. That’s the oldest in the nearly two decades, and about double the median age of homes flipped before the downturn. The median size of flipped homes was the smallest on record in 2016, at 1422 square feet.

There were 3.1% more flips in 2016 than 2015, and 0.5% more flippers. And flippers could sell their properties for a median of $189,900 in 2016, offering a median gross profit of $62,624, or 49.2%, the highest on record. So, it looks like flippers still have legs.

Gallup-Healthways has released its  Community Well-Being Index . Researchers analyzed 350,000 interviews to rank 189 communities by physical, emotional, financial, community and social health; basically, a look at the happiest and healthiest cities in America. They found that living near the beach doesn’t guarantee your happiness — but it certainly doesn’t hurt.

Communities in the Southeastern US and industrial Midwest were generally ranked lower in well-being, partly due to health problems including higher smoking and obesity rates. Topping the list: Naples, Florida. Phoenix ranked 47 out of 189.

Financial Review

Break Down

Sinclair Noe — November 1, 2016

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

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DOW – 105 = 18,037
SPX – 14 = 2111
NAS – 35 = 5153
10 Y – .02 = 1.84%
OIL – .53 = 46.33
GOLD + 10.80 = 1288.80

Stocks started the session in positive territory but slippage was immediate; slow at first then picking up momentum. The Dow Industrial Average dropped below 18,000 for the fourth time since September 12, at one point posting a 200-point loss.

The S&P 500 took out the lows of September at the 2120 level. We had talked about 2020 being a level of support, which has now been broken. The next levels of support are 2080 (representing the 200-day moving average) and 2040 (representing lows from April and May). The point here is that today’s trading did some serious technical damage; the other point is to remind you to keep an eye on the charts; they are very effective at cutting through the chatter and the clutter.

The Fed began its 2-day FOMC meeting.  Treasury yields climbed early toward the highest since May on speculation the Federal Reserve will raise interest rates this year as the global economy improves. The Atlanta Federal Reserve’s GDP Now forecast model shows the economy is on track to grow at a 2.3 percent annualized pace in the fourth quarter; that is a downward revision from just yesterday, when the GDP Now forecast was for 2.7 percent fourth quarter growth.

Investors will be scouring the accompanying statement for clues on how determined the Fed is to raise rates in December. As things stand, the markets are taking policymakers such as Bill Dudley of the New York Fed at their word when they say a move is likely before the year is out if growth stays on track. Fed funds futures data compiled by Bloomberg shows the market is pricing in a 16% chance of a November interest-rate hike and a 71% chance of a rate hike before the end of the year.

The Bank of Japan kept policy on hold. Japan’s central bank voted 7-2 to keep its key interest rate at negative -0.1%, and target for the 10-year Japanese bond yield at 0%, warning that risks to growth and inflation were “skewed to the downside.”

Australia’s central bank held rates steady at 1.50%, as expected, and said “the Bank’s forecasts for output growth and inflation are little changed from those of three months ago.”

American manufacturers grew slightly faster in October and even put more people to work for the first in four months. The Institute for Supply Management said its manufacturing index rose to 51.9%, the highest in three months, from 51.5% in September. Readings over 50% indicate more companies are expanding instead of shrinking.

A measure of factory employment jumped 3.2 percentage points to a reading of 52.9. But a gauge of new orders slipped to a reading of 52.1 from 55.1 in September, suggesting any future gains in manufacturing activity would be modest.

The Affordable Care Act Open Enrollment starts today. Arizonans will find in most counties only one insurer selling exchange plans for 2017. Premiums for some plans will be more than double this year, some of the biggest increases in the nation. Only last-minute maneuvering prevented one Arizona county from becoming the first in the nation to have no exchange insurers at all.

Outlays for U.S. construction projects fell 0.4% in September. Spending on private outlays fell 0.2%. Residential spending rose 0.5% but spending on nonresidential projects sank 1%. For overall public construction projects, spending fell 0.9%. Outlays for the first nine months of the year are 4.4% higher compared with the same period in 2015.

CoreLogic reports home prices nationwide, including distressed sales, increased year over year by 6.3 percent in September 2016 compared with September 2015 and increased month over month by 1.1 percent in September 2016 compared with August 2016. Arizona is still 22% below peak prices. Arizona home prices were up 0.6% for the month and 5.6% year-over-year.

Sales of new cars and trucks were expected to fall in October. Auto sales have been strong but there are limits and it looks like car makers hit those limits last month. General Motors’ sales fell 2 percent from last October, while Toyota’s sales fell 9 percent. Honda’s sales were down 4 percent and Nissan’s fell 2 percent. Fiat Chrysler’s sales were down 10 percent. Volkswagen’s sales fell 18 percent. Ford will report later in the week due to a fire at their headquarters.

Sales fell even though automakers increased average discounts per vehicle by 12 percent from last October to $3,726 per vehicle. But the average sales price still was expected to set an October record at $31,383. Prices are rising because more high-priced trucks and SUVs are being sold.

Gasoline is surging, despite a recent drop in crude oil prices. An explosion of a Colonial pipeline in Alabama killed one person and injured 5 other; it is also causing gasoline futures to skyrocket higher. Futures for December delivery jumped 10.8% to $1.57 a gallon. Colonial Pipeline said it hopes to restart its major gasoline pipeline between Gulf Coast refiners and customers in the East and Southeast by noon Saturday; that news pushed prices down, but futures are still up about 4% at $1.48.

Meanwhile, crude oil has not been able to mount any kind of rally despite a weaker dollar. Following last week’s inventory draws across the entire energy complex, API was expected to report a seasonally normal 1.5 million barrel build but instead printed a massive 9.3 million build.

Royal Dutch Shell and BP both reporting higher than expected earnings by making further deep cuts in spending. Shell announced higher quarterly earnings than Exxon Mobil, the world’s largest listed oil company by output and market capitalization. At $2.8 billion in the third quarter, Shell’s net income was above Exxon’s third quarter net income of $2.65 billion. Both Shell and BP maintained their dividends unchanged as expected.

Mortgage provider Freddie Mac reported a profit of $2.3 billion in the third quarter, as interest rates turned in its favor, credit quality improved, and mortgage volumes surged. Freddie has operated under federal conservatorship since the 2008 financial crisis, when it received $71 billion in bailout funds. In December, the enterprise will remit $2.3 billion to the U.S. Treasury, bringing its total paid post-crisis to $101 billion.

Pfizer lowered its earnings outlook for the year and said it was ending the development of a drug in the cholesterol-treatment sector. Pfizer reported a profit of $1.3 billion, or 21 cents a share, down from $2.1 billion, or 34 cents a share a year prior; bottom line missed estimates – revenue matched estimates.

Prosecutors are focusing on Valeant Pharmaceuticals’ former CEO and CFO as they build a fraud case against the company that could yield charges within weeks. Authorities are considering potential accounting fraud charges related to the company’s hidden ties to Philidor Rx Services LLC, a specialty pharmacy company that Valeant secretly controlled.

Federal prosecutors in Manhattan and agents at the Federal Bureau of Investigation in New York have been investigating the company for at least a year. Last October, accusations of accounting malfeasance combined with government scrutiny over the company’s drug price hikes brought the company to its knees. Valeant’s stock price is down around 90% since last year’s peak.

One of the most difficult things Valeant has had to deal with through this entire mess is its over $30 billion debt load, which could be an even bigger problem with a criminal charge. Prosecutors in Boston and Philadelphia are also said to be conducting separate inquiries of Valeant.

Boston’s investigation focuses on Valeant’s payments to charities that then helped patients make co-payments for the soaring cost of Valeant drugs, some of the most expensive on the market. The Philadelphia case is examining Valeant’s billing of government health care programs for the company’s drugs.

And while that all sounds very bad for Valeant, if you pull up a quote today, you will see the stock is up 33%. The reason – Valeant is in talks to sell its Salix unit to Japan’s Takeda for $10 billion, per the Wall Street Journal. The crown jewel of Salix’s product line is Xifaxan, a drug that cures irritable bowel system.

When the company bought Salix, it told investors that Xifaxan would be a $1 billion drug in 2016. So far though, that hasn’t been in case. Valeant acquired Salix for $11 billion in 2015 and took on around $4 billion of its debt, so the company would be taking a loss, but it would show Valeant still has some valuable assets, even in a fire sale.

Sony’s second-quarter profit missed estimates, as a one-time charge and stronger yen weighed on profit from financial services and PlayStation games.

Angie’s List said it has hired financial advisers to review its strategic options as it continues to work on a turnaround and seek new opportunities. The company said it had a net loss of $16.8 million, or 28 cents a share, in the quarter, after breaking even in the year-earlier period – a big miss on top and bottom line estimates.

Gannett (the publisher of USA Today) has dropped its bid to buy Chicago Tribune and Los Angeles Times publisher Tronc. Gannett first made a bid for Tronc in April, then Tronc rejected a sweetened offer in May.

ChemChina has extended its $43 billion cash offer for Syngenta to Jan. 5 while it works to gain regulatory approval for the transaction. On Friday, EU anti-trust regulators opened an in-depth investigation into China’s biggest-ever foreign acquisition, setting a March 15 deadline to complete its review.

In one week and a few hours, the results will pour in. Hang in there.

Financial Review

Canoe Trips on Mars

Sinclair Noe — September 28, 2015

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

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DOW – 312 = 16,001
SPX – 49 = 1881
NAS – 142 = 4543
10 YR YLD – .07 = 2.09%
OIL – .03 = 44.40
GOLD – 14.20 = 1133.10
SILV – .53 = 14.70

Well, this was just ugly. All three major indices traded in correction territory today or more than 10 percent below their 52-week highs. For the Nasdaq Composite, the 50 day moving average crossed the 200 day moving average, forming a pattern that goes by the catchy name “death cross”. The Nasdaq Biotechnology ETF closed down 6.3%, following a 5% drop on Friday.

Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low, wiping out more than $5 billion in market valuation. The fall followed publication of a note by analysts at investment bank Investec which raised doubts about Glencore’s valuation if spot metal prices do not improve. The note pointed to high debt levels and a need for deeper restructuring. The analysts wrote: “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.” Glencore, a Swiss based company, has said it will suspend dividends, sell assets and raise cash with a $2.5 billion share placement, among other measures, to cut its $30 billion debt pile and protect its credit rating.

The 15-month commodities free-fall is starting to resemble a full-blown crisis. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.

Alcoa the world’s largest aluminum producer, says it will split into two separate publicly-listed companies, with the separation expected to be completed in the second half of 2016. The company says the split will create an “upstream company”, focused on bauxite, alumina and aluminum, and a “value-add company”, focused on innovation in “high performance multi-material products and solutions in attractive growth markets”.

Royal Dutch Shell has abandoned its Arctic search for oil after failing to find enough crude. Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion to shut down exploration in the region. The unsuccessful campaign is Shell’s second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and ran aground. Environmental groups and shareholders have also pressured Shell to drop Arctic drilling.

The IMF warns world GDP at 3.3% this year isn’t realistic anymore, and a forecast of 3.8% for next year is not either. IMF Director Christine Lagarde pointed to slowing growth in emerging economies, in particular China. Lagarde says “There is no reason (for the Federal Reserve) to rush” to tighten policy, noting both the Japanese central bank and the ECB in recent years both hiked and then were forced to quickly retreat.

The Federal Reserve will probably raise interest rates later this year and tighten policy gradually thereafter, so says William Dudley, New York Fed President, echoing statements from Fed Chair Janet Yellen last week. Dudley, who cautioned in late August that the uncertain global outlook made the case for a rate increase in September less compelling, said his expectation on the timing of liftoff was “not calendar guidance. It depends on the data.” San Francisco Fed President John Williams, also speaking today, made a similar argument.

As world growth falters, the US consumer rolls along. Most of the change over the past quarter related to China. The Chinese currency was devalued, and many Chinese economic indicators continued to slow. China has showed lower growth rates and missed growth forecasts for several years. The news this morning shows Chinese industrial profits fell 8.8% in August year-over-year. It’s not new news. Still, the devaluation brought some already well-known weaknesses to the forefront. And as we have long been expecting, a slowing China generally has helped the U.S. economy as the small decrease in exports has been more than offset by lower commodity prices, which puts more money in consumer pockets.

Purchases of new cars and trucks and strong back-to-school sales drove consumer spending higher in August, a sign the economy continues to expand at a moderate pace. In August, consumer spending rose a seasonally adjusted 0.4% to match the revised gain in July. Personal incomes rose 0.3% last month. Incomes have also risen steadily since the early spring, largely reflecting strong job creation that’s tugged the unemployment rate down to a post-recession low of 5.1%. Since spending grew faster than income, the amount of money individuals save fell a tick to 4.6% from 4.7%. Inflation as gauged by the PCE price index, was unchanged in August. The PCE index is up just 0.3% in the past 12 months.

This week’s big economic report comes on Friday, when the Labor Department publishes the September employment report. The consensus estimate calls for 190,000 new jobs in September. The unemployment rate is likely to remain at 5.1%.

A gauge of pending home sales fell 1.4% in August to the lowest level in five months. The index from the National Association of Realtors declined to a seasonally adjusted 109.4 in August from 110.9 in the prior month. Pending sales have leveled off since mid-summer, with buyers being bounded by rising prices and few available and affordable properties within their budget.

The federal government is funded only through Wednesday but House Speaker John Boehner says there won’t be a government shutdown. Speaking on CBS’ “Face the Nation,” Boehner confirmed plans to pass a short-term funding bill. Boehner, who announced Friday he is resigning from Congress at the end of October, also said he will set up a committee to investigate Planned Parenthood.

President Obama addressed the United Nations General Assembly this morning, saying the US is was willing to cooperate with Russia, as well as Iran, to try to end the Syrian civil war but the two big powers clashed over whether to work with Syrian President Bashar al-Assad, whom Obama called a tyrant. Russian President Vladimir Putin, in contrast, told the gathering of world leaders that there was no alternative to cooperating with Assad’s military in an effort to defeat ISIS. Later, Obama and Putin met privately.

In opening the General Assembly, Secretary General Ban Ki-moon struck a sober theme, asserting that: “Inequality is growing, trust is fading, and impatience with leadership can be seen and felt far and wide.” Mr. Ban called explicitly for an “end to bombings” in Yemen, and named the five countries that, as he said, “hold the key” to peace in Syria: Russia, the United States, Saudi Arabia, Iran, and Turkey.

Pro-independence parties won a majority 72 seats (out of 135) in Catalonia’s regional parliament, but took down only 48% of the vote. Blocked by the national government from holding a referendum on independence, the separatists attempted to turn these elections into just that. While they won a majority of seats, the failure to gain more than 50% of the vote means had this been a referendum, it would have been a loss.

Apple said it sold more than 13 million iPhone 6s and 6s Pluses during their first weekend on the market. The company beat its previous record of 10 million in sales for the previous generation of iPhones in its first weekend in 2014. This year’s results benefited from the inclusion of the Chinese market, where regulatory problems delayed the gadget’s debut last year.

Whole Foods Market said it would cut about 1,500 jobs, or about 1.6 percent of its workforce, over the next eight weeks. The cuts are aimed at reducing costs as the company invests in technology upgrades. Whole Foods said in May that it would launch a new chain of smaller, more value-focused shops next year.

Scientists say there is water on Mars. In a paper published in the journal Nature Geoscience, scientists report definitive signs of liquid water on the surface of present-day Mars, a finding that will fuel speculation that life, if it ever arose there, could persist to now, or possibly in the future. In the research, Dr. Alfred McEwen, a professor of planetary geology at the University of Arizona and the principal investigator of images from a high-resolution camera on NASA’s Mars Reconnaissance Orbiter, along with other scientists discovered in photographs from the Mars Reconnaissance Orbiter dark streaks descending along slopes of craters, canyons and mountains. The streaks lengthened during summer, faded as temperatures cooled, then reappeared the next year.

The researchers were able to identify the telltale sign of a hydrated salt at four locations. In addition, the signs of the salt disappeared when the streaks faded. In other words, small rivers of liquid water; briny water, but water nonetheless. The salts lower the freezing temperature, and the water remains liquid. The average temperature of Mars is about minus 70 degrees Fahrenheit, but summer days near the Equator can reach an almost balmy 70.

Many mysteries remain. For one, scientists do not know where the water is coming from. One theory is that the salts act like a sponge to soak up moisture from the environment. The other possibility is underground aquifers, frozen solid during winter, melting during summer and seeping to the surface.

No Harm In Waiting For A Fed Increase

Financial Review

First Do No Harm

Sinclair Noe — September 17, 2015

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

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DOW – 65 = 16,674
SPX – 5 = 1990
NAS + 4 = 4893
10 YR YLD – .08 = 2.22%
OIL – .25 = 46.90
GOLD + 11.80 = 1132.00
SILV + .21 = 15.24

The Fed will raise rates someday, just not today. The FOMC issued their statement today, and they left interest rates unchanged, again. The biggest change in the wording dealt with international markets, saying: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

The statement also included this new line: “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced, but is monitoring developments abroad.” You may recall that China was also frequently referenced in the Beige Book published a couple of weeks ago in preparation for this FOMC meeting.

The Fed also released their economic projections and they seem to be forecasting more of the same: GDP just over 2% for 2015, the unemployment rate finishing the year at 5%, inflation still significantly short of their target, and the outlook for a rate hike before the end of the year. But don’t bet on it; this Fed might never get off the Schneid. There will be growing pressure for a rate hike, if only to avoid the perception that the Fed is weak, or the idea of a Yellen put, or the view that market volatility is enough to stay the Fed’s decision again.

And the Fed’s decision to wait raises concerns about global economic weakness. Slowing growth in China has rippled across the world, hitting commodity-producing countries hard. The MSCI Emerging Markets Index, which captures stock markets in nations such as Brazil, Chile, Egypt and China, is down 14 percent this year. Just how bad is the situation in the emerging markets? And is it about to get worse?

The statement from the Fed also featured the first dissenter, Richmond Fed President Jeffrey Lacker was gung ho for a 25 basis point increase. And in the economic projections, known as the “dot plot”, which include forecasts of where each policymaker thinks the Fed should have its policy rate at the end of a given period, there’s one remarkable outlier in the projections.

For the first time ever, one monetary policymaker thinks the U.S. needs to move to negative interest rates until at least the end of 2016 to achieve full employment and get inflation back to 2 percent. That was probably the parting shot of outgoing Minneapolis Federal Reserve Bank President Narayana Kocherlakota. Beyond that one vote for negative rates, most of the dots point to higher rates by the end of the year. And there is a good chance that might happen, if only to prove they can.

The decision to leave rates unchanged doesn’t mean much; remember we’re talking about one-quarter of one percent. The Fed hasn’t chosen to resolve the doubts about whether its monetary tools can raise rates without causing upheaval in the banking system. But it has also chosen not to create new uncertainty over whether a rate hike is a one-off or a signal of more to come. Even so, forecasts show policymakers predicted that the Fed’s benchmark rate would rise gradually, reaching 2.6 percent by the end of 2017. In June, they predicted that the rate would reach 2.9 percent by then.

Futures traders are pricing in a 21 percent probability the central bank increases it target range in October, a 49 percent chance by the December meeting and a 56 percent likelihood by January. Treasuries rallied, pushing yields lower; while the dollar tumbled to a three-week low; stocks wobbled then slipped – there is bound to be some concern that slowing global growth could hamper the domestic economy.

There was some speculation that if the Fed didn’t raise rates today, they would at least come out with a hawkish statement, reaffirming their intent to raise rates soon – but that didn’t happen. And so this is being interpreted as a very dovish statement from the Fed. It might also be giving us some insight into the Yellen-led Fed. Greenspan or Bernanke probably would have hiked rates, right or wrong. And I thought Yellen would be a bit more hawkish, just to be assertive. That was not the case. Yellen appears more cautious, but that doesn’t mean she made a mistake.

There is more danger in hiking rates prematurely than in waiting. The Fed may think inflation is transitory but for now, it certainly isn’t a problem – no harm in waiting. The Labor market has been improving but there is still plenty of slack; a stronger labor market might attract some discouraged workers to try again; a stronger labor market might result in push on stagnant wages – no harm in waiting.

If the Fed raises rates, no borrower will feel the pain more acutely than the federal government, the nation’s largest borrower; and fiscal policy has been irresponsible at best; the Fed couldn’t feel confident raising rates with the prospect of a federal government shutdown in less than 2 weeks – no harm in waiting.

The housing market has finally shown signs of life, but many markets, like Phoenix, still haven’t fully recovered; a Fed rate hike would almost certainly result in higher mortgage rates – no harm in waiting. A Fed increase might have prompted investors to pull money out of emerging, damaging their economies, and hurting their abilities to buy goods from developed countries – no harm in waiting.

The problem for the Fed is that any action they take will take time to work; steering the economy one way or the other is like trying to steer a huge ship, not a small sports car; there is lag time before the effects of policy are felt. And there might never be a perfect time to change policy. If they don’t get to it by the December, next year we move into an election year, which means there will be political implications thrown into the mix.

There was other economic news today. The number of Americans getting laid off from their jobs remains near the lowest level in decades. New applications for U.S. unemployment benefits fell by 11,000 to 264,000 in the seven days ended Sept. 12. This is the lowest level of claims since mid-July, when claims fell to 255,000, the lowest level since September 1974.

Construction of new homes slowed down over the past two months. Housing starts fell 3% to an annual rate of 1.13 million units in August. Starts in July were revised down sharply to a decline of 4.1% to an annual rate of 1.16 million units from the prior estimate of a 0.2% gain to 1.21 million.

The U.S. current account deficit narrowed to a preliminary $109 billion in the second quarter, or 2.5% of gross domestic product, from a revised $118 billion.

The Philadelphia Fed manufacturing index took a surprise turn into negative territory in September, falling to negative 6 from positive 8.3 in August.

Copper prices rose to two-month highs in early Asian trading on worries about supply disruptions due to a powerful earthquake off the coast of Chile – the world’s largest copper producer. The magnitude 8.3 quake shook buildings in the capital Santiago and generated tsunami warnings from New Zealand to California. Five people are now known to have died, and one million residents have been evacuated from Chilean coastal areas.

French media giant Altice has confirmed it will buy Cablevision for an enterprise value of $17.7B, or $34.90/share in cash (a 22% premium to Wednesday’s closing price). Together both operators represent the fourth-largest cable operation in the U.S. market.

General Motors has agreed to pay $900 million and sign a deferred-prosecution agreement to end a U.S. government investigation into its handling of an ignition-switch defect linked to 124 deaths. The deal means GM will be charged criminally with hiding the defect from regulators and defrauding consumers, however, the charges will be put on hold while the automaker fulfills the terms of its settlement. Individuals are also not expected to be charged in the criminal suit.

Australia’s antitrust regulator has deferred a decision again on Royal Dutch Shell’s proposed $70 billion takeover of BG Group, this time until Nov. 12, warning the deal could raise prices and cut the supply of natural gas to consumers on the east coast of Australia. The takeover has already been cleared by the European Commission, U.S. and Brazilian antitrust authorities, but still needs approvals from Australia’s Foreign Investment Review Board and China to go ahead.

Saying the deal was unlikely to hurt competition, the Justice Department has granted antitrust clearance to Expedia’s $1.3 billion takeover of rival Orbitz Worldwide. The department had investigated how the merger might affect the commissions Expedia and Orbitz negotiate with airlines, car rental companies and hotels and explored new charges to consumers.

Northrop Grumman  announced a new $4 billion share repurchase program. The defense contractor had previously approved a $3 billion program last December.

Sony said China censorship rules are hurting sales of its PlayStation 4 video game console, even though a ban on foreign-made gaming consoles was lifted last year.

KKR‘s Samson Resources filed for Chapter 11 bankruptcy protection, as the oil and gas producer hands control over to its lenders. Samson was bought four years ago by a group led by KKR for $7.2 billion.

Back from the dead? Google seems to have resurrected its troubled Glass connected eyewear project, now called Project Aura, by hiring engineers and software developers from Amazon. Aura will remain within Google rather than Alphabet to collaborate more closely with advanced technology efforts and develop other wearables. Google stopped selling the initial $1,500 version of Glass to consumers in January following waning interest, criticism over its price and privacy concerns.

Financial Review

Sliding Into the Close

Sinclair Noe — September 3, 2015

Podcast: Play in new window | Download (Duration: 13:14 — 12.1MB)

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DOW + 23 = 16,374
SPX + 2 = 1951
NAS – 16 = 4733
10 YR YLD – .03 = 2.17%
OIL – .12 = 46.63
GOLD – 8.70 = 1126.00
SILV + .03 = 14.83

Wall Street started the session on a high note, but could not hold it. Stocks slipped into the close and the Nasdaq turned red for the day. The stakes couldn’t be higher for the tomorrow morning’s August employment report, even though the month has typically been cursed by disappointment. The consensus guesstimate calls for about 215,000 to 220,000 new jobs created in August, with the unemployment rate holding at 5.3%, but August is notorious for misses. From 2005 to 2014, forecasters have over-estimated the initial August payrolls print seven times, including in each of the past four years.

What’s more, the Labor Department (excluding annual and benchmark revisions) has marked up its first estimate in subsequent months in eight of the past 10 years. Part of the puzzle of forecasting August payrolls is the difficulty in adjusting for annual changes in the school-year calendar. Financial-market turmoil, at least, probably did little to impact hiring decisions in August. The government surveys households and businesses in the week that contains the 12th of the month, so the data will reflect responses covering the Aug. 9-15 period; that was a few days before the market rollercoaster ride began.

Short-dated Treasury debt yields, which are tied most closely to monetary policy forecasts, rose in August, with the two-year note yield logging its fifth straight monthly increase. That was its longest winning streak since 2006 when the Fed last raised interest rates. Long-dated Treasury yields, often seen as a safe haven from stock market volatility, are virtually unchanged on the year, suggesting that bond investors are brushing off the panic about slowing global growth. This would suggest that bond traders are bracing for an imminent rate hike.

The European Central Bank will continue its 60 billion-euro a month asset purchase plan; that’s the Euro version of QE. The stimulus is intended to help get consumer price inflation back toward the ECB’s target of just below 2%. In the year to August, it stood at 0.2%. ECB President Mario Draghi today said it could go negative in the coming months following recent oil price falls. Draghi said: “The risks to the euro area growth outlook remain on the downside…” And if things actually do get worse, Draghi emphasized he is willing to do even more. The euro dropped against the dollar and Eurozone stock markets enjoyed a nice bounce.

Chinese markets are closed today and tomorrow to mark the 70th anniversary of the end of World War II. The holiday is officially called “The 70^th Anniversary of Victories in the Chinese people’s War of Resistance Against Japanese Aggression and the World Against Fascism”; and right there we have a glimpse into the problems in China. Presiding over the extravaganza, President Xi Jinping said China would remain committed to “the path of peaceful development” and unexpectedly pledged to slash 300,000 troops from the country’s 2.3 million strong military. The announcement came before a huge military parade. At the same time, the U.S. government reported that five Chinese Navy ships were sailing in international waters off Alaska for the first time.

Treasury Secretary Jack Lew criticized China’s handling of its currency devaluation. In a CNBC interview, Lew said, “there’s an economic and a political reality to things like exchange rates,” and “how they manage their exchange rate is a matter of great concern to us and that they need to be willing to let market forces drive the value up, not just drive it down.” Lew, will be participating in a meeting of G-20 financial ministers and central bankers Friday in Turkey. The treasury secretary’s remarks come ahead of the Chinese premier’s visit to the U.S. later this month.

Tomorrow brings the big monthly jobs report for August.  This will be the data that the Fed will use at their FOMC meeting September 16 & 17; the question is whether the report will be weak enough to keep the Fed from hiking rates or strong enough to allow a hike.

Also tomorrow, the G-20 will be meeting in Turkey. The International Monetary Fund has prepared a report for G20 finance chiefs, and the IMF says the turmoil in China and other factors like capital flow reversals were increasing the risks to economic growth around the world. It warned that advanced and emerging economies need to continue to support demand with reforms and investment to ensure that the turbulence in markets and China’s troubles do not stall economic activity in the rest of the world.

The report expressed continued confidence that growth is picking up “modestly” in advanced economies in the second half of 2015 and in 2016, helped by the impact of cheaper oil. But the oil price plunge, along with other commodities, is hurting emerging market economies, and they are also being buffeted by the impact on their currencies of China’s yuan devaluation and the strong dollar. The dollar’s strength, the Fund warned, could take a toll on companies with dollar liabilities. The Fund highlighted an increase in risks to overall global growth: that China would not confront its slowdown with growth-supporting policies; that commodity prices would slide further; that the US dollar would continue to rise; and that companies would suffer from higher debts.

Of course, writing a report doesn’t make it so. The reality on the ground is that gauging China’s economy is a guessing game; the Chinese simply don’t measure their economy in familiar ways and they certainly run their economy a bit differently. And most analysis overlooks the fact that China’s economy is changing; the service sector is now the driver of growth, so it makes sense that industrial growth is slowing down, but it doesn’t necessarily mean the economy has gone over a cliff. Beijing’s economic policy makers know that even though structural overhauls will moderate growth in the near-term, they’ll also bolster long-term growth and help stave off a major deceleration.

The U.S. trade deficit fell in July to its lowest level in five months as exports rose. The Commerce Department said the trade gap narrowed 7.4 percent to $41.9 billion, the smallest since February. The smaller deficit implied a modest contribution to gross domestic product from trade early in the third quarter.

The Institute for Supply Management said its services index slipped in August, to 59% from 60.3% in July, but still a very strong reading indicating growth in the sector.  Ahead of Friday’s payrolls report, the ISM services employment index fell 3.6 points to 56%.

The Commerce Department reported today on the gross domestic product broken out for each state for 2014. Just 16 states outperformed the country as a whole last year. In 32 states, gross domestic product advanced at the same or slower pace than the 2.2% economic growth recorded for the U.S. And the economies in two other states, Alaska and Mississippi, contracted last year. Among those 16 were the four largest state economies: California, Texas, New York and Florida. The fastest growing state was North Dakota, thanks to a booming oil patch; it is unlikely to repeat in 2015. Arizona came in at #37, with anemic 1.4% growth in GDP.

Jobless claims increased by 12,000 to 282,000 in the week ended Aug. 29. Since the beginning of March claims have held below 300,000, indicating employers in the U.S. are confident in their outlook.

Sony Pictures has reached a settlement with former employees in a lawsuit related to the massive data breach it suffered almost a year ago. The federal lawsuit, which is still pending class-action status, is a combination of seven different cases brought by nearly 50,000 current and former employees whose personal, financial and medical information were posted online. Additional details about Sony’s settlement are expected to be filed by mid-October.

Novartis said it will begin selling the first biosimilar drug in the U.S. after an appeals court in Washington rejected a request to block the Swiss drug maker’s sale of its copycat version of Amgen’s blockbuster remedy, Neupogen. Zarxio was the first biosimilar–a copy of a biotechnology drug–approved by the FDA. In Europe, where biosimilars have been available for several years, they typically cost 15% to 30% less than the original brands.

Royal Dutch Shell’s proposed $58 billion merger with BG Group has received unconditional clearance from the European Commission, the third of five key markets needed to clear the deal. The EU’s top antitrust regulator concluded that the acquisition would not allow Shell to influence prices for oil and natural gas, and that the markets would remain competitive after the transaction.

Pimco Total Return saw another $1.8 billion in net outflows in August, down from $2.5 billion in July and $3 billion in June. Total assets under management at the former giant of mutual funds have now fallen below $100 billion for the first time since 2007 (the fund neared $300 billion at its peak). As for the performance scorecard, Pimco Total Return’s year-to-date gain is 0.72% vs. the benchmark of 0.45%. It’s also outperformed the benchmark over 3-year, 5-year, and 10-year periods, as well as since its inception.

Meanwhile, Bill Ackman has joined a string of high profile hedge fund managers in reporting deep losses for August. The firm’s Pershing Square Holdings portfolio dropped 9.2%, and is now down 0.1% since January. Last year the fund gained 40%, beating the S&P’s 13.7% gain. Other hedge fund losses for August: Greenlight Capital -5.3%; Third Point -5.2%; Jana Partners -4.3%; Viking Global -2.1%; Omega Advisors -6%; Andor Capital -4.5%.

Financial Review

While the Getting is Good

Sinclair Noe — April 9, 2015

 

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

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DOW + 56 = 17958
SPX + 9 = 2091
NAS + 23 = 4974
10 YR YLD + .06 = 1.96%
OIL + .37 = 50.79
GOLD – 8.70 = 1194.50
SILV – .36 = 16.25

Initial claims for unemployment benefits increased 14,000 to 281,000 in the week ending April 4^th.  Over the past 4 weeks, jobless claims have averaged 282,500 a week; the lowest level in 15 years. While companies are maintaining headcounts, job listings also have climbed. Openings rose to 5.1 million in February, the most since January 2001, according to the JOLTS report on Tuesday.

Wholesale inventories rose 0.3% in February as wholesale sales fell 0.2%, perhaps a sign that companies experienced less demand in late winter that could cause them to temporarily scale back production.

In a televised speech today, Iran’s  supreme leader, the Ayatollah Ali Khamenei said Tehran would agree to a final nuclear accord with the US and five other nations only if all sanctions over its disputed nuclear work were lifted.  In remarks apparently meant to keep hardline loyalists on side, he warned about the “devilish” intentions of the United States. Meanwhile, Iran’s oil minister, speaking today in China said that OPEC would “coordinate” to accommodate Iran’s return to oil markets without causing a price crash.

Samsung Electronics expects to ship record numbers of its new Galaxy S6 smartphone after it goes on sale tomorrow, but will have problems fulfilling demand for the curved-edged version due to difficulties in manufacturing the screens. The hope is that the launch of the flagship device will help spark a turnaround at Samsung following a slump in earnings over the past year or so.

American Airlines and US Airways received their single operating certificate from the Federal Aviation Administration on Wednesday, an important step in the integration of the two airlines. The merger between the airlines closed in December 2013, but the carrier still operated separate American and US Airways flights. Passengers will not see much change. Flights will still be operated under the American and US Airways brands until the carriers merge their reservation and passenger ticketing systems this year. Once that is done, the US Airways brand, ticket counters and website will change to American.

Walgreens will close 200 of its 8,232 US drugstores. The company will also reorganize corporate and field operations and revamp its technology, which along with the store closings will help cut an additional $500 million in costs by the end of fiscal 2017. That would extend a $1 billion cost-cutting initiative announced in August.

Yesterday we talked about the idea that the prospect of higher rates has been pushing consumers away from revolving debt, like credit cards, even as they take on more non-revolving debt, such as car loans; it might also be leading to more borrowers locking in low rates of floating rate mortgages. And mergers and acquisitions are back in a big way. Yesterday was a $100 billion dollar day for M&A.  It started with a big deal in the energy sector; Royal Dutch Shell’s $70 billion acquisition of BG Group of Britain signals that the kinds of mega-energy-mergers that reshaped the industry in the late 1990s may be due for a revival. Mylan’s $29 billion approach to Perrigo, meanwhile, underscores just how red-hot consolidation in health care continues to be. Both of the generic drug makers had done their own deals in just the last two years.

This afternoon, news that Blackstone Group and Wells Fargo are nearing a deal to buy a real estate portfolio from General Electric worth as much as $30 billion. It could be one of the largest real estate deals since Blackstone acquired Equity Office Properties Trust for $39 billion in 2007 at the height of the last property boom. Commercial values in the US have since reached records as investors from around the globe seek places to put money at a time of near-zero interest rates. Unloading the assets would further Chief Executive Officer Jeffrey Immelt’s goal of shrinking GE Capital, whose lack of access to credit during the 2008 financial crisis put the parent company at risk. GE Capital has been disposing billions of dollars in holdings, including foreign bank stakes, while Immelt works to bulk up the industrial side of GE’s business.

Bankers and hedge fund managers are licking their chops as a spree of M&A, fueled by the expectation that a multi-year run of cheap money may be coming to an end is expected to push transactions that could top record value amounts.  Deal value has already surged to $1 trillion for 2015. A projected $3.7 trillion worth of deals this year would be second only to 2007, when all M&A surpassed the $4 trillion mark. Part of that comes on growing sentiment that, whenever the Federal Reserve finally decides to increase rates, this won’t be coming until after summer; so get the deals done while the getting is good. Data housed by S&P Capital IQ says seven of the 10 biggest M&A transactions in the wake of the financial crisis have all been announced within the last 16 months. What’s more, S&P Capital data shows, the year-to-date announced deal value is, right now, as high as it has ever been, including the bellwether year 2007. That also means that deals are attracting a premium.

It does not mean that every deal will work out. Altera stock dropped after reports that talks to be bought by chipmaker Intel Corp. have fallen apart. Intel has been on the hunt for growth as it faces a slowdown in the market for PCs that forced a $1 billion cut in its first-quarter sales forecast last month. Altera shares had jumped 28 percent on March 27 after reports of the talks.

In his annual letter to shareholders, Jamie Dimon, the chief of JPMorgan Chase, warns “there will be another crisis” – and the market reaction could be even more volatile, because regulations are now tougher; but the next crisis won’t be caused by the banks because there are so many regulations in place that they would not be the likely cause of a meltdown.  He argued the crackdown on the financial sector, added to more-stringent requirements for capital and liquidity, will hamper banks’ capacity to act as a buffer against shocks in financial markets. Of course, not having enough funds set aside for an emergency didn’t work out so well in 2008. Then he goes on to say the bank is in a better position than before and is much more prepared to handle a downturn. If it all sounds a bit confused; not really; Dimon doesn’t like regulations; JPMorgan share price has not been great and Dimon blames regulations.

Remember that this was an annual letter to shareholders, which means it is basically a 39 page sales brochure. There were plenty of nice charts and graphs, and everything seemed to move from the bottom left side of the page to the upper right side of the page. There is some revisionist history when it came to the acquisitions of Bear Stearns and WaMu, see page 19 of the letter.

Dimon also blamed legal and regulatory costs for weighing on the firm’s share price, writing: “While we acknowledge that our P/E ratio is lower than many of our competitors’ ratio, one must ask why. I believe our stock price has been hurt by higher legal and regulatory costs and continues to be depressed due to future uncertainty regarding both.” The letter mentions continuing foreign-exchange settlement negotiations as an area of uncertainty. Dimon calls for some serious policy discussion about the way regulators regulate, and he thinks the legal costs will “diminish” over time; and they would probably diminish faster if he can change the regulatory policies. He didn’t provide a chart on legal costs, but if he did, the numbers for the past five years would have been about $32 billion; which is bigger than all the credit they extended to small business in 2014, and bigger than the bank’s net income last year. Dimon said he expects the firm’s legal costs to “normalize” in 2016. Deep in the footnotes you can find that the bank is still looking at nearly $6 billion in legal expenses. Which is actually about the average paid for legal expenses in the past few years, but I don’t know if that means it is normal.

The European Central Bank bolstered its emergency funding for Greece’s stricken banks, as Athens made good on its promise to pay back the International Monetary Fund, averting an unprecedented default. Having threatened to deliberately miss a €448m loan repayment to the Fund without a guarantee of fresh bail-out cash, Athens sent its latest payment this morning. Christine Lagarde, the director of the IMF confirmed the payment while speaking in Washington, saying: “Yes, I got my money back.”

The Greek government has warned its paymasters it would run out of funds to make its loan obligations and continue to pay out a €1.7bn monthly social security bill without a release of bail-out cash. A two-month stalemate in Greece’s bail-out negotiations has seen capital flee the country’s banks, which have repeatedly hit the limit on the emergency cash. The ECB’s latest move will just cover the €1.1bn that was withdrawn from banks from March 30 to April 8.

Greece is currently negotiating a short-term bailout extension that it doesn’t really want, offered by European institutions which don’t trust the Greek government and approved by other governments that are running out of patience. That’s the bottom line. Athens currently has until about April 15 to present a completed reform list to its creditors.

But even if Greece gets the bailout deal when European finance ministers meet on April 24 (which isn’t assured), we’ll be back in the same place in about two months. Then, the government isn’t going to want another extension. It’s going to want the major debt deal it promised to deliver when it won the election. A deal to reduce debt is actually a good idea, even if Germany doesn’t want it. Greece’s far-left government is correct about the country’s debt burden; it’s completely unsustainable under the current plans. Greece is about to get some relief for a few months. After that, Athens, Frankfurt and Brussels go back to the brutal negotiations.

Financial Review

Goodbye Patience

Sinclair Noe — April 8, 2015

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

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DOW + 27 = 17,902
SPX + 5 = 2081
NAS + 40 = 4950
10 YR YLD un = 1.89%
OIL – 3.05 = 50.93
GOLD – 5.50 = 1203.20
SILV – .32 = 16.61

We start today with a big acquisition in the oil industry. Royal Dutch Shell agreed to buy BG Group for about $70 billion in cash and shares, the oil and gas industry’s biggest deal in at least a decade; since 2004 when Royal Dutch Shell was created. This is the biggest acquisition this year and the 10^th biggest M&A deal overall, and the fourth biggest deal overall in the oil industry. The merged company will boast a market value twice the size of BP, and even larger than Chevron. ExxonMobil is still the 800 pound gorilla with market cap north of $350 billion.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant buyback of $25 billion from 2017 to 2020. Shell investors reacted coolly to the deal. Shell’s B shares, the class of stock being used to finance the deal, fell about 7% percent in London. For BG it represents a 50% premium.

BG Group is the exploration part of the former state owned British Gas that was privatized by Margaret Thatcher in the 1980s. British Gas was split into BG and Centrica. The new company will be the largest producer of liquefied natural gas, or LNG, among international oil companies. Shell pioneered the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal. The deal will still need antitrust approvals from regulatory agencies in Australia, China, Brazil and the EU.

This is a very interesting deal for many reasons, not the least is the downturn in oil prices over the past year, which has been devastating for smaller or less strategically positioned companies in the oil industry. Case in point: Noble Energy just announced it is cutting 220 jobs across the U.S., with around 100 losses at the oil company’s Houston headquarters and another 100 or so at its Colorado operations. The cuts represent 10% of Noble’s 2,200 U.S. employees. The news comes after the firm said earlier this year that it was planning to slash spending by 40%.

The roughly 50% premium paid for BG Group would make sense with oil priced at $90 a barrel, which is not the current price. Of course we could see oil prices skyrocket; the situation in Yemen is a stupid mess and that is right at a chokepoint to the Red Sea; and that is just one of many potential hotspots. Absent a geopolitical flare-up, the price of oil is not likely to zoom in the face of excess supply and moderate demand.  Saudi Arabia is reporting it raised oil output to 10.3 million barrels a day in March, the highest in at least 12 years, and intends to keep producing 10 million barrels per day despite low crude prices. The Saudi oil minister says he believes oil prices will rise in the “near future”; maybe, but right now there is a glut.

America’s oil in storage just hit another record after rising by the most since March 2001. Stockpiles rose by almost 11 million barrels, or 2.3%. Analysts had expected an increase of 3.25 million barrels. The EIA report today showed the amount of oil the U.S. is cranking out also edged up slightly, to a rate of 9.4 million barrels a day. Investors have been closely watching the oil gather in storage tanks, which has been rising steadily since the oil-price crash started last year. U.S. crude production has been at the highest in decades even as drillers have made unprecedented reductions in the number of oil rigs out drilling new wells.

The last time we saw deals of this size was in 1999 when Exxon and Mobil merged at a cost of $83 billion and BP bought Amoco for $48 billion. Back in 1998, oil was priced closer to $12 a barrel, and the deal making marked a trough in prices. Shell CEO Ben van Beurden said the deal is “not a bet on the oil price.” You can believe that if you wish, but I doubt they would have made the deal if they thought oil was going to $30 a barrel for an extended period.

So oil prices are important but not the only thing. In the past 12 months, the oil majors have had to deal with the consequences of events in Ukraine and the Crimea as well as western government sanctions on Russia and the effects these sanctions have had on the profitability of their assets exposed to those sanctions. Shell was likely attracted by BG’s deepwater assets in Brazil and its LNG portfolio. BG Group is one of the world leaders in LNG and recently completed a $20 billion facility in Australia. The combination of Shell and BG will result in a portfolio that controls roughly 16% of the global LNG market. The LNG market is crucial for Europe; if Russia can’t or won’t meet Eurozone needs, this is an opportunity for Shell to seize market share. So, it looks like Shell is diversifying away from its core oil business, at a time when oil and gas exploration is becoming increasingly expensive in terms of profitability.

Earnings season is back. Alcoa unofficially kicks of quarterly earnings; a traditional thing; the aluminum company used to be one of the Dow 30 stocks; ticker symbol AA; they go first. Alcoa beat earnings estimates by a couple of cents per share but posted a slight missed on revenue projections. Overall, S&P 500 earnings for the first quarter are forecast to have dropped 2.8% from the year ago quarter, which would be the worst performance since the third quarter of 2009.

The Federal Reserve has released minutes from the FOMC policy meeting in March. That was the meeting where the Fed dropped the term ”patient” from the language surrounding policymakers’ approach to future interest rate hikes. At the time, Janet Yellen said that axing patient “does not mean we are going to be impatient.” Today’s minutes reveal that some policymakers are indeed impatient, ready to raise rates in June; others are very patient indeed, and a couple don’t like the idea of rate hikes at all. So, not much new in the minutes. As we suspected the Fed has not made up its collective mind about rate hikes even as they take a very small step closer to a hike. Uncertainty at the Fed is a recipe for volatility in the markets.

In other words, we could see markets moving in multiple directions, and some of the moves might even seem contrarian. While higher target rates from the Fed would likely slow economic activity by making borrowing costs higher, it would also signal that the economy is stronger and it would push the dollar higher. That would signal the world to bring their money to America – the safe haven play.

Switzerland today became the first country ever to issue 10-year debt that gives investors a yield under 0%. Several European countries inside and outside the Eurozone have sold government debt with up to five years of maturity at negative yields, which means investors effectively pay for the privilege of buying it. But no other country has previously stretched this out as long as 10 years. For Eurozone investors they have the option of paying Switzerland to park their cash, or coming to the US, letting the Treasury pay, plus arbitrage on a strengthening dollar.

So, it is possible that rates could move lower, even as the Fed moves closer to hiking rates. And some people argue that the Fed doesn’t really set interest rates, the bond market does. There is another old saying: “don’t fight the Fed.”

What does that mean for you? Well, if or when rates go up, investors will be able to buy newly issued bonds generating higher streams of income in the not so distant future. That means bonds go down in price, and bond funds go down.

It also means that personal debt becomes more expensive. Take a look at the makeup of your debt, too. Is your mortgage a floating rate loan? Do you have any other floating rate debt? If so, this might be the right time to lock it in place at a low rate. Mortgage rates are the lowest that many lenders have witnessed in their lifetimes; given the Fed’s clear signals, do you really want to delay acting on this? If you’ve been contemplating taking out a loan to make some home improvements, to buy a second home, or for some other purpose; and assuming that you’re in a financial position to handle the payments of course; this is probably a good time to think about the timing of your plans.

It might already be happening. The Federal Reserve reports consumer credit grew at a seasonally adjusted annual rate of 5.6%, for a gain of $15.5 billion in February. This is the fastest pace of growth since October. All of the increase came from non-revolving debt, like car and student loans, which grew at a 9.4% rate up – from a 5.8% rate in January. This is the fastest pace since February 2013. Revolving, or credit-card, debt declined at a 5% rate in February, after a 1.4% decline in the prior month. This is the biggest decline in credit card loans since April 2011. So, in a strange twist, the threat of higher rates is starting to cause increased credit activity; but that is likely temporary.

Over the longer term, higher rates mean less affordable homes and cars. Higher rates mean anything financed costs more. Higher rates mean a higher dollar and that means less profit for multinationals. The direction is clear, and most of us can see it. A CNBC All America Economic Survey shows 27% of Americans judge the economy as excellent or good, the highest level in eight years, up from 16% at this time last year. Looking forward, only 28% of Americans believe the economy will get better in the next year, well below the post-recession high of 36% in March 2012. Things are pretty good now but the road ahead is not so certain. Goodbye patience, hello uncertainty and volatility.