Financial Review

Up and Down the Chain

Sinclair Noe — June 23, 2017

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DOW – 2 = 21,394
SPX + 3 = 2438
NAS + 28 = 6265
RUT + 10 = 1414
10 Y – .01 = 2.14%
OIL + .43 = 43.17
GOLD + 6.60 = 1257.60
BITCOIN + 0.27% = 2745.66 USD
ETHEREUM – 3.55 % = 329.50

Energy stocks led the S&P 500 higher, posting its only positive session of the week. Overall, U.S. stocks closed little changed for the week, with the Dow and S&P posting small gains in the period.

The Nasdaq posted a 1.8% gain for the week. Health care stocks pulled back about 0.1 percent today, but the sector still notched a weekly gain of 3.7 percent to outperform the other spaces.

Today is a Russell Rebalancing Day. That is the annual reconstitution of the Russell Indexes, where the index provider makes rule-based changes to composition of its indexes, to ensure that changes in market value or investment styles, like shares of companies deemed value or growth, for example, are properly accounted.

Total market capitalization for Russell components increased more than 10% to around $27 trillion since last year. Rebalancing day typically results in a little extra trading volume but not much effect on price action for the overall market.

Yesterday, the Senate unveiled its version of Trumpcare, or the Better Care Reconciliation Act. Four GOP senators announced they would not support the bill. Rand Paul, Ted Cruz, Mike Lee, and Ron Johnson said the legislation did not go far enough in its repeal of Obamacare.

Today, Nevada Senator Dean Heller said he would not support the legislation. Heller is up for reelection in 2018 in a state won by Hillary Clinton in last year’s presidential election. Nevada also expanded the Medicaid program under the Affordable Care Act, or Obamacare, and the Senate bill would phase out that expansion starting in 2020. Heller said he can’t support a bill “that takes insurance away from tens of millions of Americans and hundreds of thousands of Nevadans.”

Several other senators are leaning toward opposition, including Portman of Ohio, Murkowski of Alaska, and Collins from Maine. Look for lots of deal making and arm twisting.

Sales of newly-constructed homes rebounded in May, and government data was revised to show a stronger spring selling season than had been previously reported. New-home sales ran at a seasonally adjusted annual rate of 610,000. That was 2.9% higher than in April and 8.9% higher than a year ago.

So far in 2017, 271,000 new homes have been sold, which is 12% higher than during the same period last year. The median sales price in May was $345,800, up from $310,200 in April and $296,000 in May 2016. At the current pace of sales, it would take 4.6 months to exhaust available supply.

About a week ago, Amazon it would acquire Whole Foods, then followed that with news it will start selling Nike products directly online. Once again, Amazon is shaking up the retail universe. Amazon stock has been on a nice run the past week, adding $18 billion in market capitalization.

In contrast, $31 billion in competitor market cap has been wiped out in the same period. Walmart and Costco have been hit the hardest, both losing more than $8 billion in value since the Whole Foods deal was announced on June 16. Whole Foods stock has been trading above Amazon’s offer of $42 a share, however, signaling that investors believe a bidding war could emerge and drive up the final price for Whole Foods.

Competitors like Target, Costco, and Kroger have been rumored as potential suitors, and they would do anything to make this deal harder for Amazon. Walmart is probably the only retailer that can truly compete with Amazon, but today they said they will not bid.

At the same time, Morgan Stanley said in a research note that the retail drug space could experience a wave of M&A action as companies try to outflank Amazon. Basically, any link in the supply chain is now subject to the influence of Amazon.

Meanwhile, outdoor gear retailer Eddie Bauer has hired investment banks to explore strategic alternatives, including a potential sale of the company. Also, today, Sears Holdings is closing an additional 20 money-losing stores. The move includes 18 Sears stores and two Kmart stores. Sears is hardly the only retailer shuttering locations.

There have been about 5,300 store closing announcements so far, this year, according to Fung Global Retail & Technology, a retail think tank.

Meanwhile, Amazon has filed for a patent for beehive-like towers that would serve as multi-level fulfillment centers for its delivery drones to take off and land. The facilities would be built vertically to blend in with high rises in urban areas. Amazon envisions each city would have one. The patent application features several drawings of these buildings, such as the beehive, a cylinder-shaped center and one that looks like a UFO.

The Brexit vote happened one year ago. Britain’s stock market, the FTSE 100, has gained nearly 17% since the UK’s June 23, 2016, vote to leave the European Union. The divorce talks between Brussels and Britain finally kicked off this week, but the outcome of the final agreement remains extremely uncertain.

The government will be working against the clock to hammer out a deal before the deadline of March 29, 2019, two years after UK Prime Minister Theresa May triggered the so-called Article 50 that officially set off the Brexit process. Little progress has been made in the three months since the Brexit clock started ticking. The UK is in a weak negotiating position.

And nobody is sure what Brexit means or what it will ultimately look like.

Qatar has 10 days to meet 13 demands from the Gulf states. Qatar is being ordered to reduce diplomatic ties with Iran, sever ties with terrorist organizations, and shut down Al Jazeera and affiliated networks, among other things, before the Gulf states will lift their blockade on the country.

Another day of Fedspeak. Cleveland Federal Reserve Bank President Loretta Mester said that recent inflation weakness was likely temporary and it should not delay another interest-rate hike this year, even though there is no “immediate need” to tighten policy. Mester is considered one of the more hawkish policymakers.

St. Louis Fed president James Bullard says the Fed can afford to stop raising short-term interest rates and wait and see how economic developments and Washington policy debates play out in coming quarters. Bullard says optimism about the economy has faded since March with economic data surprising to the downside. Bullard is considered one of the more dovish policymakers, calling for rates to remain flat through 2019.

By raising interest rates for the second time this year, Federal Reserve officials doubled down on their long-held belief that inflation will level out at their 2% target, even though the numbers hint at another story.

The Fed has been singing the same tune on inflation for nearly the entirety of this decade, and one could be forgiven for wondering how much inflation is really playing into the Fed’s decision-making process at this point. Yellen and friends made the move to lift rates to between 1% and 1.25% even though most inflation readings have drifted away from its long-run target of 2% in recent months.

Instead, it seems that a marginally improved labor market, and a desire for more wiggle room to cut rates for a slowdown that is becoming increasingly mathematically inevitable, are motivating the push to tighten policy. That includes the Fed’s outline for reducing its balance sheet, the manner of which but not the timing, was unveiled alongside the rate hike.

Treasury yields have fallen from their 2017 highs recently, with the benchmark 10-year yield trading around 2.15 percent. In March, it traded around 2.6 percent. The bond market doesn’t see inflation coming in the near term, and so far, it’s been right.

Adding to the deflationary ledger – oil prices dropped about 4% this week.

Today, SpaceX successfully fired up a Falcon 9 rocket for the eighth time this year, matching its flight total for all of last year. Its next launch is scheduled just two days later, with the ramped-up cadence putting the company on track to achieve the 20 to 24 total missions it’s targeting for the year.

The launch used a “flight proven” Falcon 9 rocket booster, which means it’s flown to space previously and been returned and refurbished. The rocket carried a Bulgarian communications satellite destined for geostationary orbit.

It launched from the historic 39A pad at NASA Kennedy Space Center in Florida, where Neil Armstrong left from before landing on the moon in 1969. On Sunday, SpaceX will launch 10 satellites for Iridium Communications from Vandenberg Air Force Base on California’s central coast.

Remember Blackberry? Once upon a time, about 8 to 10 years ago, Blackberry was the mobile phone of choice. The company reported earnings of $0.02 per share, compared to an estimated zero, but revenue fell to $235 million from $400 million from the year before. The company outsourced the manufacturing of Blackberry hardware in late 2016 in order to focus on software and services. Shares were up about 50% this year, until today – down 12%.

If you use Google’s Gmail, you may have noticed a that anything in your emails is likely to pop up as an ad. It’s not just a coincidence. Gmail scans and analyzes emails – or at least they did. They will stop the practice, due to privacy concerns and the general creepiness.

But this doesn’t mean you won’t see targeted ads in Gmail. Instead, they’ll be personalized with information gleaned from other sources. For example, Google collects data about you based on the YouTube videos you watch or the searches you make.

Financial Review

Dignity

Sinclair Noe — June 26, 2015

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

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DOW + 56= 17,946
SPX – 0.82 = 2101
NAS – 31 = 5080
10 YR YLD + .08 = 2.48%
OIL – .07 = 59.63
GOLD + 1.30 = 1175.20
SILV – .09 = 15.85

For the week, both the Dow and S&P 500 fell 0.4 percent while the Nasdaq fell 0.7 percent. Nike rose 4.3 percent to $109.71 and was the biggest boost to the Dow after reporting a better-than-expected quarterly profit, lifted as it sold more high-margin shoes and apparel at higher prices.

Micron Technology sank 18 percent to $19.66 a day after forecasting a further decline in prices of chips used in personal computers. It also gave a revenue outlook for the current quarter that was well below market estimates. The PHLX Semiconductor index (SOX) fell 2.4 percent.

The Supreme Court has ruled that same sex couples have a constitutional right to marry nationwide. Voting 5-4, the justices said states lack any legitimate reason to deprive gay couples of the freedom to marry. The ruling in support of marriage equality was widely expected, given the Supreme Court’s previous ruling on the issue. In June 2014, the Supreme Court overturned the 1996 Defense of Marriage Act, opening up federal benefits to same-sex married couples. It heard two cases: Hollingsworth v. Perry, the successful challenge to California’s Proposition 8 measure, a 2008 ballot initiative that banned gay marriage in that state; and a New York case, U.S. v. Windsor, which overturned DOMA. Today’s ruling legalized same sex marriage but there’s still no federal law protecting LGBT employees from discrimination. Twenty-one states and Washington, DC, have passed employee non-discrimination laws, but it’s still legal in many places, even the US Congress, for employers to fire workers based on sexual orientation or gender identity.

The case is Obergefell v Hodges, and the person behind the case is James Obergefell; he married his husband Arthur in 2013 after the Supreme Court struck down the Defense of Marriage Act. Arthur died three months later, and Obergefell sued to be able to have his name included on his husband’s death certificate. That is something that will change with today’s ruling; also look for changes in Social Security rules, taxation, estate planning, insurance, and the military has announced that it will now recognize same sex marriages and allow gay couples in the military to receive benefits from the Department of Defense. So, there will be a big economic impact from today’s ruling, in addition to other implications.

At the center of the marriage case was the question of whether the right to same-sex marriage is protected under the Fourteenth Amendment. Justice Kennedy wrote for the majority that: “Under the Due process Clause of the fourteenth Amendment, no State shall ‘deprive any person of life, liberty, or property, without due process of law.’ The Fundamental liberties protected by this Clause include most of the  rights enumerated in the Bill of Rights… in addition these liberties extend to certain personal choices central to individual dignity and autonomy, including intimate choices that define personal identity and beliefs.”

In closing, Kennedy writes that the petitioners have asked for “equal dignity in the eyes of the law” and the court has granted it.

Health care stocks, especially hospital operators, rose sharply yesterday after the Supreme Court ruled that Obamacare federal subsidies were legal. Fresh health care M&A chatter also followed the decision. Humana, the smallest of the big five insurers, is pursuing a deal to sell itself and could reach an agreement by next week. Among those in the running to buy it are two bigger competitors, Aetna and Cigna. Already, Anthem has offered $47 billion to acquire Cigna, a deal that Cigna has rebuffed, potentially with an eye to buying Humana. Anthem itself had also expressed interest in buying Humana, though it is now focused on Cigna. Still, it remains to be seen whether government regulators will bless too many consolidations, because of antitrust concerns.

In the case Johnson v. United States, the Supreme Court just struck down a provision of the Armed Career Criminal Act that says that someone’s past crimes count as “violent” if they involve a risk of serious injury to another person, even if the crime didn’t actually involve violence. The Armed Career Criminal Act is a federal variation of the “three strikes, you’re out” laws that have been passed in several states, though in this case, it’s closer to “four strikes.” If someone has three violent felonies (or “serious” drug crimes) on his record, the law tacks an extra five years onto his fourth conviction. The problem is what crimes count as “violent felonies”; it’s a term that has never been defined legally. So, that’s what the Supremes struck down, and now they don’t have to make those definitions on a case by case basis. In reality, the Supremes are kicking it back to Congress to fix the language.

We are heading into what should be a decisive weekend regarding Greece. Eurozone finance ministers will meet again on Saturday in a last-ditch effort to find an agreement with Greece, ahead of the country’s crucial €1.6B debt payment due to the IMF by Tuesday. International creditors offered a proposal to extend the Greek bailout program by 5 months and release $17 billion in rescue funds. While German Chancellor Angela Merkel touted the five-month bailout extension as “very generous,” Greek Prime Minister Alexis Tsipras compared its terms to an “ultimatum” and “blackmail.” Greece owes about $1.8 billion on Tuesday; money it does not have. The Greek story is developing right now, and it looks like Tsipras has just called for a July 5 referendum, so it will go to the voters.

If you are wondering why Greece might reject a deal from creditors, it helps to remember that in 2010 and 2012, Greece accepted bailout deals from European creditors totaling hundreds of billions of euros in order to prevent the collapse of the Greek banking system. The funds kept Greece from a potential default that would force it out of the eurozone, but most of the enormous sum of money involved in the bailouts ultimately didn’t end up funding public services or directly going to the Greek people.

Instead, much of the bailout funds went back to the same creditors who gave Greece both the bailouts. This resulted in a situation where the so-called troika of the IMF, European Central Bank and European Commission were effectively lending Greece money so it could pay off the debt it already owed them. Essentially the Troika paid itself while leaving the tab to Greece.  In other words, the Greek situation is very difficult to predict for now.

The University of Michigan consumer sentiment rose to a final June reading of 96.1, reaching a five-month high, rebounding from a drop in May. The yield on the 10-year Treasury rose 8.7 basis point to 2.480%, its highest level since September 30. Over the week, the yield gained 21.1 basis points, the largest weekly gain in the month of June. The two-year yield increased 8.9 basis point to 0.712% and the yield on the 30-year Treasury rose 8.3 basis points to 3.239%. Typically, we have seen that when there is uncertainty, such as the situation with the Greek debt negotiations, there is a flight to safety, but it looks like a shift in trading strategy in the Treasury market from “buying the dips” to “selling the rallies”.

While we have been paying attention to Greece, it looks like a bubble has popped in China. China’s $8.8 trillion stock market is crashing. The Shanghai Composite Index dropped 7.4% today, following a sell-off on Thursday that left Chinese shares down 3.5%. The Shanghai market, China’s largest, closed down almost 20% from its recent peak, while the second-largest Shenzhen market fell 8.2%, and is now down 20% from recent highs, entering bear-market territory. The country’s startup stocks have lost a quarter of their value since hitting a record high earlier in the month; the ChiNext index dropped 8.9% today. The selling pressure seemed driven by the sense that the government had become uncomfortable with the equity market surge throughout much of the first half of the year. At its peak earlier this year, the Shanghai composite was up roughly 60% and the Shenzhen index was up more than 120%.

The U.S. and Japan are likely to resolve outstanding bilateral issues so a 12-nation Trans-Pacific Partnership deal can be struck at a multilateral ministerial meeting in July. A deal between the two countries is vital to clinching the TPP pact, which would cover 40% of the world economy. Remaining bilateral issues include Japan’s market for farm products and the U.S. market for auto parts.

The Russell indexes go through an annual rebalancing, and it happened today. Changes in the small-cap Russell 2000 and the large-cap Russell 1000 and the Russell 3000 mean that the index funds and ETFs that track these benchmark indices must buy or sell stocks to match up with the changes.  Roughly $835 billion is invested in index funds that track the Russell indices. Normally, the rebalancing results in very heavy trading but volume was just slightly higher today.

Islamic extremists have launched terror attacks in 4 countries. As French police pieced together what happened in an attack at a factory near Lyon where one man was decapitated, at least 37 beachgoers were gunned down in Tunisia. A suicide bomber at a Shiite mosque in Kuwait left 25 people dead, while al-Shabaab militants killed 30 peacekeepers in Somalia. Officials say there is no immediate confirmation that the attacks were coordinated. Coordinated or not coordinated; I’m not sure which is scarier.