Financial Review

A Stickler for Math

Sinclair Noe — September 28, 2017

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DOW + 40 = 22,381
SPX + 3 = 2510 (record)
NAS + 0.19 = 6453
RUT + 3 = 1488 (record)
10 Y un = 2.31%
OIL – .56 = 51.58
GOLD + 4.30 = 1287.70

Cryptocurrency

• Number of Currencies: 872
• Total Market Cap: $137,946,002,185
• 24H Volume: $4,334,119,332

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	4,092.0	$67.23B	$1.69B	38.97%	1	-2.27%	9.86%
	Ethereum	ETH	286.29	$26.77B	$548.51M	12.66%	0.0693121	-5.36%	6.77%
	Ripple	XRP	0.19261	$7.23B	$117.41M	2.71%	0.00004632	-4.42%	8.64%
	Bitcoin Cash	BCH	444.00	$7.16B	$302.02M	6.97%	0.105858	-3.06%	1.37%
	Litecoin	LTC	51.840	$2.71B	$217.43M	5.02%	0.0125488	-5.50%	7.38%
	Dash	DASH	330.82	$2.45B	$48.11M	1.11%	0.0792086	-3.59%	-6.56%
	NEM	XEM	0.22060	$2.00B	$4.78M	0.11%	0.00005451	-7.43%	3.17%
	IOTA	MIOTA	0.56939	$1.54B	$25.69M	0.59%	0.00013607	-4.33%	10.18%
	Monero	XMR	93.30	$1.40B	$42.46M	0.98%	0.0227271	-4.97%	5.19%
	NEO	NEO	27.000	$1.33B	$99.73M	2.30%	0.00653991	-10.00%	50.08%

The S&P 500 and the Russell 2000 hit record high closes. The S&P is up 1.5 percent this month, on track for its sixth consecutive monthly gain. September is normally the worst month for stocks.

The Commerce Department released its third and final estimate of second quarter Gross Domestic Product. Second quarter GDP was revised to 3.1%, up from the earlier estimate of 3%. Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period.

With GDP accelerating in the second quarter, the economy grew 2.1 percent in the first half of 2017. Hurricane damage is expected to put a dent in third quarter GDP, but give a little boost to fourth quarter numbers. Estimates for the growth rate in the July-September period are just above 2.2 percent.

Details of the Republican tax plan have yet to be filled in, so we can’t say yet who would pay what. The 9-page proposal released yesterday specifies three income tax brackets — 12%, 25%, and 35% — but it doesn’t say what income levels they would apply to.

It says the $4,050 exemption that taxpayers currently get for each dependent child would be abolished, to be replaced with an unspecified increase in the per-child credit. It says tax-writing committees would provide families “additional tax relief” that they are not prepared to describe yet.

And because Senate rules will require the plan to fit within a budget resolution that will most likely allow only $1.5 trillion in revenue losses over a decade, lawmakers will have to trim its proposed tax cuts — or add new tax increases — to meet that specification before it can become law.

While there is a lot we don’t know, we can identify a group of taxpayers likely to face tax increases from this proposal: people with moderate to upper-moderate incomes who take itemized deductions, like those for mortgage interest and state and local taxes paid.

Some of these deductions would be eliminated. And while Republicans like to misleadingly claim that their plan would “double the standard deduction,” these itemizing taxpayers would lose the ability to take the personal exemption for themselves or their spouses, subjecting an additional $8,100 of their income to tax.

While these taxpayers would lose key tax benefits, rich taxpayers would come out ahead. The rich would benefit from a new preferential rate for business income — while high-income workers could pay tax at rates as high as 35%, business owners would have tax on their profits capped at 25%.

Today, Chief economic adviser Gary Cohn told reporters that a typical four-person American family bringing in $100,000 a year would save $1,000 under the Republicans’ proposed tax reform effort, which they could use to pay for a new car or a kitchen. Or not.

Cohn didn’t explain the math behind the $1,000 in savings but the rest of the math is wrong. In actuality, the average American family makes $74,000 a year before taxes, or about $30,000 less than that, according to the Bureau of Labor Statistics. The median American family income is roughly half of Cohn’s estimate, or only about $55,000.

And I don’t think I can remodel my kitchen or buy a new car for $1,000. Cohn also claimed, “The wealthy are not getting a tax cut under our plan.” That’s simply not true. This is a huge tax cut for the top 1 percent. Math will be an important part of any tax plan, something the politicians haven’t figured out yet.

Puerto Rico is struggling to recover from what its governor called its “biggest catastrophe in modern history,” with Hurricane Maria’s devastation spiraling the country into a humanitarian crisis. After much criticism that the U.S. was not doing enough to help, Trump waived the Jones Act to speed up shipments to the island.

The Jones Act is a 1920 law that prohibits foreign boats from shuttling goods between US harbors. That will make it a bit easier to get food, water, and other products to Puerto Rican ports. But it will have little impact on what is a more pressing problem. Getting supplies from those ports to the people who need them.

Thousands of cargo containers bearing millions of emergency meals and other relief supplies have been piling up on San Juan’s docks since Saturday. Even with moves to ease shipping to the island, the docks have become choke points in the effort to aid storm survivors and may not reach those who need them for days. If nothing else, Maria is a cautionary tale about the vulnerabilities of the supply chain.

The Facebook group United Muslims of America was neither united, Muslim, nor American. Among their various tactics, Russians impersonated real American Muslims to stir chaos on Facebook and Instagram. (And let’s not leave out Twitter, since the Russians didn’t).

Twitter today disclosed to congressional investigators that more than 200 Russia-linked accounts had been used to spread propaganda and misinformation on the company’s platform. The company said that, over the coming months, it will be introducing new ways to detect malicious activity, although it did not provide specifics.

The European Union is once again asking Facebook, Google, Twitter, and other web companies to crack down on hate speech and speech inciting violence and terrorism — but this time, it’s taking things a step further. The European Commission has issued guidelines for web companies to follow, and it’s warning the companies that, if they don’t comply, the Commission may pass legislation. And that legislation, of course, could lead to some huge fines.

The Supremes are back on the bench. The Supreme Court kicked off their new term with the justices hearing three consolidated cases with far-reaching implications for wage-earners. The cases—Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA, Inc.—are all about whether employers have the right to compel workers go through onerous individual arbitration proceedings in order to bring labor law claims.

If the justices answer that question in the affirmative, then the affected workers will—as a practical matter—find it nearly impossible to win back pay in cases involving wage law violations. In the typical case involving wage law violations plaintiffs bring what’s called a collective action (similar, but not identical to, a class action) to recover back pay from a common employer.

Each worker’s claim might be worth only a few hundred or few thousand dollars, but when the defendant is a large firm with lots of similarly situated employees, the collective action might be worth millions. It’s much easier to find competent counsel to litigate a potentially more lucrative collective action.

To pre-empt this possibility, more firms are inserting individual arbitration clauses into employee contracts. In a series of opinions in recent years—including three authored between 2011 and 2013 by the late conservative Justice Antonin Scalia—the court has repeatedly ruled that consumers were barred from bringing class actions by arbitration clauses they had signed as a condition of receiving a product or service.

In the first three years after the court’s pro-arbitration ruling in AT&T Mobility v. Concepcion in 2011, the number of companies using arbitration clauses to preclude employee class actions jumped from 16.1% to 42.7%. Almost 25 million private-sector, nonunion employees are now subject to class waivers contained in arbitration clauses.

Though the three specific cases before the court all involve overtime claims under the Fair Labor Standards Act, the precedent that will be created appears likely also to impact class claims brought under the Equal Pay Act, the Family Medical Leave Act, the Age Discrimination in Employment Act, and Title VII of the Civil Rights Act.

Every time the price of a barrel of crude rises above $50, US shale drillers ramp up production to take advantage of the surge. Then, as supply increases, prices fall. We may be seeing the start of that trend again after oil rose from $46 to more than $52 only to ease back closer to $51 today. Government data released yesterday showed American drillers lifted output almost 9 percent during the past three weeks, the biggest three-week increase in half a decade.

Drug maker AbbVie climbed after it resolved a patent dispute over Amgen’s version of AbbVie’s drug Humira, which is the source of most of its revenue. Amgen agreed not to begin selling its version of the anti-inflammatory medicine in Europe until October 2018, and the U.S. version won’t go on the market until Jan. 31, 2023. The settlement would mean billions of dollars in additional sales for AbbVie, which reported $16 billion in Humira sales in 2016.

Abbott Laboratories jumped after the Food and Drug Administration approved its FreeStyle Libre Flash glucose monitoring system for adults with Type 1 diabetes. The product uses a sensor inserted below the skin to measure blood glucose. Analysts say Abbott could have a competitive edge because the FDA did not advise patients to take samples of their blood to confirm the system’s readings.

Drugstore chain Rite Aid dropped after its quarterly revenue fell short of Wall Street’s forecasts. The stock lost 26 cents, or 11.2 percent, to $2.03. Earlier this month the company agreed to sell almost half of its stores to rival Walgreens for $4.38 billion, but the slimmed-down deal was smaller than investors had hoped.

Ikea has purchased TaskRabbit, which is a gig-economy app that lets users pay a handyman to assemble their Ikea furniture. That’s the kind of can-do spirit that we need around here.

Financial Review

Computer Says

Sinclair Noe — June 13, 2017

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DOW + 92 = 21,328 (record)
SPX + 10 = 2440 (record)
NAS + 44 = 6220
RUT + 6 = 1425 (record)
10 Y un = 2.21%
OIL – .13 = 45.95
GOLD + .60 = 1267.10
BITCOIN + 1.48% = 2779.42
ETHEREUM – 1.97% = 387.89

The Dow Jones Industrial Average and the S&P 500 Index ended at all-time highs, while the Nasdaq 100 Index bounced back from its biggest two-day drop since September.

European and emerging-market equities advanced. Sterling rose for the first time since the U.K. election. Ten-year Treasury yields held near 2.21 percent and the dollar slipped versus major peers before the Fed is projected to raise rates Wednesday.

Tech stocks enjoyed a bit of a rebound but there are still concerns about valuations. A Bank of America Merrill Lynch report found a record 44 percent of fund managers polled in a monthly survey see equities as overvalued, up from 37 percent in May.

The technology-heavy Nasdaq Composite Index was named the most crowded trade, with 57 percent of investors saying Internet stocks are expensive and 18 percent calling them “bubble-like.’’ In the ninth year of a bull market, stocks are expensive.

So, what was behind the recent two-day sell-off in tech? Did investors just get nervous? Are tech stocks fundamentally overvalued? Computer says…. No. The quants were just rebalancing.

According to a new report from JPMorgan quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets. The report estimates “fundamental discretionary traders” account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double its share a decade ago.

Figures from market structure research firm TABB Group point to similar gains in machine-driven trade volume, while the overall number of shares traded has declined. A subset of quantitative trading known as high-frequency trading accounted for 52 percent of May’s average daily trading volume.

Crude tumbled in early trading on a report that at the same time as OPEC and its partners agreed last month on prolonging production cuts, the group’s output was climbing the most since November as members exempt from the deal restored lost supply. Oil then reversed and gained amid estimates that U.S. supplies declined.

The producer price index was flat last month following a sharp 0.5% increase in April. Still, inflation is more widespread after being largely invisible in 2016. The 12-month rate of wholesale inflation stood at a 2.4% in May, up from zero a year earlier and just a notch below a five-year high.

The flat reading in wholesale inflation in May, as expected, was tied to falling prices for gas and fuels used to heat and cool homes. The wholesale cost of gasoline sank 11.2%. The wholesale cost of food also fell for the first time in six months. Core wholesale costs slipped 0.1% in May, when stripping out the volatile categories of energy, food and retail trade margins.

The core rate of inflation was up 2.1% over the past 12 months.

The Corelogic Home Price Index shows home prices nationwide, including distressed sales, increased year over year by 6.9 percent in April 2017 compared with April 2016 and increased month over month by 1.6 percent in April 2017 compared with March 2017. Corelogic forecasts that home prices will increase by 5.1 percent on a year-over-year basis from April 2017 to April 2018.

Arizona posted 6% year-over-year growth in home prices, with 0.7% increase March to April. Corelogic forecasts Arizona home prices will increase 6.3% over the next 12 months.

The National Federation of Independent Business said its small-business optimism index held steady at a seasonally adjusted 104.5 in May from the prior month. In May, five of the 10 index components gained, four declined and one remained unchanged. A net 28% of owners reported plans to make capital outlays, well below historic levels.

Duke University/CFO Magazine conducted a survey of US chief financial officers. The share of CFOs who are more optimistic about the economy is the lowest since before the presidential election. A jump in sentiment about near-term fixes to tax and health-care policy has given way to increased doubt as Congress stays fixated on investigating Russia’s role in the U.S. election.

The Federal Reserve’s Federal Open Market Committee met today. Tomorrow they will conclude their meeting and issue a statement – almost certainly announcing a 25-basis point increase in the fed funds target rate. Fed officials have penciled in three rate hikes this year. A rate hike tomorrow would be the second rate hike of the year.

Fed officials have said they are not worried about the strength of the economy. They view weak first quarter growth as transitory and believe inflation will resume rising toward the central bank’s 2% target. The interest-rate decision is straightforward. Monetary policy works with a lag, so the Fed must think ahead.

The big question is whether the central bank will start to shrink its $4.5 trillion balance sheet in September or December, assuming the economy stays on course. The balance-sheet decision is slightly more complicated. It has three parts: The Fed must choose when to start shrinking its holdings, how quickly to shrink them once it has started, and how small the balance sheet should be when the holdings are back to normal.

When to start shrinking the balance sheet is partially dependent on the path of interest rate hikes. Once interest rates are at more normal levels, the Fed will likely begin to let its bond holdings mature and fall off the balance sheet based on a set timetable. This coming policy shift isn’t yet imminent, because interest rates need to rise a bit more first. But it’s fast approaching, and this week isn’t too soon for the Fed to start being clearer about its intentions.

Attorney General Jeff Sessions offered an aggressive defense of his conduct surrounding the Russia investigation, telling an open Senate hearing any allegations he had colluded with Moscow to undermine the election were an “appalling and detestable lie”. Sessions recused himself from the Russia investigation in March, citing his role as a key foreign-policy adviser in the Trump campaign.

His abstention came one day after The Washington Post reported Sessions, during his Senate confirmation process, had failed to disclose two meetings during the presidential campaign with the Russian ambassador to the United States.

Meanwhile Bloomberg is reporting Russia’s cyberattack on the U.S. electoral system before Donald Trump’s election was far more widespread than has been publicly revealed, including incursions into voter databases and software systems in almost twice as many states as previously reported.

In all, the Russian hackers hit systems in a total of 39 states. The new details, seem to confirm a classified National Security Agency document recently disclosed by the Intercept.

In November, Steven Mnuchin pledged the wealthy would not see “an absolute” tax cut under the administration’s developing tax plan. That is, whatever reduction in tax rates would be offset by fewer deductions, so the net result would be the same for the wealthy. During Mnuchin’s confirmation hearing to become Treasury Secretary, Mnuchin repeated his pledge, earning the nickname “The Mnuchin Rule”.

Today, during a Senate Budget Committee hearing Mnuchin walked back the rule, indicating tax reform might result in a windfall for the wealthy.

Verizon has completed its purchase of Yahoo’s internet business for $4.48 billion. The acquisition, which was first announced last July, aims to combine Yahoo’s operating business with AOL, which it purchased in 2015. The merger will form Oath, a division of Verizon that is expected to house more than 50 media and technology brands.

Verizon plans to layoff more than 2,000 people, or the equivalent of 15 percent of Oath’s new workforce. Tim Armstrong, AOL’s former chief executive, will lead Oath as its CEO. Marissa Mayer, Yahoo’s CEO, is out.

Uber CEO, Travis Kalanick, will step away from the company for an unspecified period. But that won’t likely change the day-to-day lives of the more than 5,000 Uber employees as much as the changes the company is committing to make to their recruiting, retention, and workplace-culture policies, detailed in a report known as the Holder Report.

Financial Review

Happy Day

Sinclair Noe — March 20, 2017

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DOW – 8 = 20,905
SPX – 4 = 2373
NAS + 0.53 = 5901
RUT – 7 = 1384
10 Y – .03 = 2.47%
OIL – .55 = 48,23
GOLD + 5.10 = 1234.90

The directors of the FBI and NSA appeared before a rare open congressional intelligence committee hearing today.

FBI Director James Comey confirmed the FBI is investigating Russia’s interference in the US election and investigating possible links between the Trump campaign and the Russian government. Comey said the FBI has “no information” to support President Trump’s allegation that Barack Obama wiretapped him.

NSA chief, Admiral Mike Rogers, weighed in as well, saying that he had no knowledge of anyone asking the British or any other ally to wiretap Trump. That seemed to refute another claim made by the White House.

Confirmation hearings for Trump’s Supreme Court nominee kicked off today. Trump nominated Neil Gorsuch, 49, to replace conservative Justice Antonin Scalia, who died in February 2016.

Meanwhile, Wall Street also braced for a contentious House vote on the GOP health care bill slated for Thursday. The bill’s passage is considered a first step toward enacting tax reform, but it has faced criticism from both sides of the aisle.

The Trump administration appealed Friday a temporary restraining order against its revised travel ban policy. The reworked executive order (which halts the issuance of visas to six majority-Muslim countries for 90 days and suspends the refugee resettlement program for 120 days) was set to go into effect on March 16, but federal judges and Hawaii and Maryland blocked it from going forward.

The Justice Department filed an appeal in the Maryland case, which will take that fight to the Fourth Circuit, based in Richmond, Va. Meanwhile, a federal judge in Hawaii declined a request from the Justice Department to narrow the injunction. That ruling clears the way for the Trump administration to appeal the judge’s initial decision to the 9th Circuit Court of Appeals.

Bill Gates met with Donald Trump today.  An agenda wasn’t released, but a statement from the Gates Foundation said it has “a long history of working with officials” on issues like domestic education and global health and development. Gates and Trump also met in December to discuss innovation.

On March 16, the Gates Foundation said that it was “deeply troubled” by the president’s 2018 budget request, released that morning. The proposal included deep cuts to both the EPA and non-military overseas aid. The next day, Gates responded with an article on the Gates Notes blog, “How Foreign Aid Helps Americans.”

The meeting of the Group of 20 in Germany over the weekend featured an apparent win for the US after the communique produced by the talks omitted warnings about protectionism. One thing that was repeated was the pledge to overhaul bank-capital rules, with the statement urging the Basel Committee on Banking Supervision to finalize the Basel III reforms.

Away from the G-20, German Chancellor Angela Merkel joined Japanese Prime Minister Shinzo Abe in calling for a concerted effort to defend free trade.

Nine months after Britain voted to leave the European Union, Prime Minister Theresa May is planning to open divorce proceedings on March 29.  May will trigger Article 50 of the Lisbon Treaty, the EU’s guiding document, which details how a country leaves the bloc. It’s never been activated and is only about 260 words long. It gives the departing country up to two years to negotiate “its future relationship with the Union.” If May has her way, the actual split will occur around April 2019.

Greece missed another deadline for unlocking bailout funds today, edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted nation to the edge of economic collapse. Prime Minister Alexis Tsipras had promised the latest bailout’s long delayed review would be completed by March 20, but many see that reaching an agreement even in April is now considered a long shot.

Deutsche Bank will issue 687 million new shares at a 35 percent discount to Friday’s closing price — to raise €8-billion-euros of fresh capital. In its annual report published today the bank said it expected revenue to remain broadly unchanged this year, while revealing that the bonus pool was slashed to €500-million-euros in 2016.

Britain’s Vodafone Group and Idea Cellular agreed to merge their Indian operations in a $23 billion deal. The combined entity would have almost 400 million customers, accounting for 35% of the market share.

Albertsons, the grocery-chain operator backed by Cerberus Capital Management, has held preliminary talks to merge with Sprouts Farmers Market. Bloomberg reports the discussions, which took place in recent weeks, are at an early stage and may not lead to a deal. The talks have involved a plan to take organic grocer Sprouts private and add it to Albertsons’ portfolio, which includes the Safeway store brand.

Unilever is preparing a $7.4 billion sale of some of its food brands, British newspapers reported on Saturday. The British-Dutch company is planning to sell Flora margarine and Stork butter brands. Unilever rebuffed a surprise $143 billion takeover offer from Kraft Heinz last month, saying the bid undervalued the company.

Pressure is growing on Twitter CEO Jack Dorsey to step down, per the Sunday Times, after a report from the University of Southern California and the University of Indiana alleged that up to 48 million of its accounts – equal to 15% of its users – were robots not people (that’s nearly twice the company’s own estimate).

The number of executive departures from Uber is growing. President Jeff Jones is quitting the company, citing “incompatibility with leadership,” while Brian McClendon, a VP responsible for the company’s mapping program, is leaving to return to his home town in Kansas. Uber has been recently plagued by allegations of sexual harassment and the combative behavior of CEO Travis Kalanick.

Bullish bets on West Texas Intermediate crude prices fell by a record amount in the week ending March 14, with wagers on further price falls doubling. Energy lender Arab Petroleum Investment Corp. sees oil prices remaining below $60 a barrel for the rest of the year.

Bank of America Merrill Lynch has published a giant list of asset class returns for the year so far. Here’s a quick rundown. Looking at global asset classes, the Pacific Rim, excluding Japan is up 9.6%, matched by Emerging Market equities, Industrial metals up 7.6%, US equites (7.2%), global equities (up 6.7%) And Euro stocks (up 4.9%).

By country; Russia’s stock market is the laggard this year after being one of the best performers in the world in 2016. India is the leader, year-to-date, up 14.5%, followed by South Korea (up 13.3%) and Brazil (up 12.8%). China and Hong Kong round out the Top Five. Russia is down 9%.

By sector, Biotech is the leader (up 11.9%), followed by information technology (up 11.6%), healthcare (up 9.3%), banks (up 7%), with consumer discretionary and financials both up 6%.

The strongest currencies against the US dollar are the Mexican peso, which took a hit following the US election in November, but has gained 7.8% against the dollar since the start of the year; followed by the South African rand, and the Australian dollar.

Natural gas prices have tumbled amid unseasonably warm weather, which implies weaker demand for heating. The US had its second-warmest February ever on record, per to the National Centers for Environmental Information.

Crude oil is also a big loser, likely to the dismay of the Organization of Petroleum Exporting Countries. The top gainers among commodities include iron ore (up 15.3%), lead (up 12%), aluminum (up 11.1%) and cotton (up 10.5%). Nat gas is down 20% and WTI crude is down 9%.

Or, if you want to keep it simple, Apple hit a record high today, and it is up about 23% from the start of the year. Of course, you still must decide if you want to run with the bulls or buy the dips.

Italy is ranked the healthiest country on Earth in the Bloomberg Global Health Index of 163 countries. A baby born in Italy can expect to live to be an octogenarian.

Even though economic growth in Italy has stagnated for decades, and almost 40 percent of its youngsters are out of jobs and it’s saddled with one of the world’s highest debt loads relative to the size of its economy; Italians are in way better shape than Americans, Canadians and Brits, who all suffer from higher blood pressure and cholesterol and poorer mental health.

Italy also has “an excess of doctors.” Then there is the diet, rich in vegetables and drizzled with extra virgin olive oil. Each country in the index was graded based on variables such as life expectancy, causes of death and health risks ranging from high blood pressure and tobacco use to malnutrition and the availability of clean water.

Iceland, Switzerland, Singapore and Australia rounded out the top five most-healthy countries in the index. The U.S. placed No. 34 with a health grade of 73.05 out of 100. It’s ranking for prevalence of overweight people is 67.3 — tipping the scale as one of the world’s heaviest nations.

Norway is now the world’s happiest country, per the 2017 World Happiness Report. The Central African Republic was the least happy of 155 countries. The report was prepared by the Sustainable Development Solutions Network, an international panel of social scientists convened by the United Nations.

Researchers used a scale of zero to 10, covering six areas: gross domestic product per capita, life expectancy, support from relatives or friends, charitable giving, freedom to make life choices, and perceived levels of government and corporate corruption. Norway and several other Nordic countries dominated the top of the list.

America’s rank on the happiness scale is falling.

Even as the country pulled off an economic turnaround, with increases in income and unemployment falling to historic lows, Americans are becoming less happy. When it comes to happiness, the US ranked 19th among the 34 countries in the Organization for Economic Cooperation & Development in 2016, down from third among 24 countries on a similar measure in 2007.

And today is the first day of Spring. Enjoy.

Financial Review

Hack Attack

Sinclair Noe — December 29, 2016

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

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DOW – 13 = 19,819
SPX – 0.66 = 2249
NAS – 6 = 5432
RUT + 2 = 1363
10 Y – .03 = 2.48%
OIL – .29 = 53.77
GOLD + 16.70 = 1159.40

As expected, the Obama administration is fighting back against Russia for its hacking efforts to influence the election. The operation was broad, involving not only hacking the Democratic National Committee but scanning and intruding into state voter databases. The hackers leaked the pilfered e-mails in a bid to damage Clinton’s campaign, per U.S. intelligence agencies.

The administration sanctioned 2 Russian intelligence services, ejecting 35 Russian intelligence operatives from the US. The FBI and Homeland Security Department also released a report with technical evidence intended to prove Russia’s military and civilian intelligence services were behind the hacking to expose some of their most sensitive hacking infrastructure; a more detailed report will be released in 3 weeks, including malware and computer addresses.

Members of both parties in Congress have expressed alarm about the campaign hacking and vowed to conduct hearings into Russia’s role.

The number of Americans who applied for unemployment benefits in the week before Christmas fell by 10,000 to 265,000 – the lowest levels since last summer. Initial claims have been under 300,000 for 95 straight weeks, the longest streak since 1970. Just a reminder, the December Non-Farm Payroll report from the Department of Labor will be published on Friday, January 6; with early estimates running around 170,000 net new jobs in December.

Jobs are the lifeblood of the economy, and will give direction to the Federal Reserve moving into the New Year. We remember that last year the Fed was predicting 4 rate hikes for 2016; we ultimately got one increase in December. Now the Fed is predicting 3 rate hikes for 2017 as the economy inches toward full employment. So, the jobs reports are crucial data.

The trade deficit increased 5.5% in November to a seasonally adjusted annual $65 billion. Exports rose 1.0% to $121 billion, while imports totaled $187 billion, up 1.2% from October. Wholesale inventories edged up 0.9% to a level of $594 billion; that was 1.2% higher than a year ago. A bigger trade deficit is negative for GDP growth.

Sprint confirmed it would “create or bring back to America” 5,000 jobs, mostly in customer care and sales. President-elect Trump campaigned on bringing jobs back to the US but the 5,000 Sprint jobs confirmed Wednesday aren’t exactly new — they are part of a previously announced initiative led by Japan’s Softbank to create 50,000 jobs in the US.

Splitting from an earlier ruling, a federal appeals court has found that in-house courts at the Securities and Exchange Commission are unconstitutional. That marks a heavy setback for the agency’s enforcement efforts as it uses five administrative-law judges to handle most routine cases. A spokesman said the SEC is reviewing the decision and wouldn’t immediately have further comment.

The Food and Drug Administration released cybersecurity recommendations today for companies that manufacture internet-connected medical devices. The FDA says unsecured devices are subject to hacking and could prove fatal.

Alere is appealing a decision by the Centers for Medicare and Medicaid Services to revoke Medicare billing privileges for the health-care provider’s Arriva Medical diabetes business. CMS had alleged that Arriva submitted Medicare claims for patients who had died. Alere has denied an impropriety.

Sears just announced a fresh round of store closures. The company told employees on Tuesday that it will close 30 Sears and Kmart stores in early 2017. Most of the stores will start liquidation sales on January 6 and go out of business between late March and mid-April. This latest round of closures will bring the total number of stores that Sears has closed this fiscal year to more than 200.

That means the retailer will have fewer than 1,500 stores left by early 2017. That’s down nearly 60% from 2011, when Sears had more than 3,500 stores. The unofficial list of new store closures does not include Arizona stores. CEO Eddie Lampert, a hedge fund manager and Sears’s biggest investor, will offer a $200 million letter of credit to the department-store chain through affiliates of his firm, ESL Investments Inc. The amount could be expanded to as much as $500 million with the consent of lenders.

Apple and Samsung dominated Christmas wish lists this year but both had a luckluster holiday season. Yahoo’s Flurry Analytics looked at new phone and tablet “activations” between Dec 19 and Dec 25. Both Apple and Samsung still dominated but Apple saw a fall in share while Samsung saw a slight increase.

This year, 44 percent of activations globally were Apple devices, a decline from the 49 percent seen in a similar period in 2015, and 51 percent in 2014. Meanwhile, 21 percent of activations were Samsung devices, a tiny rise from 19.8 percent last year.

AirPods remain in short supply. If you want to buy a pair of the wireless earbuds from Apple, you won’t find them in the local Apple store; there is a 6-week waiting list. That’s what happens when you eliminate the headphone jack on the iPhone. During a visit to the New York Stock Exchange yesterday, CEO Tim Cook called the wireless earbuds “a runaway success,” and said Apple was “making them just as fast as we can.”

Meanwhile, Indian officials are meeting early next week to evaluate the incentives sought by Apple to manufacture its products in the country. The government is trying to promote local manufacturing under Prime Minister Narendra Modi’s “Make in India” campaign, but it remains to be seen whether they would agree to more concessions for Apple.

Toshiba shares dropped another 17% in Tokyo on worries about the company’s financial stability. The stock has fallen by more than 40% after the firm warned this week it’s expecting billions of dollars in losses from its takeover of a US-based nuclear construction business.

Toshiba cannot raise cash by issuing shares because of restrictions imposed by the stock exchange after last year’s accounting scandal. It looks more and more likely that the only solution is to sell off the core of the company. Meanwhile, share price is in a death spiral.

German pharmaceutical company Boehringer Ingelheim agreed to divest five types of animal health products to settle charges that a proposed asset swap with Sanofi would harm competition. The proposed asset swap involved Boehringer Ingelheim’s acquisition of Sanofi’s $13.5 billion animal care subsidiary and Sanofi’s obtaining the Germany company’s consumer health care business unit, valued at nearly $8 billion, plus $5.5 billion in cash.

The City of Madrid says all privately-owned cars with even-numbered registration plates will be banned from the Spanish capital’s roads today to curb rising air pollution. The move follows a dry, sunny stretch of weather which sent levels of nitrogen oxide, a poisonous gas which can cause respiratory problems such as asthma, soaring above European-Union-set limits. The restriction could alternate between odd and even number plates if high levels of contamination persist.

The World Economic Forum (WEF) has determined that in many parts of the world, solar energy is now the same price or even cheaper than fossil fuels for the first time. While the average global LCOE [levelized cost of electricity] for coal and natural gas is around $100 per megawatt-hour, the price for solar has plummeted from $600 a decade ago to $300 only five years later, and now close to or below $100 for utility-scale photovoltaic. For wind, the LCOE is around $50.

According to the WEF, more than 30 countries have already reached grid parity—even without subsidies. (“Grid parity” is the point when an alternative energy source, say solar, can generate power at a LCOE that’s equal or even less than the price of traditional grid power.)

The WEF highlighted how the unsubsidized LCOE for utility-scale solar photovoltaic—which was not competitive even five years ago—has declined at a 20 percent compounded annual rate, making it not only viable but also more attractive than coal in a wide range of countries.

Countries that have already reached grid parity include Chile, Mexico, Brazil and Australia with many more countries also on the same track. The WEF projects that two thirds of the world will reach grid parity in the next couple of years, and by 2020, solar photovoltaic energy is projected to have a lower LCOE than coal or natural gas-fired generation throughout the world.

This means that we have reached a tipping point for renewable energy, which is reflected in new installations. Through the end of September, solar accounted for 39 percent of all new electric generating capacity brought on-line in the U.S. Both utility-scale installations and residential installations grew strongly.

The United States solar market shattered all previous quarterly solar photovoltaic (PV) installation records. One megawatt of solar power was installed every 32 minutes in the U.S. from July to September, for a record total of 4,143 megawatts. That brings total installed solar capacity in the U.S. to 35.8 gigawatts, enough to power 6.5 million homes.

Financial Review

Cat Herders in the Oil Patch

Sinclair Noe — January 28, 2016

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

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DOW + 125 = 16,069
SPX +10 = 1893
NAS + 38 = 4506
10 Y – .02 = 1.99%
OIL + 1.43 = 33.73
GOLD – 9.70 = 1116.00

The story of the day was oil, and it made for another ridiculous day of trading, dragging stocks up and down in its wake. Oil rose as much as 7.8% after Russia’s energy minister said that OPEC and other producers may meet to discuss output. Then, OPEC delegates said no talks were planned and oil prices floated back down to earth.

OPEC is comprised of countries that rely on oil to fund national budgets. So, low oil prices have resulted in national deficits and desperate times. Several countries would probably welcome production cuts that might lead to higher prices but then you have Iraq pumping like never before; and then add Iran to the mix.

Iran has put the finishing touches on a deal to buy over 100 Airbus passenger jets. Iranian President Hassan Rouhani is in Europe, trying to revive business ties. Rouhani visited Italy with a 120-member delegation of business leaders and cabinet ministers, signing a raft of deals. The shopping trip then moved to France to buy planes. Peugeot is also scheduled to meet with the group.

All those planes and cars cost money. Iran will be adding to production, not cutting.  And that means that if Saudi Arabia cuts production, the void will simply be filled by Iran. The Saudis would lose market share with no commensurate increase in prices.  And the whole idea of coordinated production cuts is as realistic as herding cats.

So there is plenty of supply, but still no signs of demand. The world’s biggest oil companies are asking tanker operators to slow down delivery of crude. Tankers hauling 2 million-barrel cargoes are delivering them at speeds of about 13 knots, compared with a maximum of 15. The slower speeds might result in a voyage that would normally take 40 days, instead lasting 48. On-shore storage tanks are full and the oil tankers are serving as off-shore storage facilities.

Global economic growth is the driver for oil demand, but growth has slowed even faster than the oil tankers. It is difficult to determine the exact extent of the slowdown; the numbers from China might be less than accurate but there are other ways to measure. Whether you look at the Baltic Dry Index, the Shanghai Shipping index, or the US or European Air Freight statistics, or even the freight reports by US railroads the data all points to one conclusion: there is a big slowdown in the delivery of raw materials and finished products.

Demand for long-lasting “durable” goods sank in December, reflecting a downturn in business investment. Orders for durable goods fell a seasonally adjusted 5.1% last month, marking the biggest decline in a year and a half. The larger-than-expected decline could result in fourth-quarter growth turning negative. Orders for so-called core capital-goods, which strip out aircraft and defense, dropped 4.3% in December. For the full year they decreased 7.5%, erasing a 5.8% gain in 2015. It was the first annual decline in three years.

The Federal Reserve FOMC wrapped up its two-day policy meeting yesterday afternoon. The Fed left interest rates unchanged. In a written statement, policymakers said “economic growth slowed late last year,” and the risks are no longer balanced between an economy picking up steam and one slowing further.

We talked about that yesterday; you know that. Now here is the part of the Fed statement you did not hear about but it is probably the most important part. The Fed wrote: “The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.”

Here is why that sentence is so important. Wall Street tracks the Federal Reserve’s balance sheet.  If you have been paying attention over the past 7 years, you know this.  Overlay a chart of the balance sheet on the S&P 500 and it is clear that you are looking at mirror images. And right now, the Fed’s balance sheet is flat lining with a hint of downward movement.

Initial jobless claims fell last week after touching a seven-month high earlier in January. Initial jobless claims declined by a seasonally adjusted 16,000 to 278,000 in the week ending January 23. The four-week average of initial claims also tacked lower, down 2,250 to 283,000. New claims remain at very low levels. The number of people applying each week for benefits has dropped more than 50% after hitting a 27-year high of 665,000 during the tail end of the Great Recession.

So, why is the job market looking strong in the face of all this negative news? The simple answer is that US companies are still making money.  According to FactSet Research, the trailing 12-month net margin of S&P 500 companies is 9.8%, which is above the 8.8% average over the last decade. Part of the problem for stocks is that, while we are still seeing earnings, the growth of earnings has slowed.

It is now estimated that fourth quarter earnings for the S&P 500 will decline 6.1% from the year earlier quarter. About a third of S&P 500 companies have now reported and the index is on track for a median 3.5% decline in sales, according to FactSet data. Companies are still making money, just not as fast as a year ago.

Today is the busiest day of the earnings reporting season.

Amazon.com’s holiday quarter profit missed Wall Street’s estimates by a wide margin. Fourth-quarter net profit rose to $482 million, or $1.00 per share, in the quarter ended Dec. 31 – marking its largest quarterly profit on record – up from $214 million, or 45 cents per share, a year earlier. It was the first time Amazon has reported three consecutive profitable quarters since 2012. Profit was well below estimates of $1.56 a share. Net sales rose 21% to $35.7 billion, but missed analysts’ expectations of $35.9 billion. Amazon shares were smacked 12% in after-hours trade.

Microsoft reported quarterly revenue and profit that beat analysts’ expectations. Total revenue, however, fell 10% to $23.8 billion, squeezed by a strong dollar as well as a weak personal computer market that has reduced demand for Microsoft’s Windows operating system. On an adjusted basis, revenue fell to $25.69 billion. Net income fell to $5 billion; excluding items, the company earned 78 cents per share, 7-cents better than estimates.

Ford Motor reported fourth-quarter net income of $1.9 billion, or 47 cents a share, swinging from a loss in the prior-year period and beating estimates. Ford’s North America operations posted record sales, as lower oil prices helped drive demand for Ford pickup trucks.

Harley-Davidson reported net income of $42.2 million, or 22 cents a share, in the fourth quarter, down from $74.5 million, or 35 cents a share, in the year-earlier period. Revenue also dipped slightly, but the results were good enough to top analysts’ estimates.

Caterpillar reported better-than-expected adjusted earnings for its fourth quarter, though its revenue missed expectations. Caterpillar said it now expects its revenue to fall by about 10% to a range of $40 billion to $44 billion. In October, the company had forecast a 5% sales decline for 2016, with lower sales of mining equipment accounting for two-thirds of the damage. The decline would mark its fourth straight year of lower sales, a record for the company. Still, Caterpillar forecast better than expected earnings of $4 a share for 2016.

Under Armour posted double-digit revenue and profit gains in its latest quarter on strong footwear and apparel sales; they also raised their 2016 revenue guidance. Apparel sales climbed 22% to $864 million, led by growth in training, running, golf and basketball. While more than 90% of the company’s revenue is North America-based, foreign revenue increased 70%.

Samsung Electronics’ fourth-quarter earnings displayed a sharp slowdown in profit growth from chips, signaling challenges ahead as the tech giant continues to grapple with weak smartphone sales. Net profit in the December quarter fell 40% to $2.7 billion, short of market expectations. Samsung also warned of a “difficult business environment” and “weaker IT demand,” joining Apple in foretelling a downbeat 2016 for the technology sector.

On Tuesday, Freeport McMoRan reported a net loss for the fourth quarter of just over $4 billion. The company already suspended its dividend and made deep cuts in capital spending and copper production; with the release of Q4 results they also said they were looking to sell interests in certain mining assets to help reduce debt, which stand at about $20 billion, nearly 4 times its market value of $5 billion.

Yesterday, Moody’s cut more than $9 billion of Freeport McMoRan’s debt to a senior unsecured rating of B1, from Baa3, and a resulting negative outlook; that’s a move from investment grade to junk. Moody’s wrote: “At this time no meaningful catalyst is seen that will improve the overall market dynamics given weak global growth rates and slowing demand in China.”

Salt on the wound: reports today that the company’s export license in Indonesian has expired without extension. The Indonesian government is waiting for Freeport-McMoRan to respond to its request for a $530 million deposit toward building a new smelter.

American Airlines has expanded its refunds for pregnant customers visiting areas impacted by the Zika virus to include Puerto Rico, Martinique and nine countries in the Americas and Caribbean. There is no vaccine or treatment for Zika, and an estimated 80 percent of people infected have no symptoms, but the problem is birth defects.

More than 4,000 cases of microcephaly have already been reported in Brazil. The World Health Organization is warning that the virus is “spreading explosively” and could infect as many as 4 million people in the Americas.

Turkey Shoots

Sinclair Noe — November 24, 2015

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

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DOW + 19 = 17,812
SPX + 2 = 2089
NAS + 0.33 = 5102
10 YR YLD – .01 = 2.24%
OIL + .89 = 42.64
GOLD + 6.70 = 1076.40
SILV + .05 = 14.30

The US economy expanded at a faster pace in the third quarter than previously reported. Gross domestic product rose at a 2.1% annualized rate, up from an initial estimate of 1.5%. Nearly all of the improvement was because of revised data on inventories, which showed businesses restocking shelves at a faster pace than the government first estimated.

Still, company stockpiles remained elevated compared with sales, indicating that new orders and production will cool further to clear shelves and warehouses heading into 2016. Inventories grew at a $90 billion annualized rate from July through September, almost twice as much as previously estimated, but down from the second quarter.

The improvement in inventory levels was offset by a slight downward revision in consumer spending last quarter. Cheap gasoline is giving households a little extra money, and consumers are spending, just not quite as fast; consumer spending was revised down to 3% from 3.2% in the initial estimate for the third quarter. Consumption during the current fourth quarter, including the holiday shopping season, is expected to increase at an annualized rate of about 3%.

For all of 2015, the rate of economic growth is expected to be about 2.5%, not much different from the 2.4% rate in 2014. Not great but good enough. The GDP report was the one of the last big economic reports before the Fed FOMC meeting December 16^th; the other big report will be the November jobs report, which will be published on Friday, December 4^th. In reality, not much has changed since June or even October, when the Fed did not raise rates.

Corporate profits after tax, without inventory valuation and capital consumption adjustments, fell at a 3.2% pace from the second quarter, the biggest drop since the fourth quarter of 2014. On a year-over-year basis, corporate profit growth was 1.4%, compared with 8.5% year over year growth in the second quarter. That measure of corporate profits tracks most closely with what companies report in earnings statements. Profit data aren’t inflation adjusted.

The Conference Board reports that its index for consumer confidence fell to 90.4 from 99.1 in October. Despite a strong advance in hiring last month, consumers expressed more caution about the job market and future economic conditions in the most recent survey. The fall is in the expectations, not the current conditions, component. The decline in job expectations is dramatic and raises the question whether global effects, which have been negative for the US, are beginning to weigh on the American consumer, which would not be a positive for the holiday spending outlook.

Existing home prices rose in September. The S&P/Case-Shiller 20-city composite index gained 0.2%. Prices rose 5.5% for the year, up from a 5.1% yearly gain in August. The index is still about 12% lower than its 2006 peak. Phoenix home prices were up 0.2% in September, and up 5.3% over the past 12 months.

At the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 54% above January 2000 (54% nominal gain in almost 16 years).

These are nominal prices, and real prices (adjusted for inflation) are up about 40% since January 2000 – so the increase in Phoenix from January 2000 until now is about 14% above the change in overall prices due to inflation.

Turkey has shot down a Russian military jet near the Syrian border. Turkish officials said the jet was downed after it knowingly violated Turkish airspace. The two Russian pilots ejected before the plane crashed but they were shot in their parachutes as they floated to earth. And then Turkish tribesmen reportedly destroyed a Russian helicopter with a TOW antitank missile as it tried to rescue the airmen. The Russian Ministry of Defense confirmed that one fighter pilot had been killed by ground fire and that a marine deployed on the search-and-rescue helicopter died but that the rest of the crew had managed to escape.

Russia’s retaliation so far has been largely symbolic. Russia’s foreign minister canceled a Wednesday visit to Turkey, and a large Russian tour operator announced it was suspending sales to Turkey. The two countries are also significant trade partners, or at least they were. A reminder that Turkey is a member of NATO. Today, French president Francois Hollande was in Washington and conducted a joint press conference with President Obama. They vowed to intensify their nations’ military attacks on ISIS in Syria and Iraq. They also announced that next week’s climate change summit in Paris would be a “powerful rebuke” to terrorists.

In the immediate aftermath markets reacted nervously, with the lira selling off, Russian stocks sliding and global government bonds climbing as investors move to safe havens. Meanwhile, a car bomb exploded outside a hotel housing judges supervising parliamentary elections in Egypt’s North Sinai, killing at least three people and injuring 14. The region is the main area of operations for the Egyptian affiliate of ISIS.

Citing “increased terrorist threats” from militant groups in various regions of the world, the US State Department has issued a global travel alert ahead of a busy Thanksgiving week. The department did not advise people against travel but said US citizens should be vigilant, especially in crowded places. The announcement comes as Brussels remains on lockdown and follows the discovery of an explosive belt near Paris and the mobile phone of a fugitive believed to have taken part in the November 13 attacks.

Ford is the latest automaker to say it will not equip future cars with Takata air bag inflators that use ammonium nitrate, the chemical propellant that has been linked to eight deaths and more than 100 injuries worldwide. Ford’s auto recalls with Takata airbags have so far affected about 1.5 million vehicles, including certain older model-year Ford Mustangs, Ford GTs and North American-built Ford Rangers.

Costco has an E. Coli problem. Nineteen people have been infected with E. coli in California, Colorado, Missouri, Montana, Utah, Virginia, and Washington. They have tracked the source to Costco’s rotisserie chicken salad. You might want to stick with turkey for the next few days.

Skyworks Solutions has withdrawn its agreed takeover bid for PMC-Sierra after an increased offer of $2.3 billion from Microsemi gained the backing of the target’s board. Skyworks said it won’t modify its bid and that the company is entitled to an $88 million termination fee from PMC. Semiconductor makers have pursued mergers at a record pace this year.

China’s securities regulator has canceled a requirement that brokerages must hold a net positive purchase position on daily proprietary trading as the nation’s stock market stabilizes following a summer slump. With the Shanghai Composite now having gained more than 20% from its August low, regulators are withdrawing from a government campaign to prop up shares.

New York Attorney General Eric Schneiderman is clamping down on “spoofing,” issuing subpoenas to interdealer brokers BGC Partners, TFS-ICAP, GFI Group, and Tullett Prebon Financial Services. The investigation is focused on placing offers with the intent to cancel them before they trade in order to trick other investors by creating the illusion of demand. Earlier this month, high-frequency trader Michael Coscia became the first person to be found guilty of spoofing in a criminal case.

National Football League player Dwight Freeney can proceed with his lawsuit alleging that Bank of America was complicit in a fraud scheme that caused him to lose more than $20 million and forced his Rolling Stone restaurant to close. The Arizona Cardinals linebacker last Thursday defeated a bid by the parent company and its Merrill Lynch unit to dismiss, among others, fraud and negligent misrepresentation claims stemming from the bank’s recruitment of him in 2010 to manage his assets. US District Judge Margaret Morrow in Los Angeles didn’t rule on the merits of Mr. Freeney’s claims but agreed that he alleged enough facts to move forward with the case.

Just in time for the busiest shopping week of the year – iSight Partners, a privately held cyber intelligence firm is warning retailers about what they call “the most sophisticated point-of-sale malware seen to date.” The firm had shared information about the malware, dubbed ModPOS, with clients in October, and briefed dozens of companies about its dangers. Some retailers have found digital evidence that linked threat indicators they had previously seen to ModPOS, though that does not necessarily mean they were victims of breaches. Just a reminder that if you are concerned about cyber security while holiday shopping, cash still works.

CalPERS, the California Public Employees’ Retirement System said it paid $3.4 billion in performance fees to its private equity managers since 1990 while the controversial sector generated $24.2 billion in profits for retirees. CalPERS has been hard-pressed to keep up with looming obligations to its 1.7 million current and future retirees.

The CalPERS fund, the largest pension fund in the country now at about $295 billion, is considered about 74% funded, down from 77% as of June 30, 2014, mostly because of weak performance from its global stock portfolio. The global stock portfolio posted returns of 1% for the last fiscal year, ended June 30. Private equity, by contrast, returned 8.9% for the year but not without risk and hefty fees.

Jeff Bezos’s space exploration company Blue Origin achieved a key milestone: sending a rocket into space and then landing it safely back on Earth. Making reusable rockets is a central goal for a generation of companies that are trying to cut the cost of space travel and exploration. A Blue Origin vehicle called New Shepard flew to space on Monday, reaching an altitude of 100 kilometers, and then landed back at its launch site.

Financial Review

Pick a Lane

Sinclair Noe — November 17, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 6 = 17,489
SPX – 2 = 2050
NAS + 1 = 4986
10 YR YLD – .01 = 2.26%
OIL – .95 = 40.79
GOLD – 12.30 = 1070.80
SILV – .06 = 14.29

Global equity markets moved higher today, following the rally yesterday on Wall Street and brushed off concerns related to Friday’s terror attacks in Paris. In their final communique from a summit in Turkey, the leaders of the world’s largest economies stuck to a goal of lifting their collective output by an extra 2% by 2018, even though growth remains uneven and weaker than expected globally. G20 leaders also endorsed plans to address Syria’s refugee crisis, taxation, climate change, cyber security and inequality.

France launched another set of airstrikes on the ISIS stronghold of Raqqa in Syria early Tuesday as the country steps up its response to last week’s deadly attacks. The bombings follow a second night of home searches in France and Belgium to catch those responsible and linked to the killings. President Francois Hollande is now looking to expand his powers under France’s state-of-emergency statute and has called on the U.S. and Russia to form a “big unified coalition” to destroy ISIS.

Meanwhile, Russian officials said they had found evidence that the passenger jet that crashed in Egypt last month was downed by a bomb, the first time those investigating the crash have cited proof of a terrorist attack. Russia’s military doubled its attacks in Syria on Tuesday. President Putin ordered Russian naval forces in the Mediterranean to work as allies with French warships in attacking ISIS targets in Syria; not necessarily a France-Russia alliance, but certainly greater military coordination.

The consumer price index increased by a seasonally adjusted 0.2% in October. The CPI measures prices at the retail level and is used to determine cost of living adjustments. The cost of housing and medical care, two of the biggest expenses for most families, climbed again and are running above a 3% annual rate. Rents rose 0.3% in October and medical care jumped 0.7%, the biggest increase in five months. Food prices, meanwhile, rose just 0.1%, marking the smallest gain in five months. Energy prices advanced 0.3%, even though the price of gasoline was down last month. The discrepancy comes from seasonal adjustments. Overall inflation is up 0.2% in the past year. Core prices, excluding food and energy, are up 1.9% in the past 12 months.

Separately, a new report from Aon Hewitt shows health insurance costs for employees of midsize and large companies averaged $4,700 in 2015; that’s up 130% from $2,001 in 2005. The report shows 38% of employers have increased their participants’ deductibles and/or copays in the last year, and another 46% may do so in the future. Employers are making cutbacks in health coverage in other ways, too. Some 18% of companies are reducing subsidies for covered dependents, and 17% are adding a surcharge for adult dependents who have access to other health coverage. Plus, 43% of companies are considering using unitized pricing, in which employees pay per person instead of individual versus family.

So there are some signs of inflation in some areas but no indication that inflation is overheating, at least according to the headline inflation numbers. Still, for most of us, it seems like there is inflation; housing and rents have increased, health care, education, and food prices seem to be on the rise. Even wages are starting to show gains. The economy has added jobs at a rapid pace over the past few years, putting some upward pressure on wages and reducing the unemployment rate to 5%. The government said real, or inflation-adjusted, hourly wages advanced 0.2% in October. Real wages have climbed 2.4% in the past 12 months.

You’re not just imagining it. Prices are going up, except for commodities. And the price of energy has an oversized influence on the annual inflation rate. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditures index, or PCE, which is running at a 1.3% annualized pace; still below the Fed’s target of 2% inflation but likely to rise quickly with expected increases to health care premiums over the next few months.

Now add fiscal policy to the mix. After years of gridlock the government has finally approved a 2 year budget, and it actually includes some spending; it will likely add 0.3% to gross domestic product, rather than subtracting 2% from growth; it might even result in a few government jobs, rather than cutting government jobs. And those government workers will go out and spend their paychecks on Main Street, adding to demand and circulating money through the economy. Next year will be the first since 2010 that fiscal policy adds to growth. For years, Fed Chair Bernanke (and more recently Chair Yellen) complained about headwinds from fiscal policy, or the lack thereof. Now we are about to see a shift from monetary policy alone to fiscal policy – a passing of the baton, which is always the most perilous part of a relay; too early or too late, and the race comes to a grinding halt.

The next concern is whether fiscal policy is capable of running with the baton (to extend the analogy), and staying in the correct lane. If government spending goes to projects that improve productivity – things like infrastructure and education – then it will likely improve growth. French President Francois Hollande said he will step up spending on security in the wake of the terrorist attacks in Paris, but this type of spending is not likely to result in economic growth. So, it’s not just a matter of changing from monetary policy to fiscal policy, it is important that something is actually accomplished with the stimulus. This has been the big drawback of monetary policy; the Fed dropped money on Wall Street but it never made it to Main Street.

A new Reuters analysis shows that corporate spending on buybacks and dividends has surged relative to investment in long-term growth through R&D and other forms of capital spending, in a troubling sign that corporate America may be undermining itself. Almost 60% of the 3,297 publicly traded non-financial U.S. companies examined bought back their shares since 2010. In fiscal 2014 alone, the total amount returned to shareholders (including share repurchases and dividends) reached $885 billion, way more than the companies’ combined net income of $847 billion. And the spending on buybacks, or financial engineering squeezes out investments in R&D, which has dropped.

Industrial production fell 0.2% in October but manufacturing output advanced 0.4% in October. Overall production was held down by a drop in mining and utility output. In addition, the Fed revised August production higher to a 0.1% gain from previous estimate of a 0.1% drop. As a result, industrial production was up at a 2.6% annual rate in the third quarter.

The National Association of Home Builders/Wells Fargo housing market index pulled back 3 points to 62, slightly below expectations but up from 58 a year ago. A reading over 50 signals improvement. Builders have reported strong results in the most recent earnings season. D.R. Horton, the largest US homebuilder, reported a 44% jump in profit in the most recent quarter, with orders up 19%. Lennar, the number-two builder by volume, also reported profit and revenue that were better than expected. Orders rose more than 10%.

Greece has reached a preliminary deal with its international lenders on home foreclosures reform, removing a major obstacle holding up fresh bailout loans for the debt-laden country. The changes will see Athens qualify for a €2-billion-euro sub-tranche of new financial aid to pay off state arrears and €10-billion-euro in funds to help recapitalize the country’s four main banks.

Walmart beats. Walmart earned $1.03 per share from continuing operations in the third quarter, but $0.99 excluding adjustments to its leases. Still, that was marginally higher than the $0.98 expected by analysts. Comparable-store sales, or sales at stores open at least a year, at Walmart’s US stores were up 1.5%. E-commerce sales were up by 10%.

Home Depot beats. The do-it-yourself home-improvement chain earned $1.36 per share in third quarter, beating expectations for $1.32. This was driven by a healthy 5.1% gain in comparable-store sales, which was better than the 4.6% expected by analysts.

Urban Outfitters missed. Urban Outfitters reported record third quarter sales that missed estimates, and earnings per share matched estimates, but comparable-store sales climbed by just 1% during the period, missing expectations for 3.4% growth. The news came after shares dropped 7.4% following the company’s announcement that it acquired a group of restaurants including the fast-casual chain Pizzeria Vetri. Apparently I’m not the only one who fails to see the synergy between retail clothing and pizza.

Shares of Dick’s Sporting Goods are getting clobbered. Dick’s reported third quarter adjusted earnings of $0.45 per share, missing expectations by a penny. Same-store sales, or sales at stores open at least a year, were up 0.4% in the quarter across the company, less than the 1.9% increase that was expected. And then the salt on the wound: the company lowered fourth quarter guidance.

A New York state judge denied a temporary restraining order sought by daily fantasy sports companies DraftKings and FanDuel in an effort to keep operating in the state after NY Attorney General Eric Schneiderman deemed the games to be illegal gambling. The government will now move for an injunction against the companies which will be heard in court on Nov. 25. DraftKings continues to operate as usual in New York despite the pressure from Schneiderman’s office, but FanDuel stopped taking new deposits from state players on Friday.

A US House of Representatives investigative panel plans to hold a 2016 hearing on skyrocketing drug costs. Earlier this month, the U.S. Senate Special Committee on Aging launched a probe into drug pricing at Valeant and Turing, signaling growing bipartisan agreement over the need to review prescription medicine costs across the nation.