Financial Review

Trumpcare

Sinclair Noe — March 7, 2017

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

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DOW – 29 = 20,924
SPX – 6 = 2368
NAS – 15 = 5833
RUT – 9 = 1374
10 Y + .02 = 2.51%
OIL – .16 = 53.04
GOLD – 9.70 = 1216.40

Healthcare stocks were in focus today after the GOP unveiled its Obamacare replacement bill, called the American Health Care Act. The bill rolls back the Medicaid expansion and eliminates the individual mandate, which requires everyone to buy health insurance.

Under the ACA, tax credits were provided to 85% of people enrolled in the exchanges, and the amount of the subsidy was determined based on income level, geographic region, and age. The amount of the tax credit in the House bill is based exclusively on age: The older you are, the more you get per month (though still less than you would get under the ACA).

A report from the non-profit Kaiser Family Foundation found that older Americans will receive significantly less help paying for their premiums, as will the poorest young Americans. Americans earning $40,000 to $75,000, on the other hand, are the winners—their subsidies will increase. The proposal would  kill a 3.8% investment tax on the wealthy that had used to finance the health-care law. It would also kill a 0.9% surcharge on wages above $250,000.

Under the ACA, insurers could not discriminate against people with pre-existing conditions like cancer, diabetes, or heart disease. The new plan does away with coverage for pre-existing conditions and institutes a continuous coverage provision.

People who have lapses in insurance cannot be denied coverage, but they can be charged more. Enrollees cannot have gone 63 continuous days (or more) without coverage, or they would pay a 30% penalty on premiums.

Older consumers would pay more for coverage under the GOP plan. The oldest consumers on the individual market are 64, just shy of the Medicare eligibility age of 65, and under the Affordable Care Act they can be charged no more than 3 times what a 21-year-old would pay. The GOP plan would broaden the age bands, as these rate limits are called, to 5 to 1, allowing insurers to charge the oldest consumers five times more than younger ones.

What’s more, the proposal would give the states the latitude to broaden those limits even further or to constrict them back to 3 to 1 or another level. Moving to a 5-to-1 rating would increase monthly premiums for a silver plan in 2018 by 25% for a 64-year-old before tax credits.

Older consumers would get hit with a double whammy: not only may their premiums increase, but the restructured tax credits won’t go as far as those under the Affordable Care Act in subsidizing the premium cost. The new tax credits are based on age, not on income, while many of the consumers on the individual market are lower income.

The new tax credits would also rise at a slower rate than under the Affordable Care Act, where credits were pegged to the cost of the second-lowest cost silver plan in the consumer’s region. That benchmark reflects the true market cost of the plan. The new peg, by contrast, is pegged only to a measure of inflation.

The GOP’s plan includes the phase out of the Medicaid expansion. About 10.7 million people were newly eligible for Medicaid coverage after the ACA went into effect. One of the only ways to pay for the GOP’s health subsidies and cut taxes the ACA imposed on the wealthy is to cut off federal Medicaid funding.

States will be allowed to continue to enroll people into Medicaid until 2020. Then, it will “freeze,” and no other enrollees can be added, the thinking being people will eventually drop out of the program as they earn more money; 31 states expanded Medicaid to people above the poverty level under the ACA, and the Republican plan would roll that back, though how has become a major point of argument inside the party.

There are several other components to the bill, including restrictions on funding for Planned Parenthood, plus more generous use of health savings accounts. But the meat and potatoes is that the bill repeals the mandate and replaces it with a 30 percent premium penalty for anyone – healthy or sick – who does not maintain continuous insurance coverage; which sounds kind of like a mandate, and will surely be challenged in the courts.

The tax credits for buying insurance are also altered and reduced, making it more expensive for the old and poor. And major cuts to Medicaid funding which are already running into roadblocks. With Medicaid reductions and smaller tax credits, there is a strong chance that many people would lose their coverage. In other words, the new plan is less of a repeal and more of a revamp or re-branding, absent significant improvements and sustainable solutions.

The proposal has not yet been scored by the Congressional Budget Office, the federal agency that calculates the impact that proposed legislation would have on the debt and other considerations; that means we do not know how it will be paid for and whether it will cost more than ACA.

If all proceeds smoothly, and the votes are lined up, the full House could vote on the bill within two weeks. The votes might not be lining up. The new bill to replace Obamacare is being savaged by early bad reviews from a wide range of conservatives, with one Republican senator declaring it “dead on arrival” in the Senate – if it can make it through the House, and it would take less than two dozen defections among Republicans to sink the repeal effort, assuming Democrats vote as a bloc.

In other words, this could be a long, drawn out process. Just a reminder, Trump has said the repeal and replace of Obamacare needed to take place before moving on to tax reform.

Drug companies were generally lower today, including Endo, Valeant, and Mallinckrodt, which were all down more than 4%. Generics giants Allergan and Mylan were also down as much as 2%.

Losers in the hospital space include Tenet Healthcare, down 4%, and Universal Health Services, down about 2%, and HCA Holdings was down a bit less than 1%.

Biotech stocks were also getting hit, including Juno Therapeutics, Sage Therapeutics, and Intercept Pharmaceuticals, each down as much as 2%. The large health insurance stocks were flat.

The US Citizenship and Immigration Services said it plans to suspend fast-track processing for the H-1B skilled-worker visa program, a move that could slow down the process of hiring foreign workers for US companies.

The US trade deficit shot up in January to a five-year high. The trade deficit rose 9.6% to $48 billion in January from a revised $44 billion in December. The wider deficit was spurred by a 2.3% increase in imports of consumer goods such as cell phones from China and other countries.

The higher cost of oil also boosted the value of US imports. Imports totaled $240 billion in January. US exports, meanwhile, rose a smaller 0.6% to $192 billion. Exports of cars and trucks, oil and soybeans all rose sharply.

Looking further afield, a new report shows the Eurozone economy grew by 1.7% in the fourth quarter. This was in line with expectations and slightly slower than US growth over the same period. However, German industrial orders in January delivered a nasty shock, slumping 7.4%.

In South America, new figures from Brazil show the country continues to grind through its longest recession ever, spanning eight consecutive quarters. Brazil’s economy shrank 3.6% in 2016. That’s just a slight improvement from 2015, when it contracted 3.8%, but still far from good.

Exxon Mobil promised to invest $20 billion over 10 years to build and expand refineries, chemical and liquefied natural gas plants along the Gulf Coast. Chairman and CEO Darren Woods said the work, which would focus on 11 plants in Texas and Louisiana, would create 12,000 permanent jobs and 35,000 construction jobs. Exxon currently has about 71,000 employees. The promised $20 billion, decade-long investment would be roughly equal to Exxon’s total capital spending last year.

The Justice Department is seeking additional information from General Electric and Baker Hughes over their pending merger, extending the waiting period related to the regulatory review until 30 days after the companies comply. GE announced a deal in October to combine its oil and gas business with Baker Hughes, forming one of the industry’s largest oilfield services and equipment companies.

Salesforce announced an artificial intelligence partnership with IBM. As part of the agreement, data from Big Blue’s Watson will be available to Salesforce customers, and the cloud company’s technology will be integrated into IBM’s system for internal use.

Amazon has abandoned its legal battle to protect its Alexa assistant with First Amendment rights – for now. The company filed a motion against a police search warrant in an Arkansas murder case earlier this month, but dropped it after the defendant agreed to hand over the data contained on his Echo speaker. Amazon previously claimed that voice interactions were a “constitutionally protected opinion.”

RadioShack stores are closing again. General Wireless, the joint venture with Sprint that purchased 1,700 stores from the original RadioShack Corp. after it filed for bankruptcy in 2015, apparently hasn’t been able to fix the 96-year-old brand. General Wireless is now preparing its own bankruptcy filing.

Toshiba is spinning-off its core memory chip business and seeking outside investors in it. Potential suitors include Apple, Foxconn, TSMC, Microsoft, Western Digital, Micron, and SK Hynix. Apple could have the edge to win the business, which would allow it to lock in memory technology for its iPhone and other products. Micron and SK Hynix face antitrust issues while Foxconn faces national security issues. The seller values the business at $17-18 billion. Bids are due March 29.

The Oakland Raiders have found a financial partner to back their new proposed stadium in Las Vegas. Bank of America has been secured to help complete financing on a $1.9 billion, 65,000-seat stadium that would be located on the Las Vegas Strip.

The state of Nevada has committed $750 million to the project, with the team and the league paying the remaining cost contingent on the owners’ approval. The Raiders are eligible for relocation, but 24 of the 32 NFL owners must approve any move. The league’s owners are set to meet in Phoenix later this month.

Financial Review

Waiting on the Fed

Sinclair Noe — September 19, 2016

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

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DOW – 3 = 18,120
SPX – 0.04 = 2139
NAS – 9 = 5235
10 Y un – 1.70%
OIL + .16 = 43.19
GOLD + 2.80 = 1313.80

The Federal Reserve’s Federal Open Market Committee meets tomorrow and will issue a statement on Wednesday. A string of disappointing results on the U.S. economy in the past several weeks has all but ensured that interest rates will remain ultra-low for consumers and businesses for another few months.

That doesn’t mean the economy is in horrible shape, just more of the slow, consistent, sluggish, steady growth that we’ve seen for quite some time. Is it enough to move the Fed? Wall Street investors only see somewhere between a 9% to 15% chance that the Fed will hike rates. Still, the Fed could hike rates; they have certainly said a hike is on the table. Of course we won’t know for sure until the Fed makes its announcement.

The major stock indices started the day in positive territory. The Dow had an early gain of 100 points. Last week, the bulls and the bears faced off. As much as the bulls tried last week, they could never get the market back above a key hurdle. The threat of a September rate hike just continued to circulate, and never gave the buyers a chance to get traction. Then again, the bears didn’t make any progress either. As well as the S&P 500 held up last week, we’re still closer to a technical breakdown than a breakout.

Most likely, traders will not place big bets before Wednesday’s interest rate decision. After the Fed statement comes out, look for traders to trade, probably with enough commitment to break either support or resistance; a sizeable movement to finish out the week.

The Bank of Japan is also holding a meeting this week and they will issue their monetary policy a few hours before the Fed. The BOJ remains the most aggressive major central bank when it comes to quantitative easing—its program of bond and other asset purchases as well as negative interest rates that are designed to reflate Japan’s stubbornly sluggish economy.

Negative rates have failed to weaken the Japanese yen.  Year to date, the yen is up nearly 18% versus the dollar and 15% versus the euro. There is speculation the Bank of Japan may try to flatten the yield curve by buying long-term debt and selling short term debt. (Which sounds a lot like “Operation Twist”.)

Excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years, according to the Bank of International Settlements’ quarterly review. The central bank of central bankers also called the recent equity rally “more stick than carrot,” but stopped short of warning of a bubble, with policy makers questioning whether market prices fully reflect potential risks.

Global bond issuance is running at its fastest pace in nearly a decade as companies, countries and U.S. agencies such as Fannie Mae and Freddie Mac binge on debt. According to Dealogic, a total of $4.88 trillion of debt has been sold since the year began as issuers take advantage of rock-bottom borrowing costs. The figure is a hair below that of 2007, when $4.91 trillion of bonds were issued during the same period.

It seems more likely that London will lose its “passporting rights” with a hard Brexit. Some leading Conservative party members are currently pushing for a so-called hard Brexit option, which would end free movement between the U.K. and the EU and cut trading ties with the remaining 27 member states. But Jens Weidmann, the president of Germany’s central bank says if the U.K. exits the single market, the passport rights for London-based financial firms “would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area.” Passporting allows British banks, including insurers and funds to sell their services seamlessly in any EU member state, without having to obtain a local license.

Losing the right means any financial institution using London as their EU headquarter would have to move to another country and “passport” their services into the rest of the union from there. They could also stay based in the U.K, and instead apply for regulatory approval in each country it wishes to continue to do business. In any case, the industry has warned it will cost billions of pounds in office relocations, staff transfers, added paperwork and new capital requirements. There are also concerns jobs will be lost to other European financial hot spots, such as Frankfurt, Paris, Dublin and Luxembourg.

Venezuelan President Nicolas Maduro said that OPEC and non-OPEC countries are close to an agreement to stabilize markets ahead of an informal meeting in Algiers next week. The uncertainty ahead of that meeting has seen oil investors head for the sidelines, cutting wagers on both falling and rising crude prices.

The National Association of Home Builders index on builder confidence regarding newly built, single-family homes climbed to 65 points in September from a downwardly revised 59 in August. As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers.

Contract negotiations between Canada’s Unifor union and General Motors are continuing around the clock, with the two sides divided over new investment, ahead of a looming strike deadline that could see 3,900 workers walk off the job by midnight tonight. A strike would halt powertrain and vehicle production in at least two Canadian plants and potentially start a ripple effect for GM production in the U.S. that relies on those parts.

Although approval had been expected by the end of August, Iran has been told the U.S. will issue export licenses for the purchase of more than 200 Boeing and Airbus aircraft by the end of September. The US Treasury can veto sales of modern aircraft to Iran, including non-U.S. aircraft, due to the high proportion of US parts.

Sarepta Therapeutics shares jumped up as much as 82% in early morning trade after the Food and Drug Administration granted its Duchenne muscular dystrophy drug accelerated approval. The drug – the first treatment for the degenerative disease – has had a long and controversial history with the FDA. The agency voted against approval, then delayed review.

Duchenne muscular dystrophy, which mostly affects boys, typically kills patients before the age of 30. Patients and their families were particularly outspoken advocates for the approval of the drug, pushing back against the agency’s concerns at meetings open to the public. Sarepta shares are up about 160% over the last three months.

Salesforce is embedding artificial intelligence into its software, making it the latest firm to enhance workplace tools with human-like abilities. Called Einstein, the new offering is a set of online A.I. services designed to automate tasks, predict behavior and spotlight relevant information. Salesforce will demonstrate the software at its annual user conference next month in San Francisco.

The announcement also allowed Salesforce to pre-empt an announcement from Oracle, which also is holding its annual customer event in San Francisco. High on Oracle’s list of new features: real-time analysis of enormous amounts of data. Oracle calls its product Oracle A.I. Elsewhere, General Electric is pushing its A.I. business, called Predix.

IBM has ads featuring its Watson computer talking to various celebrities. More than 30 private companies working to advance artificial intelligence have been acquired in the past five years, and Salesforce has been among the most active buyers along with Alphabet, Intel and Apple.

And it’s all kind of cool and exciting and maybe a little creepy. So, what’s really happening?

And the answer is that it is probably too soon to say for certain. For Salesforce the idea is to provide its customers sales tools. Who are the best prospects to call this week? Which leads are most likely to become prospective clients? Why am I getting outsold by my competitors in certain markets? How long will it take a deal to close?

We don’t know what value A.I. can provide because people are still trying to figure out how to use it. At its core, A.I. is just a series of advanced statistics-based exercises that review the past to indicate the likely future, or look at current customer choices to figure out where to put more or less energy. People are going to have to experiment, most likely first on pain points like security and product marketing.

Technology matures when we don’t pay much attention to it, or only notice when it fails; think of electricity in your house, or your phone (which has enough computing power to fly a rocket to the moon). Of course, by the time A.I. becomes ubiquitous and fades into the fabric of everyday life, we’ll have some new technology to worry about.

Nearly one-third of Hanjin Shipping container ships that have been waiting to dock at ports around the world have offloaded their cargo, raising hopes that the disruption in the global supply chain will ease ahead of the year-end holiday season. Meanwhile, a South Korean judge has ruled that all Hanjin vessels that have unloaded must cancel their charter agreements and return the ship to their owners.

After rolling out a similar hub in the US, UPS is expanding its 3D printing services to Asia with a new facility in Singapore run by its partner Fast Radius. The company sees 3D printing as a potential threat to its warehousing business – where it stores parts for manufacturers – so it has looked to incorporate the technology into its business model.

As it grapples with a massive global smartphone recall that is estimated to cost more than $1 billion, Samsung Electronics is moving swiftly to sell stakes in other tech companies to raise cash. The firm said Sunday it disposed of shares in ASML, Seagate, Rambus and Sharp. Total proceeds from the sales were nearly $900 million.

Financial Review

Aggressively Flat

Sinclair Noe — June 1, 2016

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

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DOW + 2 = 17,789
SPX + 2 = 2099
NAS + 4 = 4952
10 Y + .01 = 1.84%
OIL – .22 = 48.88
GOLD – 2.30 = 1213.70

It turned out to be an aggressively flat day on Wall Street. The Dow kicked off the morning with a 120-point drop and the S&P 500 index posted an early 22-point slide, followed by clawing and scratching back to slightly positive territory.

Manufacturing activity grew in May but at a very slow pace that suggests the sector is unlikely to speed up anytime soon. The Institute for Supply Management said its manufacturing index rose to 51.3% last month from 50.8% in April. Readings over 50% indicate more companies are expanding instead of shrinking.

The index has been above the cutoff mark for three straight months after slipping below 50% for five straight months. The big improvement came in how fast companies delivered goods to buyers and replenishing of inventories, a sign that demand may have picked up a bit.

JPMorgan’s Global Manufacturing Purchasing Managers’ Index (PMI), produced with Markit, came in at 50.0 last month, right on the level that separates growth from contraction, compared to 50.1 in April.

Construction spending dropped 1.8% in April. The monthly data followed an upward revision to March data of about 1.5%. Weakness in April was widespread. Residential construction declined 1.5%, while public construction spending fell 2.8%. Outlays for highways were down 6.6%. Many categories are stronger than they were a year ago, however, and overall all spending is 4.5% higher than in April 2015.

The U.S. auto industry looks set for another record year, even as May new-vehicle sales showed a decline. General Motors, the largest U.S. automaker, reported a 14.3 percent drop. Ford Motor said its sales fell 6 percent. Fiat Chrysler said sales rose 1 percent. In 2015, vehicle sales were a record 17.47 million vehicles. Overall, sales hit an annualized sale pace of 17.45 million units in May.

Toyota, Fiat Chrysler, Volkswagen and Mitsubishi are still selling new vehicles with defective air bags that will eventually have to be recalled. According to a report from the Senate Commerce Committee, the automakers confirmed they are continuing to sell some vehicles with ammonium-nitrate inflators without a drying agent.

The vehicles are legal to sell but must be recalled by 2018. The report also said that 11 automakers have replaced more than 2.1 million older Takata airbags with newer versions that would also need to be replaced. It just seems so incredibly stupid.

Prime Minister Shinzo Abe is postponing an increase to Japan’s sales tax (from 8% to 10%) by two-and-a-half years until 2019. Additionally, Abe will announce a new stimulus package in the fall aimed at sparking private demand and accelerating infrastructure projects. The decision marks an about-face for Abe, who already pushed off the hike once, and repeatedly said that only an economic shock on the scale of the Lehman Brothers collapse or a major earthquake would prompt another delay.

The OECD, which has a history of cutting its growth outlooks, has done it again, warning global policymakers of a self-fulfilling “low-growth trap” where ultra-loose monetary policy risks doing more harm than good. The organization lowered its world growth forecast by some 0.3%, predicting the global economy to expand by 3% in 2016 and “by only” 3.3% in 2017.

Looking at other major events on the calendar, tomorrow the ECB and OPEC meet, separately of course. The European Central Bank is not expected to announce any new stimulus measures. OPEC is expected to talk about caps on output but OPEC is not expected to announce an actual freeze on production.

Saudi Arabia has already said it won’t freeze production unless Iran freezes production, which Iran says it won’t do. Six months after OPEC left its high-production policy in place, some of the cartel members who called loudest for output cuts are feeling the most pain.

Friday brings the monthly jobs report, and we are looking for a repeat of the April numbers, somewhere around 160,000; any numbers significantly below 150,000 or above 200,000 could change the outlook for Federal Reserve decisions on interest rate policy; the FOMC meets on the 15^th.

One week later, there is a referendum in the UK and voters will decide whether to stay in the Euro Union or exit. Right now the Brexit is a toss-up. The official scolding seems to be backfiring.

Two weeks before a FOMC meeting, the Federal Reserve publishes the Beige Book, an anecdotal collection of observations on the economy from the 12 Fed districts. Today’s Beige Book noted tight labor markets in most districts despite modest job growth, growing price pressures. More generally, the Fed reported modest or moderate economic growth in the majority of its 12 districts.

Consumer spending was “up modestly on balance” in many regions. Reports on the factory economy were mixed, and banks generally saw higher demand for loans. Crop conditions were described as “promising in many districts,” though “low commodity prices continued to put pressure on agricultural incomes.”  The energy sector “remained weak” (no surprise) and everything else is good news for American workers.

Also today, we learned that Fed Chair Janet Yellen will deliver her semiannual testimony before Congress on June 21, about a month earlier than usual. This means we’ll hear from Yellen on June 6, June 15, and June 21. So, plenty of Fedspeak from the most important member of the FOMC ahead of a July 27 policy announcement that could include the Fed’s next rate hike.

Or the Fed could hike rates in June, and Yellen could try to explain how the Fed has been hacked at least 50 times in the past 4 years. The disclosure of breaches at the Fed comes at a time when cybersecurity at central banks worldwide is under scrutiny after hackers stole $81 million from a Bank Bangladesh account at the New York Fed.

French commuters are facing more travel disruptions as rail workers go on strike and President Hollande seeks to contain the labor unrest that caused many gas stations to run dry over the past week. About half of the nation’s train services have been canceled across the country, and there are concerns that the Euro 2016 soccer tournament, which France hosts from next week, may be disrupted.

Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell by about 22 percent and may have to pay tens of millions to investors who opposed the deal for the computer maker. The court ruling applies to about 5.5 million Dell shares. Dell shareholders claimed the Dell buyout took advantage of a dip in the company’s stock price and its board never determined the intrinsic value before negotiating. A Delaware judge was asked to make an appraisal of the fair value of the deal.

Cloud-based software maker Salesforce.com said it would buy Demandware, whose software is used by businesses to run e-commerce websites, for about $2.8 billion, or a 56 percent premium to Demandware’s Tuesday closing. The deal will help Salesforce open a new front as it looks to take away more market share from traditional software providers such as Oracle and SAP, both of which already offer cloud-based e-commerce services.

The Demandware deal follows Salesforce’s formula: Buy fast-growing companies that have the dual benefit of propping up Salesforce’s growth rate and opening new business lines. Salesforce is paying about 11 times Demandware’s revenue in the past year – more than double the median multiple offered in similar transactions over the last decade.

Who knows, maybe Salesforce will actually turn a profit someday. Meanwhile, consider that Salesforce and Google went public about the same time in 2004, and even though Salesforce has trouble posting earnings, the share price has outperformed Google.

Freeport McMoRan has wrapped up the sale of a 13% interest in its Morenci unincorporated joint venture to its Japan-based partner, Sumitomo Metal Mining Co for $1 billion in cash.  Freeport is taking aggressive actions, including asset sales and deferral of capital spending in an effort to cope with the weak commodity pricing environment.

Boeing has secured a more than $3 billion U.S. Air Force contract for Joint Direct Attack Munitions tail kits that use GPS to make conventional bombs into precision-guided weapons. Boeing’s contract was raised from an initial $1.75 billion awarded in October 2014, due to warfighter demand and the need to replenish depleted inventories.

Doctors at Hackensack University Medical Center in New Jersey have confirmed the birth of a child suffering from Zika-linked microcephaly, a condition wherein the child’s brain and head are partially developed. Reports indicate she is the first baby born with complications from the virus in the tri-state area. The mother is said to have contracted Zika while in Honduras and was admitted to Hackensack while vacationing in the U.S.

Following the lead of Britain and Australia, Canada is making plain packaging of cigarettes compulsory in a bid to cut the rate of smoking. Although the country already obliges firms to slap large graphic warning labels on cigarette boxes, the new measures would require a uniform, standardized color and font on packs and restrict the use of logos and trademarks.

The Food and Drug Administration proposed voluntary guidelines for the food industry to reduce salt. Though the guidelines are not mandatory, consumer advocates said they are meaningful because they will serve as a benchmark by which companies can be measured.

Americans eat almost 50 percent more sodium than what most experts recommend. More than 70 percent of sodium consumed is already in food before it reaches the table, according to the Centers for Disease Control and Prevention, and health advocates say the guidelines could help reduce that.