Stocks Mixed in Lackluster Session

Charles Schwab: On the Market

Posted: 11/7/2017 4:15 PM EST

Stocks Mixed in Lackluster Session

 

U.S. equities finished mixed amid light economic and equity news. U.S. tax reform and global trade uncertainties continued to linger, as President Trump continued his tour of Asia. Treasuries were flat and the U.S. dollar continued its ascent, getting a boost from the weakness in European currencies, while crude oil inched lower and gold also lost ground.

The Dow Jones Industrial Average (DJIA) rose 9 points to 23,548, the S&P 500 Index was nearly unchanged at 2,591, and the Nasdaq Composite fell 19 points (0.3%) to 6,768. In moderately heavy volume, 904 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.15 lower to $57.20 per barrel and wholesale gasoline lost $0.01 to $1.82 per gallon. Elsewhere, the Bloomberg gold spot price was $5.40 lower at $1,276.55 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 94.91.

Priceline Group Inc. (PCLN $1,646) reported Q3 earnings-per-share (EPS) of $34.43, or $35.22 ex-items, compared to the FactSet estimate of $34.26, as revenues rose 20.1% year-over-year (y/y) to $4.4 billion, topping the projected $4.3 billion. The travel booking company said it saw solid growth and operating results during its seasonally busy quarter. However, PCLN issued Q4 EPS guidance that missed expectations on increased brand investments. Shares were sharply lower.

Shares of TripAdvisor Inc. (TRIP $30) tumbled over 20% after the travel booking company posted Q3 revenue of $439 million, up 4.0% y/y, below the projected $451 million. The company said re-igniting near-term hotel growth has been more difficult than expected. TRIP's Q3 EPS of $0.36 ex-items was one penny above expectations.

Tapestry Inc. (TPR $42), formerly known as Coach, posted a fiscal Q1 loss of 0.06 per share, or EPS of $0.42 ex-items, versus the projected $0.36, with revenues growing 24.0% y/y to $1.3 billion, roughly in line with estimates. The results include the contribution of its recently acquired Kate Spade. Q1 same-store sales at its Coach stores declined 2.0% y/y, compared to the expected 1.9% rise. The company reaffirmed its full-year outlook as it said it is well positioned for the holiday season. Shares finished slightly higher.

Job openings roughly flat but remains near record high, consumer credit soars

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, came in at a level of 6.09 million jobs available to be filled in September, roughly matching August's upwardly revised figure. The Bloomberg forecast called for a decline to 6.08 million. The hiring rate dipped to 3.6% from August's 3.7% pace, and the separation rate remained at the prior month's 3.6% rate.

Consumer credit saw its largest increase since November 2016, jumping 6.6% year-over-year (y/y) to $20.8 billion during September, above the $17.5 billion forecast of economists polled by Bloomberg, while August's figure was unadjusted at $13.1 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $14.4 billion, a 6.3% increase y/y, while revolving debt, which includes credit cards, rose by $6.4 billion, a 7.7% y/y rise.
Treasuries were unchanged, as the yields on the 2-year and the 10-year notes, as well as the 30-year bond, were all flat at 1.63%, 2.31% and 2.77%, respectively.

The U.S. dollar continued its rebound and Treasury yields paused from yesterday's declines, as the markets continue to grapple with a positive global economic backdrop, Fed leadership changes, and uncertainty regarding if the long road to tax reform will come to fruition.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, One Thing Leads to Another: Productivity's Rebound, that recent better productivity likely has legs heading into 2018, adding that stocks have done best following periods of weak productivity.

Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?, while Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, House Tax Reform Bill: What Investors Need to Know.
The only item on tomorrow's economic calendar is MBA Mortgage Applications.

Europe moves lower, Asia mixed

European equities traded lower, despite some weakness in the euro versus the U.S. dollar, with political uncertainties continuing to fester and reports suggesting diverging opinions among European Central Bank members regarding guidance for its stimulus measures. German industrial production fell more than expected in September, but eurozone retail sales rose more than forecasted, with Italy easily topping estimates to likely help limit losses for its markets. The British pound saw some pressure as Brexit uncertainty remained and a read on U.K. retail sales unexpectedly fell, while bond yields in the region were lower. Schwab's Liz Ann Sonders and Randy Frederick note in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about.

Stocks in Asia finished mixed on the heels of yesterday's modest extension of record highs in the U.S., while the markets paid attention to President Trump's tour of the region, and energy issues were higher as crude oil prices rallied yesterday amid a corruption crackdown in Saudi Arabia. Japanese equities rallied, hitting levels not seen since 1992, with better-than-expected wage data in September joining upbeat corporate earnings sentiment that has been bolstered by weakness in the yen. Amid this backdrop, Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer the video, Is An Optimistic Outlook for Global Equities Warranted?. Mainland Chinese stocks and those traded in Hong Kong advanced, boosted by the strength in the energy sector, ahead of some key economic reports this week. Markets in Australia gained solid ground, with resource-related issues moving higher, while the Reserve Bank of Australia kept its monetary policy stance unchanged as expected. Meanwhile, stocks in South Korea and India declined.

Tomorrow, the international economic calendar will offer the Leading Index and trade data from Japan, industrial production from Spain, and trade figures from France.

Markets Continue to Notch Record Highs

Charles Schwab: On the Market

Posted: 11/6/2017 4:15 PM EST

Markets Continue to Notch Record Highs

 

U.S. equities were slightly higher, achieving more record highs, courtesy of strength in the technology and energy sectors. Crude oil prices rallied on turmoil in the Middle East amid a corruption crackdown in Saudi Arabia, while Broadcom's unsolicited $105 billion takeover proposal for Qualcomm, and a chip deal between Dow member Intel and AMD, gave techs a boost. Treasury yields and the U.S. dollar were a tad lower amid a dormant economic calendar, while gold was higher. 

The Dow Jones Industrial Average (DJIA) rose 9 points to 23,548, the S&P 500 Index advanced 3 points (0.1%) to 2,591, and the Nasdaq Composite increased 22 points (0.3%) to 6,786. In moderately heavy volume, 852 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.71 to $57.35 per barrel and wholesale gasoline gained $0.04 to $1.83 per gallon. Elsewhere, the Bloomberg gold spot price was $11.53 higher at $1,281.44 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 94.75.

Broadcom Ltd. (AVGO $278) announced a proposal to acquire Qualcomm Inc. (QCOM $63) for $70.00 in cash and stock, in a transaction valued at $105 billion excluding debt. Under the terms of the deal, QCOM stockholders will receive $60 in cash and $10 in BRCM stock for each share owned. QCOM confirmed receiving the unsolicited proposal and said it will assess it in order to pursue the course of action that is in the best interests of its shareholders. This would be the largest deal for the tech sector in history. QCOM was higher and AVGO also gained ground.

Advanced Micro Devices Inc. (AMD $12) rallied after announcing that it designed a semi-custom graphics processor unit (GPU) that will be integrated into a new multi-chip processor package from Dow member Intel Corp. (INTC $47). INTC also traded higher.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the technology sector in his latest, Schwab Sector Views: Technology Trick or Treat?.

In late day action, CNBC's David Faber reported that Twenty-First Century Fox, Inc. (FOXA $27) has been in talks to sell most of the company to Walt Disney Co. (DIS $101), citing people familiar with the matter. According to the report, talks have been taking place over the last few weeks, with no certainty to a deal being completed. Neither company commented on the report. Shares of both firms were higher on the news.

CVS Health Corp. (CVS $67) reported Q3 earnings-per-share (EPS) of $1.26, or $1.50 ex-items, versus the FactSet estimate of $1.48, as revenues rose 3.5% year-over-year (y/y) to $46.2 billion, roughly in line with forecasts. The company issued Q4 EPS guidance that matched expectations and narrowed its full-year profit outlook. Shares were lower as analysts expressed disappointment regarding its profit margin and same-store sales performance out of its retail unit, which both declined y/y.
 
Michael Kors Holdings Ltd. (KORS $55) posted fiscal Q2 profits of $1.32 per share, or $1.33 ex-items, compared to the forecasted $0.83, with revenues growing 5.4% y/y to $1.2 billion, topping the expected $1.1 billion. Q2 same-store sales declined 2.5% y/y, versus the anticipated 4.5% decrease. The luxury retailer raised its full-year outlook, and shares jumped over 15%.

Economic front quiet today

Treasuries finished higher amid a dormant economic calendar, as the yield on the 2-year note was flat at 1.61%, while the yields on the 10-year note and the 30-year bond dipped by 1 basis point to 2.32% and 2.80%, respectively.

The yield curve flattened and the U.S. dollar was little changed last week as the markets assessed the likelihood of a December rate hike by the Fed and President Trump's pick of Fed Governor Jay Powell as the next Chairman of the Central Bank. Also, global economic data continues to paint a positive picture and tax reform remains a source of uncertainty in the wake of last week's House bill.
Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?, while Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, House Tax Reform Bill: What Investors Need to Know.

The week's relatively light economic calendar will get moving tomorrow with the release of the JOLTS Job Openings report, with the measure of unmet demand for labor forecasted to show 6.1 million jobs were available to be filled during September, matching that seen in August, while in the final hour of trading consumer credit will be reported, with consumer borrowing for September expected to have increased to $17.8 billion from the $13.1 billion registered in August.

As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, global and domestic economic growth, along with a solid earnings picture and a potential tax reform tailwind, suggest investors should remain at their target equity allocations. Pullbacks are possible but a recession doesn’t appear to be in the cards in the near term, which historically has meant the risk of a pullback turning into a bear market is low.

Europe dips as week begins, Asia mixed

European equity markets dipped as the global markets appeared cautious ahead of a host of key economic data this week in Asia, and amid remaining global political and monetary policy uncertainties. The corruption crackdown in Saudi Arabia also garnered some attention. Global sentiment has jumped to lead the recent rally in the stock markets and Schwab's Liz Ann Sonders and Randy Frederick note in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about. Stocks mostly shrugged off stronger-than-expected German factory orders and Markit's eurozone manufacturing and services sector activity report. In other economic news, U.K. new car registrations fell in October. The euro overcame losses and was little changed, while the British pound gained ground on the U.S. dollar. Bond yields in the region moved lower.

Stocks in Asia finished mixed following the extended weekly winning streak in the U.S., bolstered by a flood of upbeat economic reports, while the markets were likely cautious ahead of a busy week of data for the region and as President Trump began his tour of Asia. The Reserve Bank of Australia (RBA) is expected to deliver its monetary policy decision, while Japan will report its machine orders figures and China will release its trade data. Stocks in Japan and Hong Kong finished flat, while mainland Chinese equities advanced modestly. Meanwhile, markets in Australia and South Korea dipped, but securities in India ticked slightly higher.

In addition to the aforementioned RBA policy meeting, the international economic calendar will include retail sales from the U.K., the Eurozone and Italy, as well as industrial production from Germany.

Financial Review

Send in the Clowns

Sinclair Noe — May 22, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 89 = 20,894
SPX + 12 = 2394
NAS + 49 = 6133
RUT + 9 = 1377
10 Y + .01 = 2.25%
OIL + .48 = 50.81
GOLD + 4.80 = 1261.40

First quarter earnings season is wrapping up, and the big-name reports are getting scarce, with this week’s heavy hitters including Best Buy, Dollar Tree, and Costco. Both the S&P 500 and tech-heavy Nasdaq composite set records early last week before worries about growing political uncertainty in Washington, which could hamper President Trump’s agenda of tax cuts and deregulation, knocked those indexes back from their highs.

On Wednesday, the Congressional Budget Office will release its analysis of the health-care bill that passed the House of Representatives earlier this month. Official Washington will comb through the score, with partisans on each side hoping it suits their talking points. The first CBO score estimated that 24 million more people would be uninsured in 2026, and that number is not expected to change substantially.

Another number could unravel the whole deal.  If the bill isn’t found to save at least $2 billion over 10 years, Republicans won’t be able to use the so-called budget reconciliation process to pass it. Under that process, 51 votes are required to pass legislation in the Senate, versus 60.

Not saving at least $2 billion would mean Republicans would have to start all over again by passing a new budget resolution.

The Trump administration today asked that a major federal court case weighing the fate of the Obamacare cost-sharing subsidies be put on hold again, leaving billions of dollars in payments to insurers up in the air for 2017 and 2018. The subsidies are available to low-income Americans who buy individual health insurance on the ACA exchanges.

In the meanwhile, insurers that are trying to set premium rates for insurance plans to be sold in 2018 are running up against deadlines and have repeatedly asked Congress to fund the subsidies during the transition.

Tomorrow, the White House is scheduled to release Trump’s first full budget. A president’s budget is a wish list, and many of the proposals in it may not become law.

Also Wednesday, the Fed will release the minutes of its May 2-3 meeting. Over the last few week, labor market and inflation data have sent contradicting signals. The labor market supports the hawkish Fed stance. Employment rose 211,000 in April from a wobbly showing in early spring and the unemployment rate dipped to 4.4%, matching the lowest level since May 2007.

On the other hand, core inflation data was soft in both March and April. Today, Dallas Fed President Rob Kaplan said he still expected two rate hikes this year. Perhaps more important than the timing of the next rate hike is what the Fed plans to do about its balance sheet. Chair Janet Yellen and other top officials have claimed for some time that they are eager to begin reducing their nearly $4 trillion in US government and mortgage debt.

And while this may be true at the margin, the truth is that though many of them may make noises about reducing the size of the balance sheet, a sizable and probably most of the Fed officials believe the massive balance sheet is here to stay — indeed, most of them schooled in the modern central banking theories believe a rather large balance sheet is now an essential part of monetary policy.

More than one Fed official has indicated that even a “normal” balance sheet as they currently envision it could total about $2 trillion worth of government and/or housing debt.

President Trump visited Saudi Arabia over the weekend and sealed $110 billion in arms deals with the Saudis, with options running as high as $350 billion over 10 years. Shares of defense firms General Dynamics, Raytheon, and Lockheed Martin all hit record highs before easing to trade up between 0.6 percent and 1.6 percent. Boeing was up 1.5 percent and the biggest boost on the Dow.

Blackstone and Saudi Arabia’s main sovereign wealth fund, the Public Investment Fund, signed a non-binding memorandum of understanding to create a $40 billion vehicle to invest in infrastructure projects, mainly in the United States. Blackstone said it expected the vehicle to have $40 billion of equity commitments, with a $20 billion anchor investment from the PIF and the rest of the money obtained from other investors.

Through this equity and debt financing, Blackstone expects to invest in over $100 billion of infrastructure projects. Today, Trump visited Israel. Next up, the Pope.

Oil prices moved higher on rising confidence that top exporters will this week agree to extend supply curbs, or even deeper cuts. However, energy companies lagged. Iraq announced this afternoon, that it will back a proposal from Saudi Arabia and Russia to extend output cuts for nine months, removing one of the last remaining obstacles to an agreement at the OPEC meeting in Vienna this week.

Iraq, the second largest producer in OPEC, has the worst record of compliance with its pledged cuts, pumping about 80,000 more barrels of oil a day than permitted during the first quarter.

The Supreme Court delivered a unanimous decision on where patent lawsuits may be filed, a setback to patent trolls, or companies that buy patents not to use them but to demand royalties and sue for damages. Such companies have often sued in remote federal courts that have a reputation for friendliness to plaintiffs.

More than 40 percent of patent lawsuits, for instance, are filed in a federal court in East Texas. In recent years, a single judge based in Marshall, Texas, oversaw about a quarter of all patent cases nationwide, more than the number handled by all federal judges in California, Florida and New York combined. The decision was a victory for big technology companies and other patent holders, which have complained about what they called forum shopping in patent cases.

The case, TC Heartland v. Kraft Foods raised the question of whether companies could sue essentially anywhere their products are sold, or in the jurisdiction where it resides.  Today’s Supreme Court decision won’t eliminate patent trolling but it will probably limit the practice.

A divided U.S. Supreme Court rejected two North Carolina congressional districts, saying Republican lawmakers relied too heavily on race when drawing them. The gerrymandered voting districts were used until the 2014 election. The case produced an unusual split: Justice Clarence Thomas, perhaps the most conservative justice, joined the court’s four liberals in the majority.

Ford Motor replaced its chief executive, Mark Fields, and vowed to catch up in the race to build self-driving cars and define a new era in personal mobility.  Jim Hackett, who had overseen the Ford subsidiary that works on autonomous vehicles, immediately takes over as the new CEO.

Fields came under fire from investors and the company’s board for failing to expand the company’s core auto business and for lagging in developing the high-tech cars of the future. But for a Ford CEO, stock price is Job One; Fields’ biggest transgression during his 3-year tenure as Ford CEO was a 40% drop in Ford’s share price.

Hackett said the board had given him a free hand to transform the nation’s No. 2 automaker, including seeking alliances with Silicon Valley firms, changing its product lineup, and divesting itself of unprofitable global operations.

US-based Huntsman Corp. and Switzerland’s Clariant are combining to create a chemical manufacturer with a market value of more than $14 billion. The deal creates a global specialty chemicals company that is 52% owned by Clariant shareholders and valued at about $20 billion when including debt. Clariant makes aircraft de-icing fluids, pesticide ingredients, and plastic coloring. Huntsman makes chemicals used in paint, clothing, and construction.

In the past 30 days, about 40 percent of the Midwest got twice the amount of normal rainfall, with soils saturated from Arkansas to Ohio. While spring showers usually benefit crops, the precipitation has come fast enough to flood some corn and rice fields and trigger quality concerns about maturing wheat. Bad conditions got worse with rain on Friday. There are lakes in some fields.

Planting was off to a fast start in the second half of April, before 10 inches of May rainfall and lower temperatures erased early optimism. Corn and wheat are headed for monthly gains on the Chicago Board of Trade while rough-rice futures are headed for the biggest such advance in six years. Even with the challenges, farmers have made speedy work of planting.

U.S. sowing of corn, soybeans and spring wheat was ahead or even with the five-year average as of May 14, while corn emergence was behind schedule.

For years, Citigroup employees suspected that millions of dollars that the bank was moving to Mexico might be suspicious. Yet the bank failed to sufficiently alert regulators or step up its monitoring for money laundering. From 2007 to 2012, the banking unit generated about 18,000 alerts of suspicious transactions among the 30 million Mexico remittances it processed, yet the bank conducted fewer than 10 investigations.

Today, Citigroup agreed to pay $97 million to settle an investigation into Banamex USA. In exchange, the Justice Department will not charge the bank criminally for the misdeeds of Banamex USA, based in California.

After 146 years, the Greatest Show on Earth, Ringling Bros. and Barnum & Bailey Circus took its final bow. An army of circus performers and technicians end a tradition that first had its roots in 1871 under showman P. T. Barnum. The circus animals, lions, tigers, and bears will be sent to sanctuaries or to work in European circuses.

And if you’re looking for the clowns, well you can find a reasonable facsimile in Washington DC.

Market Rebound Continues

Charles Schwab: On the Market

Posted: 5/22/2017 4:15 PM ET

Market Rebound Continues

U.S. equities continued their rebound from last week's malaise that came amid a flare-up in domestic political uncertainty and volatility. Defense stocks got a boost from President Trump's deals with Saudi Arabia on his first overseas trip, and Ford announced a new CEO. Treasury yields and gold are moved higher, and the U.S. dollar was little changed, with the economic calendar empty today. Meanwhile, crude oil prices extended a run as of late amid continued production cut optimism.

The Dow Jones Industrial Average (DJIA) increased 90 points (0.4%) to 20,895, the S&P 500 Index added 12 points (0.5%) to 2,394, and the Nasdaq Composite gained 49 points (0.8%) to 6,134. In moderate volume, 792 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.46 to $51.13 per barrel and wholesale gasoline was $0.01 higher at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.06 to $1,260.99 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.98.

Ford Motor Co. (F $11) announced that President and Chief Executive Officer (CEO) Mark Fields will retire and be replaced by Jim Hackett, who has led Ford Smart Mobility LLC since March 2016. Executive Chairman Bill Ford said Jim Hackett is the right CEO to lead Ford during a transformation period for the auto industry and the broader mobility space. Shares gained ground.

Huntsman Corp. (HUN $26) and Clariant AG (CLZNY $22) announced an agreement to combine in a merger of equals through an all-stock transaction, creating a global specialty chemical company with approximate annual sales of $13.2 billion. The merged company will be named HuntsmanClariant. Under the terms of the deal, Huntsman shareholders will receive 1.2196 shares of the new company for each share owned and each share of Clariant will remain outstanding as a share of the new company. Clariant shareholders will own about 52% of the company and Huntsman shareholders will own approximately 48%. HUN lost modest ground, while CLZNY moved nicely higher.

Amgen Inc. (AMGN $153) saw some pressure after a study of its osteoporosis treatment showed a newly observed cardiovascular safety signal that will have to be assessed, likely delaying approval in the U.S. Shares of AMGN's Belgian partner for the treatment, UCB SA (UCBJY $35), fell sharply.

Dow member Boeing Co. (BA $184) and Lockheed Martin Corp. (LMT $277), along with other aerospace and defense companies, moved higher after several defense and commercial agreements were announced yesterday amid President Donald Trump's visit to Saudi Arabia as part of his first trip overseas.

Fed, housing and business activity reports set to join political focus this week

Treasuries dipped as the U.S. economic docket was void of any major releases today. The yields on the 2-year and 10-year notes, along with the 30-year bond, all ticked 1 basis point (bp) higher to 1.28%, 2.25% and 2.91%, respectively. For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Along with continued focus on the political front, this week's economic calendar will bring looks at the housing sector, beginning with tomorrow's new home sales report, with economists expecting a 1.8% month-over-month (m/m) decline during April to a rate of 610,000 units, as well as Markit's preliminary Manufacturing and Services PMIs for May with both indexes forecasted to inch higher to 53.0 and 53.3, respectively, while the Richmond Fed Manufacturing Index will round out the day, forecasted to move lower to a level of 15 for May. More housing data, manufacturing and business activity reports will come later in the in the form of existing home sales, the second read on Q1 GDP and preliminary durable goods orders. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her article, ½ Full: Seeing Through a Weak Q1 leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Moreover, the release of the Fed's May meeting minutes could command attention as the markets grapple with the path of future rate hikes and the expected beginning of the paring of the Central Bank's bloated balance sheet. For analysis, see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com, where Randy and Liz Ann Sonders also offer the video, June Rate-Hike Highly Likely? Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Finally, following last week's brief spike in volatility, see the latest articles, Is The Stock Market Just Quiet Or Is It Too Quiet? from Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Liz Ann Sonders', Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Europe mixed on M&A, politics and euro strength, Asia mostly higher

European equities finished mixed, with the markets continuing the grapple with political uncertainty on both sides of the pond. The euro continued to climb versus the U.S. dollar, which has been pressured by ramped-up U.S. political uneasiness. The euro got a further boost from comments from German Chancellor Angela Merkel regarding the currency being "too weak," leading to Germany's trade surplus, per Bloomberg. However, the British pound dipped versus the greenback, as ongoing U.K. Brexit negotiations fostered uncertainty. Adding to the political risk, Germany, Italy and the U.K. face elections later this year. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Bond yields in the region were mixed. Telecommunications issues led to the upside to extend a recent rally, while oil & gas issues moved modestly to the upside as crude oil prices extended a run as of late on optimism the extension of production cuts will be announced.

Stocks in Asia finished mostly to the upside as the U.S. markets continued to recover on Friday from a midweek selloff that came as volatility spiked amid flared-up U.S. political uncertainty, which appeared to call President Trump's ability to pass pro-growth policies into question. The global markets are shrugging off lingering geopolitical uncertainty as North Korea conducted another missile test over the weekend, while paying attention to U.S. President Trump's first foreign trip. Japanese equities gained ground, with the yen stabilizing after last week's rally, while the nation's trade report showed exports grew at a smaller pace than expected and imports topped forecasts. Australian securities rose, with basic materials recovering and oil & gas issues gaining ground as crude oil prices extend a recent run on optimism of extended production cuts. South Korean listings showed some resiliency in the face of the North Korean missile tests and a deceleration in that nation's export growth, advancing 0.7%, and markets in India moved higher, back to near record territory as the markets cheered the finalization of rates for the national sales tax, per Bloomberg.

Chinese stocks finished mixed, with mainland stocks declining, amid festering regulatory crackdown concerns and economic uncertainty in the wake of recent soft data, but those traded in Hong Kong increased, with insurers getting a boost from some analyst optimism toward the group. For analysis of the global front amid the backdrop of trade and geopolitical uncertainty, see Schwab's Jeffrey Kleintop's, CFA, articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

The Markit Manufacturing and Services PMIs from around the globe will dominate tomorrow's international economic calendar, while other reports will include the All-Industry Index from Japan, the Ifo Business Climate survey, GDP and trade data from Germany, as well as Spain's trade balance.

Financial Review

More Records

Sinclair Noe — May 15, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 85 = 20,981
SPX + 11 = 2402 (record)
NAS + 28 = 6149 (record)
RUT + 11 = 1393
10 Y + .01 = 2.34%
OIL + .98 = 48.82
GOLD + 2.70 = 1231.40

The S&P 500 and the Nasdaq hit record highs today. Profits from S&P 500 companies surged by 14.9% during the first quarter, the fastest rate since 2011, per CFRA Research. That’s a far cry from the earnings decline of nearly 7% experienced at the start of 2015.

Roughly three-quarters of the 450 or so S&P 500 companies that have reported results this season have beaten profit expectations, the highest rate since 2010. The S&P 500’s price-to-earnings ratio of 17.5 remains well above the 10-year average of 14, but below the 13-year highs experienced earlier in the year. The energy, tech, financials and materials sectors –  enjoyed stellar growth of 20% or more during the first quarter.

On Friday, a major piece of malware hit the web, and throughout the weekend infected hundreds of thousands of computers around the globe. The software, called WannaCry 2.0, is what’s known as ransomware. A type of malware that burrows into your computer, ransomware encrypts the files on your machine, keeping you from being able to access them. The malware’s creator then asks that you to pay a fee to unlock your data.

The first round of the WannaCry 2.0 attack seems to have passed. But chances are the creator, or some other hacker, will re-purpose the malware and send it back into the wild again. Ransomware doesn’t just pop up on your computer by magic.

You must download it. And while you could swear up and down that you’d never be tricked into downloading malware, cybercriminals get plenty of people to do just that. Beyond that, make sure your system is up to date, back up your files, don’t stay connected to the cloud or unnecessarily connected to the internet. And finally, never pay the ransom.

Major oil-producing nations have struggled of late to bolster oil prices, as inventories piled up and crimped the potential for demand. Prices dipped below $44 a barrel this month, their lowest level in more than a year.

For years, Saudi Arabia and other nations in OPEC were often able to easily prop up prices. But their clout has ebbed as new players like American shale producers came into the market and the growth in demand for oil slowed. Saudi Arabia and Russia said an agreement to cut oil production should be extended by 9 months.

Production cuts agreed by OPEC and other major producers are set to expire at the end of June. But both Saudi Arabia and Russia said they would work to convince other countries to extend the cuts until the end of March 2018.

Oil hit its highest in more than three weeks. The oil majors, Exxon and Chevron moved higher. We aren’t really seeing a significant correlation between oil prices and the broader market, but the move in oil stocks helped give a boost to an otherwise quiet market.

The 13 members of the Organization of the Petroleum Exporting Countries are due to meet on May 25 to discuss the extension. That does not mean it is a done deal. There is disagreement among the ranks. Iran and Iraq do not want to reduce their production. The Saudis will not make cuts on their own. In the short term, large amounts of crude remain unsold and in storage.

Saudi Arabia and Iran have been selling some of those stores, blunting the impact of the cuts. In the longer term, the Saudis may be making the situation easier for US shale producers by agreeing to rein in output for such a long time.

Saudi Arabia is planning to cement ties with President Trump by investing $40 billion in US infrastructure development. The kingdom’s sovereign wealth fund is set to announce the plans which may be unveiled next week to coincide with Trump’s visit to the kingdom. Trump will be making his first foreign trip since taking office on 19 May, visiting Saudi Arabia and Jerusalem then heading to Europe.

The program would potentially be worth $200 billion in direct and indirect investment in the next four years.  Trump has said he intends to push for $1 trillion in US infrastructure investments over the next decade, with $200 billion coming from taxpayers and the rest from the private sector.

The National Association of Home Builders and Wells Fargo said on Monday their index of builder confidence in newly built, single-family homes climbed to 70 points from 68 in April. NAHB said the report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor.

Builder confidence is a reasonably good predictor of housing starts, the process of breaking ground on a home. Housing starts have run at about a 1.2 million pace for the past several months. Total starts and single-family only are about 64% of their long-run averages.

Also, the New York Federal Reserve said its barometer on business activity in New York state unexpectedly fell in May, putting it into negative territory for the first time since October.

Thermo Fisher Scientific has agreed to acquire Patheon for $35 a share, or $7.2 billion including $2 billion of net debt. Thermo Fisher is involved in research and laboratory services; they make electron microscopes and DNA sequencing machines. Patheon offers development and manufacturing services to biopharmaceutical companies; they make the drugs and chemicals. Patheon shares jumped 34% on the news.

Moody’s will buy Dutch business intelligence company Bureau van Dijk for $3.2 billion. Moody’s said the deal, which is expected to close late in the third quarter, will be funded through cash held offshore and new debt financing.

Amazon.com went public exactly 20 years ago as an unprofitable online bookstore that was just three years old. If you had invested $1,000 in Amazon, and held it, you would now hold about $638,000 worth of stock. Admittedly, it did not look like a good investment 20 years ago, and price has been on a roller-coaster.

And if you are wondering which sector Amazon will crush next, consider furniture and appliances. Amazon plans to build at least four massive warehouses focused on handling the bulky items that trucking companies sometimes call ugly freight and parcel carriers see gumming up their operations. Furniture is one of the fastest-growing segments of online retail, growing 18% in 2015, second only to groceries, and some 15% of the $70 billion US furniture market has moved online.

Players are struggling to get the market right, however. Delivering couches and dining sets is more complicated and expensive than handling conventional parcels, and that may provide a fresh challenge to Amazon’s budding self-controlled logistics network.

Sears Holdings’ CEO Eddie Lampert vowed to fight back against suppliers trying to take advantage of his company, saying that “dire predictions” about the retailer’s future have hurt its position with vendors. Lampert says Sears has been working with suppliers to ensure that their level of credit risk is “both affordable and appropriate,” but some vendors have tried to capitalize on its situation.

Driverless car maker Waymo—owned by Google’s parent company Alphabet—has shown “compelling evidence” that its “former star engineer” stole more than 14,000 confidential files. A federal judge said in a ruling made public today, that engineer, Anthony Levandowski, joined Uber last summer to lead its self-driving car efforts and he is now barred from working on “lidar” technology for Uber.

It also instructs Uber to return the “pilfered” files by May 31 at noon. Waymo sued Uber in February, alleging theft of trade secrets and its in-house lidar, the technology that allows a self-driving vehicle to “see.” It later upped the ante and said Uber colluded with Levandowski to steal proprietary information.

Meanwhile, in a separate announcement, Waymo, the self-driving car unit that operates under Google’s parent company, has signed a deal with the ride-hailing start-up Lyft. Lyft is the arch-rival of Uber, and Alphabet-Google is ticked off at Uber right now, so a Waymo-Lyft deal is a union formed out of shared loathing for Uber.

The deal calls for the companies to work together to bring autonomous vehicle technology into the mainstream through pilot projects and product development efforts. The deal was confirmed by Lyft and Waymo.

The City of Philadelphia has sued Wells Fargo, accusing the largest US mortgage lender of intentionally steering minority borrowers into higher-cost home loans than it offered white borrowers.

In a complaint filed in Philadelphia federal court, Philadelphia faulted Wells Fargo’s “long history” of “redlining” in Philadelphia, and said the bank’s practices reflected a “total breakdown of appropriate internal controls” like its recent creation over unauthorized customer accounts. The city alleges that Wells Fargo pushed minorities into riskier loans with higher rates, even in cases where the borrowers had credit profiles that would have qualified them for lower-rate loans.

The complaint charges that the problem has been ongoing since 2004 and is a violation of the Fair Housing Act, and comes in the wake of an important Supreme Court decision on the legislation. On May 1, the high court ruled that Miami could sue Bank of America for predatory lending practices that increased segregation.

Philadelphia City Council recently voted to change handlers of its $2 billion payroll account, switching from Wells Fargo to Citizens Bank.

Financial Review

The Re-balancing

Sinclair Noe — May 16, 2016

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

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DOW + 175 = 17,710
SPZ + 20 = 2066
NAS + 57 =4775
10 Y + .05 = 1.75%
OIL + 1.66 = 47.87
GOLD + .70 = 1274.50

The National Association of Home Builders’ index of home builder sentiment was 58 for the fourth month in a row. Readings over 50 signal improvement.

A reading of New York-area manufacturing conditions fell sharply in May. The Empire State general business conditions index dropped to a reading of negative 9, from positive 9.6 in April.

This week’s economic calendar includes the April CPI tomorrow, a look at inflation on the retail level and minutes from the Fed’s FOMC meeting last month. And there is a connection between the two reports. In the March 16 FOMC meeting, the Fed stated, “Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”

In other words, when the dollar drops and oil prices go up, we should be at 2% inflation; well, we are pretty much there, or at least closer. The weaker dollar makes imports, including oil, more expensive, and the higher prices tend to spread through the broader economy. A sluggish April jobs report still leaves a June rate hike on the table.

Before we see an interest rate hike, the Fed needs to prepare the markets, and so far, the markets don’t think a hike will happen in June.  The CME’s Fed Watch tool, which uses fed fund futures trading levels to determine the likelihood of a hike at each meeting, indicates that a better than 50 percent chance of a move doesn’t happen until the December FOMC session. It is a bad idea to surprise market participants with a rate hike, so the Fed needs to start jawboning, otherwise we can expect a September or December hike.

Goldman Sachs says the crude oil supply glut is over and the market has moved from a state of oversupply to a deficit, and believes major supply disruptions in markets such as Nigeria, Venezuela and China will sharply lower production levels. Goldman raised its price forecast for crude to $50 a barrel for the second half of 2016, saying: “the physical rebalancing of the oil market has finally started.”

Goldman Sachs has quietly overtaken Chevron and Exxon Mobil to become one of the biggest natural gas merchants in North America, expanding in physical commodities trading even as other banks pull back. Last year, Goldman bought and sold 1.2 trillion cubic feet of physical gas in the U.S. – equal to a quarter of the country’s residential consumption and more than twice its volumes in 2013. According to Natural Gas Intelligence, Goldman is now the seventh-largest gas marketer in North America.

Back to the Goldman thesis that we’ll have $50 a barrel oil for the second half; it really isn’t much of a stretch because oil is just a couple of dollars shy of $50 right now. But can that level hold? In the past there has been a strong correlation between the dollar and oil: dollar down – oil up, dollar up – oil down. Now, if the Federal Reserve sees inflation hit its target of 2%, we might reasonably expect an interest rate hike, or even multiple hikes, which would make the dollar stronger and push the price of oil lower.

If you think the Fed will hike rates two or three times, you might think $30 a barrel oil is where we are headed. And that would certainly be the case if the US imported oil the way we did in the past, but over the past 8 years we have cut our imported oil by more than half, to about 5 million barrels a day; thanks to the production from the shale oil patch. So let’s look at the shale fields.

Energy bankruptcies continue to pile up. Breitburn Energy Partners and some of its units have filed for restructuring under Chapter 11. The oil & gas MLP said it secured a $75M debtor-in-possession financing to help fund its operations during the bankruptcy process. Also Sandridge Energy reached a pre-packaged bankruptcy pact with lenders. It has agreed on a reserve-based lending facility and a swap of about $3.7 billion of other funded debt for equity. Recent asset sales have been terrible and that’s why you’re seeing this wave of restructuring of debt rather than sales.

Few struggling energy companies have been able to find buyers, although there was a rare exception today. Range Resources agreed to buy Memorial Resource Development Corp. in a $3.3 billion all-stock deal to take advantage of growing demand from natural gas exports and chemical manufacturers. Despite this anomaly, we know that investment in the oil patch has slowed dramatically. C&I, or commercial and industrial loan activity continues to drop on a weekly basis. Still, mostly we are seeing Chapter 11, and that means higher oil prices will lead to all out pumping to get out from under reorganization.

Then consider what is happening with Saudi Arabia, which suffered another cut to its credit rating on Saturday as Moody’s Investors Service downgraded the country along with Bahrain and Oman because of the past slump in oil prices.  The credit rating agency said: “A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks.”

As a side bar, the US Treasury today said the Saudis hold about $116 billion in US government debt, far less than the $750 billion the Saudis threatened to cash in if Congress enacts a bill allowing the monarchy to be held responsible in American courts for any role in the Sept. 11, 2001, terror attacks. It also shows the Saudis have been burning through their foreign exchange reserves. How can the Saudis improve their financial situation? Easy – they pump more oil. Goldman might be right that the supply glut is over for the time being, but the higher the price, the more supply comes to market. And that brings us to…

Royal Dutch Shell is eyeing a possible $40 billion spinoff of non-core assets around the globe as it grapples with $70 billion in debt following its takeover of BG Group earlier this year. Shell is establishing a separate division, New Energies, to invest in renewable and low-carbon power. Even if we see more supply in the oil market, we still have to consider demand; and there we are seeing a definitive shift away from oil to renewables, which should put a permanent ceiling on demand.

Pfizer announced it would buy Anacor Pharmaceuticals in an all-cash deal worth about $4.5 billion, as it turns to smaller deals after walking away from its scuttled acquisition of Allergan. The deal values Anacor at $99.25 per share or a premium of 55% over Friday’s close. Anacor has no products on the market, but it does have a treatment for eczema under review at the Food and Drug Administration.

Gannett said it raised its all-cash offer for Tribune Publishing to about $475 million, just two weeks after Tribune’s board rejected a lower bid. The revised offer represents a 22% increase over its prior bid and a nearly 100% premium over Tribune Publishing’s share price on April 22.

Warren Buffett’s Berkshire Hathaway revealed a new stake in Apple. Berkshire now holds 9.81 million Apple shares worth just over $1 billion. For the record, Warren has never been a big fan of tech, so the Apple bet probably came from one of his portfolio managers, Todd Combs and Ted Weschler.

European antitrust authorities will impose a record fine on Google in the coming weeks for abusing its dominance of the online search market in the region, according to the U.K.’s Telegraph newspaper. The European Commission is planning to fine the tech giant about €3-billion-euro, surpassing the toughest antitrust punishment to date. Google will also be banned from continuing to manipulate search results to favor itself and harm rivals.

Following a meeting with the U.S. Labor Secretary Thomas Perez, Verizon management and the unions representing the company’s 39,000 East Coast workers on strike have agreed to resume negotiations tomorrow. The employees walked out on April 13, after having failed to reach an agreement on a new labor contract over issues including healthcare, moving positions offshore and temporary job relocations.

Amazon is getting ready to roll out new lines of private-label brands; the strategy is aimed at boosting margins as well as gaining insights into what goods consumers purchase. The new brands will include items such as nuts, spices, tea, coffee, baby food, vitamins, diapers and laundry detergents. Amazon will only offer these labels to its Prime subscribers, and the first of the brands could start appearing at the end of May or early June.

Philips is seeking to raise as much as $1.1 billion from the initial public offering of its lighting unit as it pushes ahead with a plan to list on Amsterdam’s stock exchange after a private sale didn’t result in a buyer. Final pricing is set for May 26, with the listing commencing the following day.

Hawaii has become the first state in the nation to sue Takata over its air bags, seeking $10K per violation for more than 70,000 cars sold across its islands. According to the Hawaii Office of Consumer Protection, Takata switched to ammonium nitrate – a cheaper inflator component – despite the fact that it was widely known to be an unstable and dangerous chemical. The lawsuit also names Honda, the automaker most affected by the continuing mass recalls of Takata airbags.

The world’s largest sovereign wealth fund is going to sue Volkswagen. Norway’s sovereign wealth fund is set to sue Volkswagen over the huge losses it suffered as a result of Volkswagen’s emissions scandal. VW shares are down over 23% since the scandal erupted in October 2015.

The Supreme Court handed down a decision on Zubik v. Burwell, the religious challenge to the contraception mandate Obamacare. The Affordable Care Act requires most employers to offer health insurance to their employees, including contraceptive coverage. Religious nonprofits were offered a work-around that allows them to file a one-page form with the federal government, so that the insurance company can step in and provide the coverage directly to their employees. But the plaintiffs claimed that infringed on their religious freedom.  The Supremes decision today was a no-decision; they kicked it back to the lower court and said, essentially, work it out.

Financial Review

Risk Off

Sinclair Noe — February 11, 2016

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

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DOW – 254 = 15,660
SPX – 22 = 1829
NAS – 16 = 4266
10 Y – .06 = 1.64%
OIL – .17 = 27.28
GOLD + = 50.10

It’s a bad day for global stock markets.  Markets in Hong Kong opened for the first time this week and had their worst start to a lunar new year since 1994, falling 3.9 percent, adding to a 12% plunge since the beginning of the year. The MSCI Asia Pacific excluding Japan Index lost 2.2 percent. The Europe Stoxx 600 dropped 3.6%.

In her testimony to Congress yesterday, Federal Reserve Chair Janet Yellen was not certain whether she had the legal authority to cut rates into negative territory. Yellen on Wednesday said the crucial question confronting the Fed was whether the domestic economy is strong enough to keep growing modestly even as the global economy struggles. This is the question.

Today, Yellen headed over to the Senate Finance Committee and repeated her testimony from yesterday before opening it up for questions. Yellen said the cause of the market selloff is “not mainly our policy,” noting that the market was tranquil in the immediate aftermath of the increase in interest rates in mid-December. She doesn’t think the Fed will cut rates anytime soon. The key for the central bank is whether the negative shocks hitting the economy persist, Yellen said. The central bank will know more in a few weeks.

Bond investors are making it clear that they do not expect further rate hikes from the Fed, and the bet seems to be that the rest of the world will drag down the US, rather than the US economy serving as an economic engine for the rest of the world.

Futures traders are betting that the Federal Reserve will refrain from raising interest rates for at least two years as stocks and other risky assets plummet. The yield on the 10-year Treasury note dropped as low as 1.53%, the lowest level since August 2012, and close to the record low of 1.39%. The probability for one rate hike by December has dropped to about 10%, from 94% less than two months ago.

In Sweden, the Riksbank surprised analysts by cutting its main repo rate to minus 0.5 percent, from minus 0.35 percent this morning. Negative rates are breaking out all over the world. Yields on German government bonds that mature over the next seven years are negative. Swiss 10-year bonds offer negative yields and today the Swiss National Bank did not rule out even deeper cuts. And after the Bank of Japan moved to negative short-term yields earlier this year, the yield on the Japanese 10-year note fell into negative territory Tuesday.

And while paying a government to park your cash may sound like an automatic losing proposition, here’s something that might surprise you: buying an index of Japanese government bonds or Swiss government bonds has returned more than 6% so far in 2016. Remember, as rates go down, price goes up.

The idea behind negative rates is that it will force the banks to put money into circulation; they will lend money rather than pay to park money; the money will start to circulate through the economy, stimulating business and commerce. When interest rates turn negative, Europeans turn to cash.

The amount of cash across the euro zone rose to more than 1 trillion euros last year, with almost 30 percent of it hoarded in 500 euro notes. Cash in circulation is almost double the amount of 10 years earlier and has risen steadily throughout the debt crisis, a trend that reflects fears about the euro zone and its banks as well as exasperation with low returns on savings.

Even though there is more cash in circulation, it doesn’t mean it is actually circulating. The reality is that in a deflationary environment, people hold onto money because whatever you might buy today will be cheaper tomorrow. ECB data has shown that nervous individuals keep more of their money at home or in a vault.

CoCo bonds are getting hit hard, again. A lot of the recent worries with European banks have been centered on CoCo bonds, or contingent convertible bonds. These bonds automatically convert debt to equity when a bank’s cash reserves fall below a certain level.

So, in the event of a default, the holders of CoCo bonds no longer have a bond that pays interest, they now own stock in the bank that can’t pay interest on its debts. It is, essentially a bail-in. Today’s selling has run the yields on Deutsche Bank’s and Santander’s CoCo bonds to fresh highs (yields rise when prices fall), causing more concerns about Europe’s banks.

Deutsche Bank expects to write down the value of its Postbank by about a third, ahead of a planned sale of the retail unit as part of a strategic overhaul. The institution’s book value will be cut to $3.1 billion. Deutsche Bank shares are down around 35% since the start of the year.

Bank stocks across Europe are down, with the Bloomberg Europe Banks Index dropping 5.6%. Credit Suisse Group slid to a 27-year low as the bank grapples with a restructuring plan. Societe Generale missed fourth-quarter profit estimates, with earnings declining 35 percent at its investment bank.

Morgan Stanley will pay $3.2 billion to settle federal and state charges that it misled investors in residential mortgage-backed securities that later soured during the financial crisis. The case against the bank alleges that Morgan Stanley painted a rosy picture to investors about the quality of the residential mortgages it had securitized, even though the loans had material defects.

Puerto Rico’s Senate has cleared legislation that would enable the island’s main electricity provider to restructure almost $9B of debt. The bill now moves to Puerto Rico’s House of Representatives, which would need to approve it before Feb. 16, when the restructuring agreement between creditors and the electric utility, PREPA expires. A previous deal fell apart in January after the territory’s legislature had failed to pass the act by a previously agreed date.

Oil prices hit a 12-year low. West Texas Intermediate futures dropped to $26.13 a barrel, breaking below the $26.19 low from January to reach the lowest since May 2003. Supplies at Cushing, Oklahoma, the biggest US oil-storage hub, rose by 523,000 barrels to 64.7 million last week, according to government data.

The site is considered full at 73 million barrels. And at some point you have to wonder what happens when all the storage tanks are full. Shortly after hitting a low for the day, OPEC sent out a tweet from the United Arab Emirates Energy Minister saying: “OPEC is ready to cooperate on a cut, but current prices are already forcing non-opec producers to at least cap output”.

Well, that was good enough to push oil prices a little higher, and that in turn helped lift stocks, but not before the S&P 500 index hit an intra-day low of 1810 – taking out the intra-day low of Jan. 20 at 1812. We told you in January that after the S&P dropped below 1860 there really wasn’t any meaningful support for a while. Nine days ago I repeated that a drop below 1860 and it was Katy bar the door, or short the Spiders. Well today, we dropped through minor support at 1812 and broke it.

Next we look for confirmation. The next levels of minor support are a couple of hundred points lower around 1560, and we don’t have major support…, well we don’t want to talk about it right now. In other words, we could be looking at a very, very big drop if 1810 does not hold. Look for some support at 1810 along with some support for oil prices at $26. We might see a bounce, but if these levels don’t hold, it gets really dangerous.

Now, is OPEC serious about production cuts? No. And here’s why. Saudi Arabia just announced it will send ground troops to Saudi Arabia, supposedly to fight ISIS, but more to support Sunni rebels which are currently being pounded by Russia and Assad. The exact role of the Saudis in Syria has not been determined, and it might not pan out. Still, increased involvement would be in addition to the Saudi’s engagement in Yemen and Bahrain.

Now normally, military action in the Middle East would result in a fear premium for oil, but these are not normal times. No fear premium now, although it could come later if we see escalation that draws the Iranians into conflict. For now, it means the Saudi’s will have to pump oil at 100% to pay for their military excursions.

Jobless claims dropped by 16,000 to 269,000 in the week ended Feb. 6; that’s a 7-week low. The number of people continuing to receive jobless benefits dropped by 21,000 to 2.24 million. With staffing additions probably slowing this year as the labor market makes it tougher to attract skilled workers, employers are showing little appetite to reduce headcounts.

Boeing plans to cut jobs in its commercial airplane division (the company’s largest business), as part of cost reductions in the wake of market share losses to Airbus. But wait, there’s more…, The US Securities and Exchange Commission is reportedly investigating Boeing Commercial Airplanes’ accounting practices with respect to the company’s 787 Dreamliner and 747 jumbo jet programs.

Nearly one in five vehicles on U.S. roads is in need of repair of a safety issue serious enough to be involved in a federal government recall, according to Carfax. That means there are more than 47 million cars nationwide with open recalls, up 27% from a year ago. NHTSA data shows that in 2015 there were close to 900 recalls affecting a record 51 million vehicles.

PepsiCo reported better-than-expected quarterly net revenue as higher sales of snacks and non-fizzy beverages such as Gatorade in North America helped reduce the impact of a strong dollar. PepsiCo increased its annual dividend and increased its stock buyback program. However, the company forecast 2016 adjusted earnings below many analyst estimates, citing a strong dollar.

Rio Tinto, the world’s second-largest mining company, reported that in 2015 it earned half of what it earned in 2014, and changed its dividend policy so that they won’t increase automatically. The commodities that Rio Tinto produces have been getting crushed for about a year now; and it’s not just iron ore and copper. Rio Tinto owns the largest diamond mine and diamond production increased 25%, even as fewer people bought diamonds. So the good news is that diamond prices are down, just in time for Valentine’s Day.

Financial Review

The Question

Sinclair Noe — January 5, 2016

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

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DOW + 9 = 17,158
SPX + 4 = 2016
NAS – 11 = 4891
10 Y un= 2.25%
OIL – .87 = 35.89
GOLD + 3.10 = 1078.50

The Dow Jones Industrial Average had its greatest opening-day loss since 2008 yesterday. Today might be considered a tepid recovery, or maybe just a reminder that the world did not end with the change of the calendar.

China moved to shore up shaky investor sentiment today following an equities selloff that rocked global financial markets on revived concerns about the country’s economic slowdown. China’s CSI 300 Index initially dropped 2%, but a late session rally erased losses and the index closed 0.3 percent. State-controlled funds bought equities and the securities regulator signaled that a selling ban for major investors which was due to expire this week may be extended.

The People’s Bank of China pumped nearly $20 billion into the economy, the largest amount since September. The yuan rebounded from a five-year low.  The Nikkei 225-share index in Japan finished the day 0.4 percent lower. The Hang Seng Index in Hong Kong closed 0.7 percent down. European stocks rose, with the FTSE 100 in London up 0.7 percent for the day. The Euro Stoxx 50 index rose 0.4 percent.

Kuwait recalled its ambassador from Iran. The announcement is the latest in an unfolding regional row that escalated with Saudi Arabia’s execution of a Shiite cleric over the weekend. Saudi Arabia’s embassy in Tehran was ransacked and set on fire Saturday. Saudi Arabia broke off diplomatic ties with Iran in response, followed on Monday by its allies Bahrain and Sudan, and a diplomatic downgrade by the United Arab Emirates. The Strait of Hormuz, which connects the Persian Gulf with the Arabian Sea, carries about 20% of the world’s petroleum, and about 35% of the petroleum traded by sea, making it a highly important strategic location.

At almost any other time, an escalating diplomatic conflict between OPEC members Iran and Saudi Arabia would mean a spike in oil prices, even if temporary, but this latest problem saw prices dip slightly yesterday, and today, prices dropped to a 2-week low. That should give us some indication about the strength of the downtrend in oil.

President Obama announced executive actions on gun control today, in the wake of mass shootings across the country. The executive action will require all gun dealers to be licensed, including those who sell online and at gun shows, clamping down on dealers who pass themselves off as “hobbyists” or “collectors.” It closes a loophole that allows people to acquire guns through “gun trusts” without background checks, and increases the responsibility of gun dealers for reporting missing guns. It includes a plan to hire more staff to process background checks and enforce gun laws, and allocates $500 million to mental-health care.

Puerto Rico is bracing for lawsuits following the island’s second default in the past five months. Governor Alejandro Garcia Padilla said, “Every dollar used to pay lawyers will be a dollar not available to pay creditors.” The U.S. territory was able to pay the majority of the nearly $1 billion due to bondholders on Monday, but a series of transfers from revenue bonds to general obligation bonds was not enough; Puerto Rico defaulted on two of the 13 bonds that had scheduled payments. Because of the New Year’s Day holiday, all of the due dates were extended until the close of business on Monday.

CoreLogic reports US home prices rose 0.5% in November, representing a 6.3% year-over-year gain. Arizona posted a 5.9% price gain in the last 12 months.

Automakers are reporting a record year for sales. New vehicle sales in 2015 totaled 17.47 million, topping the record setting sales of 2000.  Fiat Chrysler reported its 69th straight monthly gain in sales; that was a record for Fiat Chrysler, but it missed analysts’ estimates. Nissan achieved its best-ever December in the US with strong sales of trucks, minivans and sports utility vehicles, including its premium Infiniti brand. For the full year, Fiat-Chrysler reported 2.2 million vehicles sold, up 7% from 2014. Nissan, with 1.35 million, was also up 7%. General Motors sold 3.1 million vehicles, up 5%. Ford, with 2.6 million, was also up 5%; sales of Ford’s F-Series pickups jumped 15 percent as the trucks remained the top-selling vehicle line in America for the 34th consecutive year. Toyota, with 2.5 million vehicles sold, was up 5% as well. And Honda posted 1.58 million vehicles sold, an increase of 3%.

Early news from the Consumer Electronic Show: Nvidia has revealed a new lunchbox-size super-computer for self-driving cars, saying Volvo will be the device’s first customer. The Drive PX 2 has computing power equivalent to 150 MacBook Pro computers, and can deliver up to 24 trillion “deep learning” operations per second – allowing the computer to use artificial intelligence to program itself to recognize driving situations. Partnerships between automakers and Silicon Valley on self-driving technologies appear to be taking center stage at the annual tech conference.

The coolest news out of the CES might be the debut of a new prototype electric car from Faraday; it features 1,000 horsepower and goes from zero to 60 in 3 seconds. The vehicle looks like a cross between a Formula One race car and the Batmobile. Faraday officials said they’ll sell a vehicle in a “couple of years’ time,” and are a few weeks from breaking ground on a 3 million-square-foot factory in Nevada. The Batmobile prototype is not what they will eventually sell; they will probably come out with a more practical sedan as its first offering.

Facebook’s Oculus will release its virtual reality Rift headset to consumers for pre-order on Wednesday but one big question remains: how much will it cost? In a blog post on Monday, Oculus revealed very little except that pre-orders will open from 8 a.m. Pacific time and that each headset will come with two free games. Last year, Oculus executives hinted that the Rift headset and a computer needed to run it would cost no more than $1,500 together.

New York City will begin replacing thousands of pay phones this month with free Wi-Fi hot spots that will sit atop a 9-foot tall box featuring electronic advertising screens and an Android tablet that can be used to place free phone calls. The $200 million project, called LinkNYC, is being run by CityBridge, a joint venture between three tech companies: Qualcomm, CIVIQ Smartscapes, and Intersection – which has backing from Alphabet.

2015 was a record setting year for mergers and acquisitions. Buyers spent $3.8 trillion, the highest amount ever, surpassing the previous record set in 2007, before the financial crisis. The fourth quarter was the busiest of last year, with $1.3 trillion in transactions announced, passing the trillion-dollar mark for the first time since the second quarter of 2007. And the calendar for 2016 looks busy, as companies will try to wrap up previously announced deals; including ABInBev and SAB Miller, Anthem and Cigna, Aetna and Humana, Shire and Baxalta, plus Halliburton and Baker Hughes; to name just a few of the bigger deals.

The FCC is delaying its informal deadline by 15 days to review the proposed $56 billion merger of rivals Charter Communications and Time Warner Cable. The break will give the agency more time to assess the impact of the proposed deal on TWC’s regional sports networks and Charter’s residential pricing/packaging.

Fairchild Semiconductor has received a revised takeover proposal from a group led by China Resources Holdings and Hua Capital Management. The improved bid would value the company’s equity at $2.46 billion. Phoenix-based ON Semiconductor in November agreed to buy Fairchild Semiconductor for $2.4 billion to bolster its business of making power-management chips. Fairchild said this morning that its board still supports the deal with ON Semiconductor and is not making any recommendation related to the revised proposal, but they did acknowledge the offer from the Chinese investor group would constitute a “superior proposal”.

Meanwhile, Chandler-based Microchip Technology is planning to submit a binding offer for Atmel by early next week, challenging the latter’s planned merger with Dialog Semiconductor. Reuters reported last month that Microchip was the undisclosed bidder that made a $3.8 billion unsolicited offer for Atmel. Atmel said on Dec. 11 it had started negotiations with an unidentified party that made a $9 per share cash offer that could potentially be deemed more valuable than a cash-and-stock acquisition proposal by Dialog it accepted in September.

More tech/media deals: Dell is close to selling its Perot Systems unit to French IT consulting firm Atos for $4 billion. Activision Blizzard confirmed its acquisition of Major League Gaming, but did not disclose financial details. China’s Dalian Wanda Group has sealed a deal to take a majority stake in U.S. movie studio Legendary Entertainment that values the company at $3-$4 billion. Harman Industries, best known for JBL and Harman Kardon audio gear said it agreed to buy automotive cybersecurity company TowerSec. Terms of the deal were not disclosed.

If all this M&A activity has you thinking that stocks are a little overvalued, you might be right. Citigroup today downgraded US stocks to underweight. They didn’t call for a definitive end to the US bull market, but they think there might be better opportunities elsewhere. Citi assigned an underweight ranking to the US, the UK, and Australia; specifically the sectors of consumer staples, utilities, and industrials. Citi assigned an overweight ranking to Europe (excluding the UK) and Japan; specifically to the sectors of IT, financials, and health care.

And finally, we answer the most pressing question of the day: the Powerball drawing is at 10:59 PM tomorrow (that’s 8:59 PM Arizona time). Ticket sales usually close down about an hour before the drawing. The jackpot is expected to top $450 million. The odds of winning are 1 in about 292-million. If you buy 2 tickets, your odds are still about 1 in 292-million.