Financial Review

Uncertain

Sinclair Noe — February 6, 2017

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

Subscribe: iTunes | Android | RSS

Financial Review by Sinclair Noe for 02-06-2017
DOW – 19 = 20,052
SPX – 4 = 2292
NAS – 3 = 5663
RUT – 11 = 1366
10 Y – .08 = 2.41%
OIL – .72 = 53.11
GOLD + 15.70 = 1236.20

Traders around the world seem uncertain about whether to buy or sell. European markets were mixed. Most Asian markets ended the day with gains. This follows a week where U.S. stocks dropped and then slowly climbed back up. The Dow Jones industrial average ended the week with a 0.1% dip. The S&P 500 and Nasdaq each edged up by 0.1% over the week.

Big business in the UK is starting to feel the pain from Brexit. An Ipsos Mori poll of senior executives at more than 100 of the top 500 companies in the UK found that 58% of businesses believe they are starting to feel the impact of the UK’s decision to leave the European Union.

A decision on a Scottish referendum is coming soon. When the U.K. triggers Article 50 to leave the EU, it might also trigger a fresh independence referendum. Scotland – one of the United Kingdom’s four nations along with England, Wales and Northern Ireland – voted to keep its EU membership last June, but will leave the EU because the UK voted to do so. The British parliament could technically block the move, but to do so would likely provoke a constitutional crisis.

Top Euro Union diplomats have vowed to uphold sanctions against Russia for destabilizing Ukraine, despite US intentions to ease those sanctions. The EU imposed a series of economic and diplomatic sanctions against Russia in 2014. Over the past week, a flare-up in hostilities has erupted between the Ukrainian military and Russia-backed separatists, with each accusing the other of a new wave of shelling. Over the weekend, President Trump committed to meet with NATO leaders in Europe in May.

A federal appeals court rejected early Sunday morning a request from the Justice Department to immediately reinstate an executive order on immigration and refugees, asking for more court filings before it rules on the matter. Airlines in Europe and the Middle East respond to the suspension by allowing passengers from countries that had been blocked to fly.

Ninety-seven tech companies, including Netflix, Twitter, Apple, and Facebook filed an amicus brief on Sunday night against the executive order that places an immigration ban on citizens of seven Muslim-majority countries. The brief states that the executive order “inflicts significant harm on American business, innovation, and growth” and “makes it more difficult and expensive for U.S. companies to recruit, hire, and retain some of the world’s best employees.”

More than any other industry, tech companies hire the lions’ share of the 85,000 foreign workers allowed into the US annually under the H1-B visa program. The H1-B is a temporary visa intended to bring in foreign professionals with college degrees and specialized skills to fill jobs when qualified Americans cannot be found.

A research report from Goldman Sachs estimates that nearly one million H-1B visa holders now reside in the US, and they account for up to 13 percent of American technology jobs. The big tech companies have pressed for increases in the annual quotas, saying there are not enough Americans with the skills they need.

But many tech workers see the H-1B program as a way to pay temporary workers less; or ship their jobs abroad, or at least to bring in workers from abroad, train them, and then ship the jobs offshore.

And it’s not just tech workers. Each year, more than 6,000 medical trainees from foreign countries participate in medical residency programs through J-1 non-immigrant visas, according to the American Association of Medical College.

Once they complete their residency, physicians can either return to their home country for two years before they are eligible to re-enter the U.S. through a different immigration pathway, such as an H1-B worker visa, or they can apply for a Conrad 30 J-1 Visa Waiver. This allows them to extend their stay in the U.S. if they commit to serving in rural and under-served areas for three years.

 The point being, don’t expect a quick resolution to a complex problem.

This past Friday we focused on the January Jobs Report, but there was some other news of note. President Trump signed two executive orders dealing with Wall Street. The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

So, once again the banksters that caused the meltdown of 2008 will oversee policing their industry. What could go wrong?

The second order calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves. The orders don’t do much by themselves to roll back reforms but they do offer details on how the financial industry is likely to receive favored status over the next 4 years.

The order on the fiduciary rule is more like a memo; no extension was granted, and no guidance about seeking a stay to the rule. Nothing in the final version of this memorandum delays the fiduciary rule; still, it was enough for the acting Labor Secretary to state the Department of Labor “will now consider its legal options to delay the applicability date.”

Right now, the date is April 10. And apparently, no matter the administration, government continues to move at a glacial pace.

Over the past month, several Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its quantitative easing during and after the financial crisis. There is some concern the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities.

In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Moody’s Analytics estimates that if the Fed gets out of the bond-buying business as the economy strengthens, it could help lift 30-year mortgage rates past 6 percent within three years.

Bill Gross, in his monthly newsletter says that other central banks have stepped up bond buying as the Fed has cut back, but when those central banks stop buying bonds, there will be a bear market in bonds that will ripple out.

The global central bank balance sheet has surpassed $12 trillion, Gross said. At the same time, Fitch Ratings recently reported that global sovereign debt with negative yields still surpasses $9 trillion.

Even if central banks remain accommodative, it only serves to inflate asset prices without boosting economic growth, creating “an unhealthy capitalistic equilibrium that one day must be reckoned with.”

JPMorgan has received approval and license to underwrite corporate bonds in China’s interbank bond market, making it the first U.S.-headquartered bank to do so. China is the third largest bond market in the world with $6.3 trillion outstanding at the end of 2016, with the interbank bond market accounting for over 90%.

U.S. energy companies added oil rigs for a 13th week in the last 14. Despite OPEC cuts, U.S. crude inventories increased more than expected last week. With output being cut, more investors are betting on rising prices despite indicators such as the Baker Hughes rig count pointing to increased U.S. supply. The Commodity Futures Trading Commission says investors raised their net long U.S. crude futures and options positions in the week to Jan. 31 to a record 412,380 lots.

Canadian department store operator Hudson’s Bay, which also owns the Saks Fifth Avenue stores, has made a takeover approach to U.S. department store chain Macy’s. Hudson’s Bay could raise equity and debt against its real estate portfolio, which could be worth $14 billion, to fund the deal. The company could also bring in a partner.

The economic calendar is a bit light this week, with the JOLTS report serving as the highlight alongside the preliminary reading on consumer confidence from the University of Michigan. But we will stay busy with earnings reports. Analysts will be looking for S&P 500 companies to maintain the 7.5% average profit increase that has marked an encouraging fourth-quarter earnings season so far and will be needed to sustain the market rally.

Tyson Foods reported stronger-than-expected first-quarter earnings and sales and raised its annual outlook, citing strong beef and pork sales.

Toyota Motor reported a sharp decline in net profit for its fiscal third quarter, as the relatively strong yen continued to weigh on earnings. Toyota and other Japanese exporters are being hammered by the yen’s strength. A U.S. dollar bought 109 Yen on average in the third quarter; a year earlier, it bought 121 Yen.

Toyota has a glut of used cars in the U.S.–fueled by years of record sales–which is weighing on new car prices. Toyota said it is ramping up production of more-profitable trucks and sport-utility vehicles to increase profit.

Toyota Motor and Suzuki Motor said they plan to trade expertise in parts supplies and R&D. Any deal could see Toyota benefit from a supply chain that has helped Suzuki dominate India’s massive auto market, while Suzuki could hope to access Toyota’s innovations in automated driving, artificial intelligence and low-emission vehicles.

Hasbro’s revenue was helped in the fourth quarter by surging sales of products in its girls’ category, which include its line of Disney Princess and Frozen dolls. Profit and revenue came in above Wall Street’s expectations.

Tiffany & Co. abruptly replaced Chief Executive Officer Frederic Cumenal after disappointing financial results, just hours before the jewelry chain introduced a new campaign with the first Super Bowl ad in its history. The shake-up follows the departure of the jeweler’s top designer three weeks ago, and weak holiday sales that sent the stock tumbling.

Google used the Super Bowl to plug its Google Home connectivity service, but the TV commercial apparently confused the systems in homes of those who already have it. For them, Google Home went wacko. Apparently, the home systems heard the TV broadcasts calling its name, and it became befuddled. OK Google do not listen to the commercial.

Financial Review

Like It Never Happened

Sinclair Noe — June 29, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 284 = 17,694
SPX + 34 = 2070
NAS + 87 = 4779
10 Y + .04 = 1.51%
OIL – .30 = 49.58
GOLD + 6.80 = 1319.30

Stocks rallied for a second day, and it was a global rally. The dollar weakened. The yield on 10-year Treasuries rose four basis points to 1.51 percent after falling Monday to the lowest in almost four years. The MSCI All-Country World Index had its biggest two-day gain since August. The S&P 500 moved from negative year to date to slightly positive. The Dow Jones Industrial Average stretched its rebound to 553 points since Monday’s close.

Britain’s FTSE 100 Index erased its post-Brexit losses with a 6.3 percent surge over two days. The Stoxx Europe 600 Index climbed 3.1 percent. The gauge has recovered 4.7 percent after tumbling 11 percent over two days. It is still heading for a second consecutive quarterly decline. Emerging-market shares climbed. Maybe cooler heads prevailed; maybe it is a short squeeze. Goldman’s basket of the most shorted shares in the Russell 3000 Index rose the most since 2009. Doesn’t matter. Prices moved higher.

And so this raises the question of whether all the fear over Brexit was justified, or if this is just the calm before the storm. The fall in the pound sterling is a blessing for the British economy, and a headache for the Eurozone. The exchange rate is acting as a shock-absorber. The FTSE 100 index of equities in London is back to where it was on the eve of the vote, compared to falls of roughly 6% in Germany and France, 10% in Spain, 11% in Italy, 13% in Ireland, and 14% in Greece.

The UK was stripped of its AAA credit rating but there has been no sign of systemic meltdown. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.

US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.” Nobody seemed to heed his words at the EU’s summit in Brussels, but the situation still carries the potential for significant economic damage, even if it plays out in slower motion.

European Union leaders wrapped up a two-day conference in Brussels and called for an orderly British withdrawal from the bloc to minimize instability. They also spelled out conditions for a new relationship with a departing Britain, warning that if British business wants to continue to enjoy the seamless single market after its departure, it would also have to accept that EU citizens can continue to enter Britain.

Francois Hollande, the French President, has warned London that it will no longer be the center of euro-denominated clearing following the Brexit vote, dealing a blow to one of the City’s biggest markets and casting further doubt on the London Stock Exchange’s merger plans. Mr. Hollande, speaking after a tense meeting of European Union leaders last night, said: “The UK has said it doesn’t want any more freedom of movement. Now it won’t have access to the single market anymore.”

Scottish minister Nicola Sturgeon, spoke before the European Commission in Brussels, trying to make the case for Scotland to stay in the EU. In last week’s referendum, Scottish voters backed staying in the EU by a nearly 2-1 majority. Mrs. Sturgeon argued that Scotland must not be dragged out of the EU against its will. She wants to negotiate directly with Brussels to protect membership rights of Scots and is open to a new independence referendum, splitting from the UK, if that is the only way to keep Scotland in the bloc. Sturgeon drew a mixed response from EU leaders. Spanish Prime Minister Rajoy said flatly, “If the United Kingdom leaves, Scotland leaves.”

Moody’s has cut its outlook on the British banking system from stable to negative following last week’s referendum, saying: “We expect lower economic growth and heightened uncertainty over the U.K.’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions.”

The Federal Reserve delivered a report card on the largest banks in their annual stress tests. US units of Deutsche Bank and Banco Santander were the only firms to fail the tests in 2015, and they failed the tests again this year. The Fed gave Morgan Stanley only a conditional pass, saying that the bank also had to resolve weaknesses in its processes. Morgan Stanley has until Dec. 29 to resubmit its capital plan for approval. The stress test results, known as CCAR (or Comprehensive Capital Analysis and Review), are particularly important because they determine how much capital big U.S. banks can put toward dividends, stock buybacks, acquisitions or investments.

General Electric has won approval to drop its designation as a too-big-to-fail financial institution, capping a transformation that has included the sale of almost all of its lending business. The Financial Stability Oversight Council determined that GE no longer poses a threat to U.S. financial stability. The decision marks the first time a company has been granted formal release by the council.

The Commerce Department reports consumer spending increased 0.4 percent last month, on increased demand for automobiles and other goods. Consumer spending in April was revised up to show it advancing 1.1 percent instead of the previously reported 1.0 percent jump. Consumer spending rose at a 1.5 percent annual rate in the first quarter, holding down gross domestic product growth to a 1.1 percent pace. Personal income rose 0.2 percent after advancing 0.5 percent in April. Wages and salaries gained 0.2 percent. Savings slipped to $730.6 billion last month from $753.7 billion in April.

A gauge of pending home sales slid 3.7% in May, a step back following several months of strong sales. The National Association of Realtors’ index fell to 110.8 in May from a downwardly-revised 115.0 in April. Even with that revision, April figures were the highest since February 2006 – but May marked the first year-over-year decline since August 2014.

The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Last week the NAR reported sales of previously-owned homes rose to the highest level in more than nine years in May. So, it appears demand is still strong but there is a shortage of inventory.

Congress has been thinking about doing something about the debt problem in Puerto Rico. Of course, Congress hasn’t actually done anything yet. They did table further debate on a bill, which means a vote could come later this evening or tomorrow on a measure to allow Puerto Rico to restructure its total debt and establish an oversight board to impose big cuts in spending. And it probably doesn’t matter.

Puerto Rico will default on more than $1 billion in general obligation bonds on Friday. The default will mark the first time the U.S. territory has failed to pay what it owes on general-obligation debt, a $13 billion swath that its constitution says has the top claim to the government’s funds. Puerto Rico had already defaulted on debt issued by three agencies, but creditors were left with little recourse because the securities were backed by weaker legal safeguards.

Governor Garcia Padilla previously said the commonwealth couldn’t raise enough to cover what’s owed to bondholders even if he shut down the government. The island has about $2 billion in principal and interest payments due Friday, and total debt of around $70 billion. Without the ability to file for bankruptcy protection as cities including Detroit have done, Puerto Rico pushed Congress to give it legal tools to force creditors to the bargaining table and prevent an onslaught of lawsuits. Instead, it looks like they will be headed to court.

Energy Transfer Equity has terminated its merger agreement with Williams Cos. after a court ruled that it can walk away from the deal since it was unable to deliver a required tax opinion by June 28. Williams published a statement saying it is committed to completing the merger and will “enforce its rights” under the terms of its agreement. The deal had been valued at nearly $33 billion when it was signed last year.

Toyota announced another massive recall. The Japanese carmaker said it needed to recall 2.8 million cars over a possible fault in emissions control units, after it announced on Tuesday that 1.4 million Prius and Lexus models had to be brought in to have their air bag inflators fixed.

Coca-Cola expects to pull some of its beverages from Vermont stores this week as the state imposes a new law requiring all products made with genetically modified organisms to include warning labels. Although its top beverages will stay on shelves, including Coca-Cola, Diet Coke and Coke Zero, some smaller brands or configurations may temporarily disappear. Kellogg, Campbell Soup and Mars previously announced they would comply with the Vermont law and begin labeling their products for GMOs.

Nike’s futures sales disappointed. Nike reported adjusted earnings per share of $0.49, beating the consensus by a penny. Revenue rose 6% to $8.2 billion but was a bit shy of estimates. The closely followed worldwide futures orders jumped 11%, missing the 13% increase that analysts were anticipating.

FINANCIAL REVIEW

Brilliance in Euphemistic Ambiguity

Sinclair Noe — September 18, 2014

Financial Review

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

DOW + 109 = 17,265
SPX + 9 = 2011
NAS + 31 = 4593
10 YR YLD + .03 = 2.63%
OIL – 1.40 = 93.02
GOLD + 1.60 = 1225.80
SILV un = 18.62

Stock moved higher for a third day. Record high closes for the Dow and the S&P 500. The Dow notched its 17th record close of the year; the S&P posted its 34th record high close for the year. The stock market is in Fed mode. The Fed wrapped up their policy meeting yesterday, and they didn’t scare anybody; they even gave added assurance that they will be overly communicative. Interest rates are probably going to go up in the future but not at any specific time that can be identified. The Fed stuck with the phrase “considerable time” which is a great way to speak words that contain absolutely no meaning. Brilliant, brilliant performance in euphemistic ambiguity.

And even if the Fed tightens, the rest of the world’s central banks are getting looser, and it just figures that some of that will spill over to Wall Street. The ECB lowered rates so much that they’ve gone negative. Just the other day, the People’s Bank of China pumped about $80 billion into five banks.

The number of investment advisors that are bearish is at the lowest level since 1987. When bears start to dwindle to extremely low levels it’s often viewed as a contrarian signal on Wall Street; the Investors intelligence sentiment index now stands at 14.1%, the lowest level of bears since January 1987, when the index stood at 13.3%. The more extreme the reading, either to the bearish side or bullish side, the greater the likelihood the market moves in the opposite direction. History warns that the lack of bears warrants attention.

The number of Americans filing new claims for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits dropped 36,000 to a seasonally adjusted 280,000 for the week ended September 13th. This hints at the idea that the weak August jobs report might be an aberration.

The Commerce Department said housing starts fell 14.4 percent to a seasonally adjusted 956,000-unit annual pace last month. But July’s starts were revised to show a 1.12-million unit rate, the highest level since November 2007.

In another report, the Philadelphia Federal Reserve Bank said its index of mid-Atlantic business activity slipped in September. Despite the drop, factory employment in the region hit its highest level since May 2011 and new orders accelerated.

So, three decent economic reports showing reasonable strength in jobs, housing, and manufacturing.

Also today, the Federal Reserve released its Flow of Funds report. Consumer credit grew by 3.6% in the second quarter, but that’s slower than the 4.2% growth in the overall economy. Overall household debt as a percent of gross domestic product has declined to about 70% from just over 90%. Other types of debt; such as credit cards, student loans and auto loans have expanded, but still not enough to offset the declines in mortgages; household home mortgage debt stood just under 55% of GDP, the smallest since 2002. Credit growth has been slower than overall growth in the economy. The same cannot be said for wealth. The net worth of Americans hit a record high in the second quarter; up 1.7 percent to $81.5 trillion, of course that does not mean the wealth was spread around evenly. So today’s climbing net worth is different from the housing bubble in one key way: from 2003 to 2007, the run-up in net worth was fueled by a binge of household borrowing. Today’s climbing net worth has happened alongside a falling debt burden. Put another way: assets are climbing even though debts are falling.

Wall Street is all a twitter about the next big IPO, Alibaba, which has priced its initial public offering at $68 a share, the top end of the expected range. At that price, the IPO, one of the largest-ever, would give Alibaba a market valuation of $167.6 billion.

The New York Stock Exchange will hold an industry conference call tomorrow morning before the open to provide operational updates on the public offering. The idea is to avoid a Facebook or Twitter type of flop, if possible.

The Justice Department is trying to get banks to rat out their employees. According to Marshall Miller, the number 2 official with the Justice Department’s criminal division, if the banks cooperate with the DOJ, they might avoid prosecution by exposing nefarious individuals. The law enforcement types want the banks to stop stonewalling investigations. For example the recent criminal case against BNP Paribas, the French bank guilty of doing business with blacklisted countries such as Iran and Cuba; BNP stalled the investigation to the point that prosecutors missed the deadline to charge individuals. In turn, rather than receive a so-called deferred-prosecution agreement, BNP was forced to plead guilty in a rare criminal action against a giant global bank. This might give us some insight into the Justice Department’s plans for prosecuting the currency-rigging investigation, an inquiry that has swept up several of the world’s biggest banks, including Barclays and JPMorgan Chase.

But there are risks to the corporate executives for ratting out the rank and file. And the problem is that the rank and file would have very little reason not to turn on their masters before their masters turn on them. For the first time, it almost looks like the DOJ almost wants to put some bankers behind bars.

The polls in Scotland have closed. We may know later tonight or maybe tomorrow whether the Scots voted for independence from the UK. The ballot asks a simple question: “Should Scotland be an independent country?”

I’ve been reading about Scottish independence, and it seems the view from London that is that independence would doom the Scots to a horrible economic collapse. Steve Forbes writes: “Both Scotland and the remnants of the UK will be poorer. Capital will flee Scotland. London will get hit as well,” and “The break-up of Great Britain would encourage all the forces of chaos, terrorism and aggression and set a terrible precedent.” So, apparently, if Scotland forms its own country through the democratic process, the terrorists win. I don’t know, but we’ll find out soon.

Yesterday the US House of Representatives voted to authorize the arming of moderate, non-jihadist Syrian rebels. The vote was tacked onto a spending bill to fund the federal government and it passed 273 to 156. As you know, this was legislation of the utmost importance because we have heard repeatedly that if the US doesn’t stop ISIS, they will come over here and chop our heads off and kill us all. The Senate will likely take it up in December, maybe.

Why the delay? Well, after spending pretty much all of August and the beginning of September on vacation, the House of Representatives is taking a Congressional recess, adjourning until after the midterm election. That means the House won’t return to session until November 12, the week after Election Day, or almost two months from now. And now they’re leaving DC after just 8 days since their last vacation, so they can campaign to keep their jobs, which apparently consists of campaigning to keep their jobs.

Maybe all these threats of terrorism are a bit overblown, after all it would be pretty tough to defeat the US, and the reason is because we are now armed to the teeth. The Associated Press reports that school police departments across the US have taken advantage of free military surplus gear, stocking up on mine-resistant armored vehicles, grenade launchers and scores of M16 rifles. The surplus program has come under scrutiny following the police response to protesters in Ferguson Missouri. It has become common practice to hand out surplus weapons to law enforcement agencies; kind of a menacing peace dividend.

And now we learn that at least 26 school districts are loading up on weaponry. Federal records show schools in Florida, Georgia, Kansas, Michigan, Nevada, Texas and Utah obtained surplus military gear. At least six California districts have received equipment. But now, cooler heads prevail, and the Los Angeles unified school district has been thinking about the appropriateness of the weaponry, and so they have decided to return to the Pentagon three grenade launchers. They’ll keep the mine resistant armored vehicles and the M-16s.

No word yet on what they plan to do with the tactical nukes.