Financial Review

Non-Freak

Sinclair Noe — August 24, 2017

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

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DOW – 28 = 21,783
SPX – 5 = 2438
NAS – 7 = 6271
RUT + 4 = 1373
10 Y + .02 = 2.19%
OIL + .24 = 47.64
GOLD – 4.50 = 1286.80
BITCOIN + 0.99% = 4405.76 USD
ETHEREUM + 0.10% = 326.24

Stocks drifted in an aimless manner today, meandering from positive to negative and back and forth again. The good news is that the market has made it through most of August without freaking out – and there have been a few opportunities for a freak. But the markets have been well behaved and orderly, with a slight downward bias.

Soon, August will end and Congress will return and they will have a plate full of issues including the debt ceiling and tax reform. Trump picked a new fight today with fellow Republicans over the debt ceiling, blaming congressional leaders for not including funding for veterans’ affairs as part of the debt ceiling package. Trump tweeted that debt ceiling approval is now a mess.

Earlier in the week, Senate Majority Leader McConnell said the debt ceiling would be raised. Today at a town hall meeting in Washington state, House Speaker Paul Ryan confirmed debt ceiling legislation would be passed in time. And it probably will. It is not complicated. Write a clean bill, no amendments, and it will pass. It should be easy, but…

On the tax reform side, Republican congressional leaders don’t expect to release a joint tax plan with the White House next month, and they’ll rely instead on House and Senate tax-writing committees to solve the big tax questions that remain unanswered.

White House officials and congressional leaders involved in tax negotiations, jointly released a two-page statement in July that outlined a broad set of agreed-upon tax principles.That statement was short on specifics, including such basic matters as where to set the corporate tax rate and how to set up individual tax brackets.

Back in March, White House press secretary Sean Spicer’s said the Trump administration would be “driving the train” on efforts to rewrite the tax code. So far, the train hasn’t left the station. Chief economic advisor Gary Cohn had said previously that a tax framework would be released after Labor Day. More recently, he indicated the White House was pushing tax efforts back to the hill.

House Ways and Means Chair Kevin Brady has said he expects hearings and markups on tax legislation this fall. The Senate Finance Committee is planning to do the same. It might be possible to get tax reform this year but don’t hold your breath.

Tomorrow, Janet Yellen will be giving what could be her last speech Friday as Fed chair at the annual gathering in Jackson Hole, Wyoming. Yellen’s term as Fed chair expires in February and Trump does not seem inclined to re-appoint her.

Yellen has brushed aside questions about her future. She professes to be focused on the job at hand, which is a significant one — namely, guiding the Fed from a path of the ultra-accommodative crisis-era policies to a more normalized stance. That includes higher – though still low – rates and the first steps toward unwinding the $4.5 trillion balance sheet of bonds the Fed accrued during its economic stimulus efforts.

With all that in play, Fed watchers expect Yellen’s speech to be less a valedictory look at the past and more a course-charting path for her successor. Yellen’s speech comes nearly a full decade after the Fed began cutting its benchmark funds rate, in September 2007 in the face of the unfolding financial crisis that threatened the nation’s banking system and ultimately pulled the economy into recession.

By December 2008, the funds rate had been sliced to near zero and the Fed began buying bonds to generate liquidity and keep interest rates low to spur the housing industry. By the time Yellen took over in February 2014, the Fed was still at zero but had pumped up its balance sheet with trillions of bonds.

Stocks were on their way to the second-longest bull market in history, but the rest of the economy remained in question. The Yellen Fed has begun the process of normalization, raising rates 4 times, even though the inflation rate remains stubbornly south of 2%.

In the next few years, the Fed will continue dealing with the low-interest-rate world the financial crisis ushered in, plus the unwinding of the balance sheet, plus a raft of economic challenges to economic growth. Maybe Yellen will offer some advice tomorrow.

Yellen’s remarks are entitled “Financial Stability,” and therefore could skirt direct discussion of monetary policy. But given the nature of the forum and its high-profile audience — academic economists, top central bankers, and a handful of market participants — that is unlikely.

Rather than focusing on monetary policy directly, Yellen is likely to discuss how the Fed is supposed to manage its mandate of maintaining a stable financial system even as it stimulates economic growth to a level that is strong but does not generate undue inflation — or credit bubbles.

In a way, market expectations that the Fed will leave interest rates on hold at its next meeting in September, waiting until at least December to make another move, provide Yellen some breathing room.

Look for Yellen to maintain a slightly dovish tone, but mainly look for her to say nothing that would freak the markets. Nothing to rock the boat. She only must keep the markets and the economy steady and calm for 6 more months, and then it’s someone else’s problem.

Hurricane Harvey is headed for Texas. The hurricane has been gaining strength in the Gulf of Mexico. Only a few oil and natural gas platforms in the storm’s path have been shut, so they are still producing but rainfall threatens to flood refineries in Corpus Christi and Houston. Winds up to 75 mph and as much as 15 inches of rain were forecast. Flooding will be a big problem as the storm hits the Texas coast.

The National Association of Realtors reports sales of previously-owned homes slid to their lowest level of the year in July as the familiar dynamics of tight supply and strong demand continue to strain the housing market.

Existing-home sales ran at a seasonally adjusted annual rate of 5.44 million in July. That was down 1.3% from a downwardly-revised June pace. While July’s pace was 2.1% higher than a year ago, it was the lowest since last August.

Inventory dropped 9% from year ago levels. Strong demand meant listings went into contract in under 30 days. It also pushed prices higher. The median sales price in July was $258,300, a 6.2% increase compared to a year ago.

Amazon.com’s acquisition of Whole Foods will close on Monday, and they are going to make changes from Day One. The biggest of the changes seemed aimed at changing the store’s reputation as “Whole Paycheck” — a seller of food that might be wholesome for customers but also devastating to their pocket books.

No more. Amazon said it would offer lower prices on a “selection of best-selling staples across its stores, with much more to come.” Amazon also said that its Prime membership program, which costs $99 a year, will eventually become Whole Foods’ customer rewards program, providing members with further savings in stores. It did not provide any other details about those plans.

Shares of some of the country’s biggest grocery companies fell sharply after Amazon’s announcement. Kroger fell more than 6.5 percent, and Walmart, the nation’s biggest grocer, fell about 2 percent.

The collateral damage among grocers is just the latest example of Amazon imposing its will on an entire industry with a simple corporate announcement, leaving billions of dollars of erased market value in its wake. And there’s nothing to suggest this dynamic will slow down anytime soon. Retailers are being forced into a new reality where the specter of Amazon lurks at every turn.

Abercrombie & Fitch posted a smaller-than-expected loss in the second quarter, thanks to strength from its Hollister brand. The teen retailer said same-store sales fell 1%, better than the expected drop of 2.1%.

Revenue topped analysts’ forecasts at $779.3 million. The adjusted loss of 16 cents a share was better than forecasts for a loss of 33 cents. Sales at its Hollister brand rose 5% during the quarter.

Abercrombie shares jumped by 17% today, which seems like an over-reaction.

Sears recorded a smaller-than-expected loss in the second quarter while its revenue beat Wall Street expectations. Sears recorded an adjusted loss of $1.16 a share on revenue of $4.3 billion. Analysts were expecting a loss of $2.48 a share and sales of $4.2 billion.

Even though the department store topped expectations, it’s still struggling to lure shoppers through its doors. Sears announced it plans to close 28 more Kmart stores this year, which is in addition to the 150 Sears and Kmart stores it’s closing by the end of the current quarter.

Sears shares have fallen 39% over the past year.

Tiffany reported revenue of $959.7 million, boosted by growth in its fashion and design jewelry, and its profit topped expectations at 92 cents a share.

But it wasn’t all good news for Tiffany, same-store sales fell for the seventh quarter in a row, down 2% worldwide, which is a bigger drop than the 1% decline analysts were expecting.

Tiffany shares have jumped nearly 14% since the start of the year.

Dollar Tree advanced 5.6 as one of the best performers on the S&P 500 after the retailer’s profit and comparable sales beat estimates.

Signet Jewelers surged 16.7 percent after the company issued results and said it would buy an online jeweler.

Financial Review

Sparring

Sinclair Noe — July 20, 2017

Podcast: Play in new window | Download (Duration: 11:25 — 6.5MB)

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DOW – 28 = 21,611
SPX – 0.38 = 2473
NAS + 4 = 6390 (record)
RUT + 0.58 = 1442 (record)
10 Y – .01 = 2.27%
OIL – .39 = 46.73
GOLD + 3.00 = 1245.00
BITCOIN – 1.93% = 2821.99 USD
ETHEREUM – 0.26% = 227.99

Sen. John McCain tweeted a message of gratitude for the outpouring of support that greeted news Wednesday of his brain-cancer diagnosis. He tweeted: “I greatly appreciate the outpouring of support – unfortunately for my sparring partners in Congress, I’ll be back soon, so stand-by!”

The Dow and the S&P fell slightly from record highs, while the Nasdaq and Russell 2000 squeaked out new record highs. It was close, but the MSCI Emerging Markets Index of stocks managed to eke out its ninth straight increase. That’s the longest rally since April 2015. The 0.02 percent rise in the index was the smallest of the current streak. Still, that brought the index’s gain for the year to 23 percent.

Europe’s economy is experiencing a pickup in both current and forward indicators of growth. Improvements in household and corporate sentiment and activity have been reinforced by a decline in perceptions of political risk following the victory of Emmanuel Macron in the presidential and legislative elections in France.

The European Central Bank may not make a decision on the future of its bond-buying program until October. Policy makers are currently committed to spending 60 billion euros ($70 billion) a month on debt until at least December, and have repeatedly said any winding down must be gradual.

The ECB Governing Council met in Frankfurt today, ECB President Mario Draghi told reporters that policy makers unanimously agreed to put off a formal debate until the fall, but that they opted not to set a precise date for talks.

If you missed out on the euro’s rally because you thought European Central Bank President Mario Draghi was leaning dovish at today’s news conference after policy makers decided to keep interest rates unchanged, you’re forgiven. After all, Draghi emphasized several times the need for patience and evidence that wages and inflation are on the rise before winding down stimulus measures.

All that would normally weigh on a currency. But what Draghi didn’t do was dwell on the recent strength of the euro, other than to say it had received “some attention.” For traders, that was a green light to push it above $1.16 for the first time since May 2016. The euro is spiking because Draghi has not been able to put ‘FX’ and ‘policy’ into the same sentence.

The Fed is on a course of gradual rate increases. Bond guru Bill Gross is warning about looming interest rate increases and the damage they can do to a debt-laden global economy. In his monthly investor outlook, the Janus Henderson Advisors fund manager said the course of global central banks toward tightening policy could be perilous for the economic recovery. Raising interest rates will increase the cost of short-term debt that corporations and individuals hold.

In the U.S. alone, households have $14.9 trillion in debt while businesses owe $13.7 trillion. Gross said, “While governments and the U.S. Treasury can afford the additional expense, levered corporations and individuals in many cases cannot. ”

A broad measure of how well the U.S. economy is performing surged in June after a strong gain in May, suggesting growth could speed up in the months ahead. The leading economic index jumped 0.6% last month after a revised 0.4% increase in May.

The improvement in the index was spearheaded by strong housing permits after several months of weakness. Home builders plan to step up construction to meet rising demand as the economy enters is ninth year of expansion.

The U.S. got off to a slow start in 2017, and although growth accelerated in the spring, the economy is still not expanding full bore despite the strongest labor market in more than a decade.

The Congressional Budget Office has release its analysis of the latest version of Senate Republicans’ legislation to repeal and replace the Affordable Care Act. CBO says it would leave 22 million Americans without health insurance coverage by 2026. Yesterday, the CBO said that a repeal-only version would result in 32 million uninsured by 2026.

The number of Americans who applied for unemployment benefits sank in mid-July and hovered near a 44-year low, reflecting the healthiest jobs market in more than a decade. Initial jobless claims in the period running from July 9 to July 15 fell by 15,000 to a seasonally adjusted 233,000.  That matches the second-lowest level since the 2007-09 recession.

Arizona’s seasonally adjusted unemployment rate remained the same at 5.1% in June. The US unemployment rate was 4.4% in June. A year ago, the Arizona seasonally adjusted rate was 5.3% and the US rate was 4.9%. Arizona lost 42,800 Non-farm jobs in June. The Private Sector lost 5,700 jobs. Government lost 37,100 jobs. Arizona Non-farm employment grew by 2.4% (62,700 jobs) over the year in June.

With tech stocks at a record high — and stalwarts like Microsoft having doubled their market cap in just about three and a half years — some may worry that we’re setting up for a repeat of the tech bubble. Others may point to research that shows tech earnings are rising in-line with the index’s overall march higher.

Sometimes, things are different. And, on cue, Microsoft reported a better-than-expected quarterly profit and revenue. Microsoft said revenue from its cloud unit, which includes the flagship Azure platform and server products, rose about 11 percent to $7.4 billion in the quarter.

The company’s net income more than doubled to $6.5 billion, or 83 cents per share, from $3.1 billion, or 39 cents per share, a year earlier. Excluding one-time items, Microsoft earned 98 cents per share beating estimates of 71 cents. On an adjusted basis, revenue rose 9 percent to $24.7 billion – also beating estimates.

Microsoft shares hit an intraday record price of $74.30 and closed at an all-time high of $74.22. Microsoft reported after the closing bell, and share were up about 1.5% in after-hours trade.

Visa reported a better-than-expected quarterly profit and raised its full-year earnings forecast. Consumer spending has been on the rise in the United States, and shoppers pay with plastic. Visa’s payment volumes in the US rose 12.1 percent on a constant dollar basis to $840 billion in the quarter.

More than half of the company’s total volume of transactions comes from the United States. Net income rose to $2.06 billion, or 86 cents per share – beating estimates of 81 cents, and up from $412 million, or 17 cents a year ago. Visa also raised its forecast for full-year profit.

EBay reported a nearly 94 percent fall in quarterly profit. Net income fell to $27 million, or 2 cents per share, in the second quarter, from $435 million, or 38 cents per share, a year earlier. They did have about $400 million in income tax provisions that dented profits… still, not good.

As part of its review of Amazon’s agreement to buy Whole Foods, the Federal Trade Commission is considering allegations that Amazon misleads customers about its pricing discounts. The FTC is probing a complaint brought by the advocacy group Consumer Watchdog, which looked at some 1,000 products on Amazon’s website in June and found that Amazon put reference prices, or list prices, on about 46 percent of them.

And for 61 percent of products with reference prices, Amazon’s reference prices were higher than it had sold the same product in the previous 90 days.

Retailers and appliance makers fell after Sears said it would sell its Kenmore home appliances on Amazon and integrate the brand’s smart gadgets with the Alexa digital assistant. Sears was up 10.6 percent at $9.60 and Amazon shares rose 0.2 percent.

Once a dominant force, Sears Holdings appliance sales account for about 15 percent of its total sales of $3.3 billion in fiscal 2016. So, you no longer need to go to Sears for Kenmore appliances or Craftsman tools – so, why would you go to Sears?

Home Depot fell 4.1 percent, shaving off 40 points from the Dow and weighing the most on the S&P 500. Retailers Lowes and Best Buy, as well as appliance maker Whirlpool, were down between 3.9 and 5.6 percent. The market cap loss in Home Depot, Lowe’s, Whirlpool and Best Buy was about $12.5 billion by the end of the day.

Financial Review

Drifting Higher

Sinclair Noe — June 7, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW + 37 = 21,173
SPX + 3 = 2433
NAS + 22 = 6297
RUT + 1 = 1396
10 Y + .03 = 2.18%
OIL  – 2.10 = 45.88
GOLD – 6.80 = 1287.80
BITCOIN – 1.57% = 2736.57
ETHEREUM – 2.04% = 258.86

Major stock, bond and currency markets did little more than drift higher ahead of what many are calling Super Thursday. That’s when the U.K. holds a very important general election, the European Central Bank announces its decision on monetary policy, former FBI director James Comey testifies to the Senate about Russian meddling in the U.S. election, and Brazil’s Electoral Court may issue a decision on campaign corruption that could unseat President Michel Temer.

The Senate Intelligence Committee held public hearings today, with Director of National Intelligence Dan Coats and NSA Director Admiral Mike Rogers repeatedly said they would not discuss their private conversations with President Donald Trump.

Coats and Rogers said they did not feel the public setting of the Senate intelligence committee’s hearing was an appropriate venue to discuss their conversations with Trump. Acting FBI Director Andrew McCabe invoked the probe of special counsel Robert Mueller, when McCabe said he wouldn’t comment on issues in the special counsel’s lane.

Fired FBI Director James Comey is scheduled to appear before the committee tomorrow. Today, Comey released his written prepared opening remarks, saying the President had demanded his loyalty, pressed him to drop a probe into ex-national security adviser Michael Flynn and repeatedly pressured him to publicly declare that he was not under investigation.

The document provides a detailed account of Comey’s private meetings with the President, included direct quotes from Trump and revealed the former FBI chief’s discomfort with the President’s behavior.

President Trump took to Twitter early this morning to break the news about his pick for FBI director. The nominee is Christopher Wray, a private attorney specializing in the defense of individuals and corporations in white-collar criminal cases. He represented New Jersey Gov. Chris Christie during the “Bridgegate” investigation.

This afternoon, Trump traveled to Cincinnati to pitch his 10-year, $1 trillion infrastructure outline as part of a week’s worth of events emphasizing progress on the proposal, though it has yet to be fully fleshed out.

Over the past week, Trump has often undercut and confounded his own aides as they try to shift the conversation toward the infrastructure plan, he was tweeting out new attacks on the news media and feuding with his own Justice Department over its defense of his targeted travel ban.

So far, the infrastructure proposal is not much more than an outline, short on details and specifics, other than a plan announced this week to privatize the nation’s air traffic control. The plan, conceived by the commerce secretary, Wilbur Ross, and economic advisor Peter Navarro, calls on the federal government to spend $200 billion in cash and tax credits that would, they say, result in $800 billion in additional private investment.

In congressional testimony this year, the transportation secretary, Elaine Chao, predicted that a more detailed proposal would be released by late May. But last week she would say only that it was “coming soon.”

Russian hacking of the 2016 U.S. election included sophisticated targeting of state officials responsible for voter rolls and voting procedures, per a top-secret U.S. intelligence document that was leaked and published this week, revealing another potential method of attempted interference in the vote.

The month-old National Security Agency document outlined activities including impersonating an election software vendor to send trick emails to more than 100 state election officials. However, there is no evidence that hackers could manipulate votes, or the vote tally.

Analysts at the NSA believed the hackers were working for the Russian military’s General Staff Main Intelligence Directorate, or GRU. The document’s publication by The Intercept received attention because an intelligence contractor, Reality Winner, was charged the same day with leaking it.

According to Bill Gross, who manages the $2 billion Janus Henderson Global Unconstrained Bond Fund, markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they’re taking. Speaking at a Bloomberg Investors conference in New York, Gross said, “Instead of buying low and selling high, you’re buying high and crossing your fingers.”

Central bank policies for low and negative interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies. Despite being concerned about high asset prices, Gross said he feels required to stay invested and sees value in some closed-end funds.

Consumer and business bankruptcies are rising again, after declining for years since the financial crisis. That’s not a propitious sign. For bankruptcy filings by businesses from large corporations to tiny sole proprietorships, the dance started in November 2015. At first it was the energy bust. But bankruptcies of energy companies have tapered off with new money surging into the oil & gas sector once again.

Now bankruptcies in the retail sector are steadily worsening, and other sectors too have picked up the slack. So here we go again. Total US business bankruptcies in May rose 4.7% year-over-year to 3,572 filings, according to the American Bankruptcy Institute. That’s up 40% from May 2015 and up 10% from May 2014.

And there’s another concern: Bankruptcy filings are highly seasonal. They peak in tax season – March or April – and then fall off. The decline in April after the peak in March was within that seasonal pattern. Over the past years, filings dropped in May. But not this year. This year, they jumped.

Sears is closing 72 more stores, in addition to the more than 180 closings that had already been announced this year.  The closings will bring Sears’ store count to about 1,200, down from 2,073 five years ago.

OPEC and other oil producing nations have cut back production in hopes of shrinking a global oil glut. Today, the U.S. government reported an unexpected increase in inventories of crude and gasoline. Crude stocks in the United States grew 3.3 million barrels to 513 million barrels, according to the U.S. Energy Information Administration.

Gasoline inventories also unexpectedly rose, imports increased, and exports dropped. The EIA report pegged total product demand at 19.340 million barrels a day. That included a drop of 505,000 barrels a day for gasoline demand and 520,000 barrels a day for distillate demand from a week earlier.

A 1.4 million barrel-per-day petroleum-demand drop is the kind of shift one associates with a catastrophic storm or economic plunge. Even more shocking, the rise for crude inventories came despite a decline in domestic production and the biggest weekly drop in Saudi imports ever.

Oil has traded below $50 for the past couple of weeks amid speculation that rising U.S. output will counter supply curbs by OPEC and its partners, including Russia. U.S. crude production will average more than 10 million barrels a day in 2018, breaking a record almost five decades old.

Low-cost, long-haul air travel has taken off across the Atlantic. Transatlantic routes are among the industry’s most popular and profitable, and budget carriers are trying to grab a slice of that business by boosting capacity on them by 68 percent this summer.

And that means the flying public may see price wars. Like Boston to London, round trip for under $300. Norwegian Air Shuttle and Icelandic rival Wow have grabbed headlines with one-way fares as low as $69 and $55 this summer, although Wow’s flights involve a stop in Reykjavik.

Lufthansa’s Eurowings budget carrier is in its second year of long-haul flying, while Air France is planning to launch a lower-cost long haul brand this fall in a project dubbed Boost. International Airlines Group launched low-cost long-haul brand Level on Thursday with surprisingly strong ticket sales.

Toshiba aims to name a winner for its prized semiconductor business next week. Sources told Reuters the choice has narrowed to one bid from U.S. chipmaker Broadcom and U.S. tech fund Silver Lake and another from Toshiba chip partner Western Digital and Japanese government-related investors.

Toshiba is rushing to find a buyer for the world’s second-largest producer of NAND chips, which it values at $18 billion or more, to cover billions of dollars in cost overruns at its now-bankrupt U.S. nuclear business Westinghouse Electric.

The British pound sterling gained ground today as the UK saw the final day of campaigning ahead of Thursday’s general election. Polls suggest that Theresa May’s Conservative Party hold a lead of around six points over Jeremy Corbyn’s Labour Party, although outliers suggest that lead could be as big as 12 points, or as small as one point.

While a big move in the price of sterling is expected once results start to come out on Thursday evening, investors in Britain’s currency were largely in wait and see mode ahead of the vote. The polls have been notoriously wrong in recent voting.

Yes, there’s a lot going on tomorrow, but don’t forget to keep an eye on Canada. The Bank of Canada will release its semi-annual Financial System Review and investors will be watching for what the central bank says about the nation’s red-hot housing market. Toronto home prices rose almost 30 percent last month from a year earlier.

In Vancouver, the country’s most expensive real estate market, they’ve climbed 58 percent over four years. Meanwhile, household debt is at record levels, surpassing gross domestic product for the first time. Fitch said Wednesday that banks with greater exposure to those two cities are more sensitive to a market correction.

In the last FSR in December, the Bank of Canada listed elevated household indebtedness, housing market imbalances and fixed-income liquidity as the three main risks to the financial system, and the focus should be similar this time.

Financial Review

Consuming Oxygen

Sinclair Noe — May 10, 2017

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

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DOW – 32 = 20,943
SPX + 2 = 2399
NAS + 8 = 6129
RUT + 7 = 1399
10 Y + .01 = 2.41%
OIL + 1.45 = 47.33
GOLD – 2.30 = 1219.80

President Trump’s stunning firing of the FBI director, James Comey, injected another volatile ingredient into the partisanship already engulfing the capital and threatened to overwhelm Republican efforts to turn their government control into legislative success.

The abrupt decision has investors raising questions about whether the president’s pro-growth, tax-cutting reforms will stall as the focus shifts to why Comey was dismissed while the FBI was investigating possible Russian ties to Trump’s campaign. Every piece of Trump’s agenda just became harder to get through Congress. Wall Street is shallow that way.

Whoever Trump nominates as Comey’s replacement will face a brutal confirmation hearing before the Senate Judiciary Committee. It will get saturation-level media coverage. There are legal implications that will take time to fully unravel. The Comey dismissal is going to consume most of the oxygen in Washington for the foreseeable future.

As US equity markets continue to price to perfection a grab bag of promised corporate giveaways, a group of researchers at the International Monetary Fund (IMF) had the temerity to ask last month – what could possibly go wrong.

In their April 2017 “Global Financial Stability Report,” IMF researchers methodically pare back the rosy lenses of the stock market and focus on the warning signs in the U.S. corporate debt market. Two findings have the power to potentially jolt the equity markets out of their euphoric stupor. The researchers note:

“The [U.S.] corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010…”

“The number of [U.S.] firms with very low interest coverage ratios—a common signal of distress—is already high: currently, firms accounting for 10 percent of corporate assets appear unable to meet interest expenses out of current earnings.

This figure doubles to 20 percent of corporate assets when considering firms that have slightly higher earnings cover for interest payments, and rises to 22 percent under the assumed interest rate rise.

The stark rise in the number of challenged firms has been mostly concentrated in the energy sector, partly as a result of oil price volatility over the past few years. But the proportion of challenged firms has broadened across such other industries as real estate and utilities.

The report acknowledges that equity markets “have taken a relatively benign view” of the downside risks and warns that there could be a “swift repricing of risks in the event of policy disappointment.”

The Senate rejected efforts to roll back an Obama-era rule limiting methane emissions from energy production sites on federal land. The vote over the greenhouse gas was close — 49-51 — with Republican Sens. John McCain, Lindsey Graham and Susan Collins coming down against the resolution.

In a statement, McCain said he voted against the repeal because the effort made use of a legislative tool called the Congressional Review Act, which would have blocked similar regulations in the future. The greenhouse gas rule is intended to curb a practice called flaring, during which energy producers burn off natural gas that they can’t process or sell. That process releases methane into the atmosphere.

Oil prices rose more than 3 percent, as inventories suffered the biggest one-week drop this year. The US Energy Information Administration said crude inventories fell 5.2 million barrels last week. Gasoline and distillate stocks also fell. Production rose, however, and gasoline demand over the last four weeks was 2.5 percent lower than at the same time a year ago.

Prices also found support in comments by Algeria’s energy minister that Algeria and Iraq favor extending global supply cuts when OPEC meets this month. Saudi Arabia’s energy minister went public with his support not only for an extension of the OPEC cuts for another six months, but he also dangled the possibility of an extension into next year.

Per the just released Monthly Treasury Statement, in April the US Treasury collected $456 billion and spent $273 billion, resulting in a budget surplus of $182 billion, higher than the $179 billion expected, and well above last year’s $106.5 billion surplus.

In a surprising jump in government revenues, receipts rose 3.9% y/y in April while outlays plunged a whopping 17.7% y/y. The increase in the surplus is due entirely to calendar quirks and a shift in the timing of some corporate income tax payments.

On Friday, Treasury Secretary, Steven Mnuchin, will be on the world stage for the start of two days of meetings in Italy, with finance ministers from the G7: The United States and six other major economies — Canada, Germany, Japan, Britain, France and Italy. The talks come amid several geopolitical uncertainties.

The issue of trade was at the forefront in March, when Mnuchin and leaders of the world’s 20 largest economies met in Germany. The tough talks ended in the group deciding to drop longstanding pro-trade language from a joint agreement. Hoping to bypass another row this week, Italian officials said they would keep trade off the official agenda. Italy is the current president of the G7 and has the power to set the agenda of the finance ministers’ meetings.

Aetna, one of the major five public health insurers in the US, announced it will remove its products from the Obamacare exchanges in Nebraska and Delaware. The move comes after Aetna announced it was pulling out of Iowa and Virginia over the past few weeks, citing losses sustained in the Affordable Care Act’s individual insurance exchanges.

The moves mean Aetna has completely removed itself from every Obamacare exchange for now.

Tesla opened up orders and announced pricing information for its Solar Roof product. The company also launched a calculator to show people how much it would cost to replace their roof with a Tesla Solar Roof. It uses information like the size of the roof, the average local price of electricity, and how much sunlight a neighborhood receives during a year to calculate the price.

Tesla’s Solar Roof uses both solar and non-solar tiles, which allows consumers to choose how many solar tiles they need based on their home’s electricity consumption. Tesla’s estimate of $21.85 per square foot is based on a roof that’s 35% solar tiles.

To help put the cost into perspective, a Tesla Solar Roof for a home needing 3,000 square feet of roofing would cost more than $65,000 if 35% of the tiles were solar. Per Consumer Reports, a slate-tile roof for a home the same size would cost about $45,000, and an asphalt roof would be about $20,000. Tesla said the cost would be offset by the value of energy the tiles produce.

Sears Holdings Chief Executive Officer Edward Lampert blasted the media for “unfairly singling out” the company over the past decade and blamed “irresponsible” coverage for the retailer’s woes. Sears, once the largest US retailer, warned investors in March there was a chance it may not be able to continue as a going concern after years of losses and declining sales.

But sure, let’s say the reason is the media and not pathetic management that has not been able to capitalize on an iconic brand name, and failed to modernize. Lampert, a hedge fund investor who is rarely seen in public, kicked off his appearance at an annual shareholders’ meeting at Sears’ headquarters in Hoffman Estates with a slideshow of headlines about the company’s financial distress, dating back to 2008.

Sears has not reported a profit for six years, which Lampert compared to Amazon.com’s early unprofitable growth. There is a pretty big difference between Sears and Amazon. Sears has not reported a profit for six years. Sears has been closing stores, selling off assets like its Craftsman brand and borrowing money from Lampert to survive.

Amazon plowed profits back into the company as it created and dominated in e-book readers and voice assisted speakers, and state of the art distribution centers and logistics. Amazon also built a new division that handles cloud computing, one of its fastest growing divisions.

Sears never figured out how to turn its print catalogue into an online catalogue. Sears has almost no online presence. Earlier this year, because of new rules from the Securities and Exchange Commission, Sears was required to disclose that there is “substantial doubt” about the retailer’s “ability to continue as a going concern.”

So today Lampert ranted that the media is to blame for the problems with Sears and he predicted people will look back and wonder how they missed the Sears’ turnaround, which he said would be driven by the Shop Your Way loyalty program. Sure, that’s the ticket Eddie.

Snapchat’s user growth slowed to its lowest pace in years, as parent company Snap Inc. missed Wall Street expectations for its first quarterly earnings as a public company on Wednesday, sending its shares plunging more than 20% in after-hours trading. Snap added 8 million new daily users in the first three months of the year, representing year-on-year growth of 36%. Now last year, Snapchat was growing its DAUs by 52%.

Shares of Whole Foods Market rose by as much as 3.5 percent Wednesday after the company named five new board members and a CFO, and released fiscal second-quarter earnings that met expectations. The grocery store chain posted adjusted earnings of 37 cents per share on $3.74 billion in revenue. Whole Foods had been expected to report earnings of 37 cents per share on $3.73 billion in revenue.

Same-store sales were down 2.8 percent for the quarter — a shallower drop than Wall Street had expected. It was the seventh consecutive quarter of negative comparable store sales.

Financial Review

Quiet, Almost Too Quiet

Sinclair Noe — March 9, 2017

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

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DOW + 2 = 20,858
SPX + 1 = 2364
NAS + 1 = 5838
RUT – 5 = 1360
10 Y + .05 = 2.60%
OIL – .53 = 49.75
GOLD – 7.20 = 1201.80

Stocks dipped in afternoon trade but held on for minor gains, next to nothing really. Another quiet day. The S&P 500 and the Dow Industrials have not suffered a 1% decline in 102 trading sessions, dating back to October 11.

The longest stretch of trading days without a 1% decline since Dec. 18, 1995 for the S&P 500 and the longest since Sept. 20, 1993, for the Dow. It’s quiet, almost too quiet.

Another drop in oil prices weighed on energy shares while financial shares pared some of their early gains. When asked during a briefing whether President Donald Trump still backs his campaign pledge to restore the Glass-Steagall Act, White House spokesman Sean Spicer said that he did.

The law, which separated commercial and investment banking, was repealed in 1999 and, if reinstated, would mainly apply to larger banks, which have been market leaders in the past few months. Much of the gain for financials has been built on the idea of deregulation.

The European Central Bank left interest rates unchanged. The Governing Council left the main refinancing rate at 0%, while the rate on deposits parked overnight at the bank remains at minus 0.4%. The rate on the bank’s marginal lending facility remains at 0.25%.

In a statement, the bank repeated that it expects rates to remain “at present or lower levels for an extended period and well past the horizon” of its bond-buying program, which is scheduled to run through at least December. The ECB also repeated that it stands ready to extend the size or the duration of the bond-buying program if the outlook deteriorates.

The Labor Department reports imports rose 0.2 percent in February, above the expected gain of 0.1 percent, after climbing 0.4 percent a month earlier. Export prices, meanwhile, rose 0.3 percent.

Outplacement consultancy Challenger, Gray & Christmas reported employers announced plans in February to cut 36,957 jobs, a 19 percent decline from January. Per Challenger, employers said they would hire 166,266 workers in the first two months of 2017, the highest January-February on record.

The retail sector once again planned the most cuts as companies closed brick-and-mortar locations and steered business online. Retailers said they would cut 11,889 jobs in February. The energy sector saw a massive year-over-year drop in job cuts, announcing only 5,930 compared with 45,154 in February 2016.

The number of Americans who applied for unemployment benefits jumped by 20,000 to 243,000 in early March, but layoffs remained near a 45-year low. The four-week average of initial claims, meanwhile, rose by 2,250 to 236,500. Continuing jobless claims dropped by 6,000 to 2.06 million. Tomorrow, the government is expected to report a gain of about 210,000 new jobs in February.

Meanwhile, the Arizona Department of Labor published the state jobs report for January and it shows the Arizona unemployment rate unchanged at 5%, however the state lost 53,600 jobs in January. The biggest job losses per sector were in Trade, Transportation, and Utilities (-18,000 jobs); Professional and Business Services (-16,400 jobs); and Government (-13,700 jobs). Arizona Non-farm employment grew by 2.0% (53,700 jobs) over the year in January.

If you are looking for entertaining analysis of the markets, it’s tough to beat Bill Gross’ monthly investment letter. Gross, who runs the Janus Global Unconstrained Bond Fund, characterized the run-up as the “Trump bull market and the current ‘animal spirits’ that encourage risk.”

Details on Trump’s plans remain scarce, however, and equity gains have moderated on growing concerns that stock valuations may be high. The S&P 500 is trading at about 18 times forward earnings estimates against the long-term average of about 15 times.

Gross said the global economy has created more credit relative to GDP than that at the beginning of 2008’s great credit recession. Gross said: “In the U.S., credit of $65 trillion is roughly 350 percent of annual GDP and the ratio is rising,” adding, “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road.

One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.” It happened in 2008, Gross said, noting central banks could drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. “Today, central bank flexibility is not what it was back then.”

You may recall that back in January, Bill Gross said that if the yield on the 10-year Treasury note crossed 2.60%, that would be the critical level both to the bond market and to stock prices. “If 2.6 percent is broken on the upside … a secular bear bond market has begun,” Gross said.

“Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017.”

Gross said the 10-year yield has been in a downward trend line since 1987. If that channel is broken, look out. Today, the 10-year note closed at 2.60%.

House Democrats on the Energy and Commerce Committee staged a marathon fight to slow down the GOP’s Obamacare replacement, but ultimately failed to stop the bill. After a 27-hour delay, the Energy and Commerce committee approved the American Health Care Act in a party line vote. The bill will next be considered by the House Budget committee. The Congressional Budget Office is expected to score the bill next week.

As part of a plan to reshape its business, Royal Dutch Shell is selling its oil sands interests in Canada in a two-part deal worth $7.25 billion. It will offload stakes and reduce its share in the Athabasca Oil Sands Project for $8.5 billion in shares and cash, while jointly purchasing Marathon Oil Canada Corporation with Canadian Natural Resources for $1.25 billion.

Oil drops below $50. West Texas Intermediate crude oil plunged more than 5% on Wednesday after Department of Energy data showed US inventories swelled to a record-high 528 million barrels. That selling has continued day, with WTI dropping below $50 a barrel, its lowest since the end of November.

PPG’s bid to buy Dutch paints and chemicals rival Akzo Nobel was rejected. A deal would have created a global behemoth in specialty chemicals that would have made ingredients for products including skin creams, car paint and iPhone coatings. Akzo said the unsolicited $22.1 billion cash and stock offer undervalues the company and isn’t in the best interests of shareholders.

The French waste and water company Suez Environnement said it has partnered with a Canadian pension fund manager to acquire General Electric’s water treatment technology business in an all-cash deal that valued the business at about $3.4 billion.

GE put its Water and Process Technologies unit on the sales block in October after it agreed to merge its oil and gas division with a fellow services provider, Baker Hughes. The GE business provides water treatment and process services to industrial clients and reported revenue of $2.1 billion last year, with about half of that in North America.

Sears reported a narrower loss in the fiscal fourth quarter than the period a year earlier, but revenues continued to fall, as they continue to close stores and sales continue to decline at its remaining stores. The company’s long-term debt obligations nearly doubled from the prior year, despite the chain’s efforts to raise cash by selling off assets.

Sears took a $381 million charge during the quarter to write down the value of its trade name. Sears completed the sale of its Craftsman brand to Stanley Black & Decker for an initial upfront cash payment of $525 million with additional payments over time.

The Great Recession and the housing bubble left many homeowners underwater, with negative equity in their homes, they were stuck – under house arrest; they couldn’t sell, they couldn’t move, and many homeowners could not keep up important maintenance, much less upgrades. That’s good news for home flippers.

In 2016, the median age of a flipped home was 37 years, per a report out from Attom Data. That’s the oldest in the nearly two decades, and about double the median age of homes flipped before the downturn. The median size of flipped homes was the smallest on record in 2016, at 1422 square feet.

There were 3.1% more flips in 2016 than 2015, and 0.5% more flippers. And flippers could sell their properties for a median of $189,900 in 2016, offering a median gross profit of $62,624, or 49.2%, the highest on record. So, it looks like flippers still have legs.

Gallup-Healthways has released its  Community Well-Being Index . Researchers analyzed 350,000 interviews to rank 189 communities by physical, emotional, financial, community and social health; basically, a look at the happiest and healthiest cities in America. They found that living near the beach doesn’t guarantee your happiness — but it certainly doesn’t hurt.

Communities in the Southeastern US and industrial Midwest were generally ranked lower in well-being, partly due to health problems including higher smoking and obesity rates. Topping the list: Naples, Florida. Phoenix ranked 47 out of 189.

Financial Review

Double Hat Trick

Sinclair Noe — February 10, 2017

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

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DOW + 96 = 20,269
SPX + 8 = 2316
NAS + 18 = 5734
RUT + 10 = 1388
10 Y + .01 = 2.41%
OIL + .81 = 53.81
GOLD + 5.70 = 1234.50

Reckitt Benckiser has agreed to buy Mead Johnson Nutrition for $90 a share, or $16.6 billion, taking the UK consumer-products group into the infant food market. Including debt, the deal is valued at $17.9 billion. The transaction will add to Reckitt’s per-share earnings in the first full year.

Blackstone has agreed to acquire insurance broker AON’s employee benefits outsourcing unit for $4.3 billion in cash, giving Blackstone ownership of a business that processes work benefits for 15% of the U.S. population. It will also allow Aon to exit the capital-intensive business, allowing it to invest in growth areas beyond its core insurance brokerage operations.

The University of Michigan preliminary February consumer sentiment index fell to 95.7 from January’s final reading of 98.5. The most marked decline was in a forward-looking part of the survey, down 5.1% from January.

Oil is rallying on OPEC. West Texas Intermediate crude oil is higher after data released by the International Energy Agency showed a record-high 90% compliance to the OPEC output deal in the first month.

The IEA, which advises industrial nations on energy policy, said that if current compliance levels are maintained, the global oil stocks overhang that has weighed on prices should fall by about 600,000 barrels per day in the next six months.

But this may be as good as it gets for OPEC; participation in production cuts has been uneven among OPEC members, with Saudi Arabia shouldering the cuts to compensate for other countries which continue to pump – a situation that won’t continue indefinitely.

The Labor Department says import prices increased 0.4 % last month after an upwardly revised 0.5 % rise in December. In the 12 months through January, import prices jumped 3.7 %, the largest gain since February 2012, after advancing 2.0 % in December.

Import prices are rising as firming global demand lifts prices for oil and other commodities, but the spillover to a broader increase in inflation is being limited by dollar strength. Prices for imported fuels increased 5.8 % last month. Import prices excluding fuels fell 0.2 %. The report also showed export prices edged up 0.1 % in January.

Iron ore futures surged past $100 a ton, while spot ore rose to $83.84 a dry ton, the highest since October 2014. The rise came after official data showed that China’s exports surged 7.9% from a year earlier in dollar terms, leaving the country with a trade surplus of $51.4 billion.

In a shift, President Trump agreed to honor the “one China” policy during a phone call with China’s leader Xi Jinping. Trump angered Beijing in December by talking to the president of Taiwan and saying that the United States did not have to stick to the policy.

Trump held a news conference today with Japanese Prime Minister Shinzo Abe at the White House. The US and Japan account for nearly a third of the global economy. Trade in goods and services between the world’s No.1 and No. 3 economies was worth nearly $268 billion in 2015.

Trump vowed that the currencies of the US, China and Japan would soon be on “a level playing field.” Trump did not explain how the three countries would reach a level playing field, or what he meant by the phrase. Trump also said he will make a fresh policy announcement next week in response to the court ruling blocking his travel ban. Again, no details.

$21.6 billion. That’s how much an internal Department of Homeland Security report says Trump’s “wall” along the U.S.-Mexico border would cost. The report’s estimated price tag is much higher than a $12 billion figure cited by Trump during his campaign and the $15 billion estimate from top Republican leaders in Congress.

Meanwhile, the European Union is struggling with a familiar problem – Greece. The country could soon run out of cash and would not be able to make crucial debt repayments. Greece is currently on a third bailout program worth €86 billion euros ($92 billion); that bailout program still has more than a year to go, but the IMF is worried that Greece’s debt is not sustainable.

If indeed European creditors recognize next week that Greece has completed all the agreed measures for the second bailout review, then this would pave the way for new disbursements. With fresh funds, Greece should be in condition to meet deadline payments next summer and avoid a financial collapse.

But the view among creditors is that such a deal next week is “unlikely”. Even as Greece has shown some economic growth, 0.4% last year with 2.7% forecast for 2017, and the Greeks have managed to build a small budget surplus; the Greeks debt load continues to increase, yields on government bonds has climbed into double digits and debt has increased to an expected 183% of the country’s total economy from 159%.

And the main reason is that the Greeks are not eligible to participate in the European Central Bank’s Quantitative Easing program. And right now, the ECB is the only buyer of Euro bonds.

The IMF weighed in this week, publishing its analysis of the challenges to the Greek economy. The IMF says that in addition to needed reforms, European governments need to provide debt relief to Greece. The IMF analysis is that Greece represents a real problem without debt relief; Euro creditors believe they can present a unified front to break the deadlock. Eurozone governments, and especially Germany, are opposed to debt relief.

Today, Greece’s creditors called for more reforms in the form of more austerity measures. The additional austerity dose would hardly be accepted by the government led by Alexis Tsipras. The leftwing Greek leader promised not to impose further cuts or tax raises after almost seven years of painful measures adopted in exchange for the lenders’ money.

The Greeks have also opposed further pension adjustments, as it has adopted 11 cuts since 2010. There is a possibility of snap elections, which would add a new layer of uncertainty. And if things go wrong with Greece, Italy is next in line, with the second highest debt burden among Eurozone nations, plus a dangerously weakened banking system.

The Greek debt crisis seems like the never-ending economic story but that doesn’t mean the problem has been resolved. It doesn’t mean there is an imminent collapse, but consider this – Germany has been repatriating its gold. Germany has been bringing gold home from New York and Paris since 2013.

So far, 642 tons has been transferred. They just expedited a transfer of 330 tons stored with the New York Federal Reserve. They still have about 100 tons in a vault in Paris. Why the rush? The German central bank says it is bringing the gold home to help build public “trust and confidence.”

Sears Holdings reported a 10.3% drop in comparable store sales for the holiday quarter, and said it would cut debt and pension obligations by at least $1.5 billion this year. Sears also announced a new plan to cut costs by at least $1 billion in 2017 by reducing overhead, improving merchandise at its stores and through better inventory management.

Renault peddled SUVs to Europeans and it worked. The French car company’s 2016 profit surged 38% to $3.4 billion from the year before thanks to the popularity of its new SUVs among Europeans. CEO Carlos Ghosn said the automaker would be open to a merger with Nissan if the French government would sell its stake in Renault.

Sweden’s SAAB  has offered to build the world’s most modern fighter aircraft factory in India, it said on Friday, as it goes head-to-head with US rival Lockheed Martin to supply hundreds of locally produced planes to India’s military.

Danish wind turbine maker Vestas Wind Systems has jumped to the top of the U.S. wind market, overtaking General Electric in new capacity installed last year. Vestas, the world’s biggest wind turbine maker, supplied 43% of the 8.2 gigawatts of wind power capacity connected to the US power grid last year; GE supplied 42%.

The Galaxy S8 will be unveiled in New York next month, per the Wall Street Journal, and Samsung is ready to display a whole host of new features. While the physical home button will be stripped away and the fingerprint scanner moved to the back of the device, and only curved-screen versions will be released. The company will also showcase its new virtual assistant called Bixby, and possibly its recently trademarked “Samsung Hello.” And yes, it will have a headphone jack.

For many liquors, aging is the key to their distinct flavors. Brandy is no exception, with top-shelf labels spending years in casks. But chemists think they have discovered a shortcut—ultrasound. Spanish researchers blasted ultrasound through a barrel of brandy for 3 days and the results were close to 2 years of aging.

Now, if they can just figure out a way to reverse the aging process. Still, something to keep in mind as we head into the weekend –  if you are clever, you can get a lot done in just a couple of days.

Financial Review

The Mark Inside

Sinclair Noe — January 27, 2017

Podcast: Play in new window | Download (Duration: 12:08 — 5.6MB)

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DOW – 7 = 20,093
SPX – 1 = 2294
NAS + 5 = 5660
RUT – 5 = 1370
10 Y – .02 = 2.48%
OIL – .64 = 53.14
GOLD + 2.90 = 1192.20

Major market indices traded in a tight range today. The Nasdaq pulled out another record high close. Meanwhile the VIX, the volatility index closed at 10.52, a multi-year low, indicating a certain complacency among investors, not in all sectors for sure, but with regards to overall market risk.

Gross domestic product, the value of all goods and services produced, rose at a 1.9 percent annualized rate in the fourth quarter, following the prior quarter’s 3.5 percent rate of growth.

For the full year, the U.S. grew just 1.6%, down from a 2.6% clip in 2015; still, even if growth was a bit sluggish, it marks 7 straight years of growth. A wider trade deficit — a negative for GDP — was by far the biggest anchor in the fourth quarter. The economy would have topped 3% growth if the trade gap has basically been unchanged.

Consumers increased spending by a solid 2.5%, with strong purchases of big-ticket items such as new cars or computers. Businesses also ratcheted up overall spending, including the first increase in equipment purchases in five quarters.

Home builders boosted investment in new housing by just over 10%, marking the first advance in three quarters. Companies also stocked up more: the value of inventories jumped by $48.7 billion after barely any change in the spring and fall. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.

Today’s GDP report shows that there is still plenty of room for economic growth, and President Trump’s proposals for tax cuts and infrastructure spending could certainly bolster the economy in the short-term. But in economics, things tend to cut both ways. Expansionary fiscal policy would likely lead to a stronger dollar, which would harm US manufacturing.

We could also see a higher federal deficit. And then remember the Federal Reserve is standing by to make sure we maintain price stability; and even though the Fed is not expected to hike rates at their FOMC policy meeting next week, they anticipate 3 hikes this year, which would be much more likely in the face of fiscal accommodation.

Orders for long-lasting goods made in the U.S. fell in December for the second month in a row, largely because of a cutback in demand from the Pentagon. New orders for durable goods dropped 0.4% last month. Bookings for defense-related equipment, including jets and other major hardware, accounted for the unexpected decline. Orders were also weak for primary metals, fabricated parts and computers. One strong area: orders for new cars rose 2%.

Mexican President Enrique Pena Nieto scrapped a planned trip to meet with President Trump, who has repeatedly demanded that Mexico pay for a wall on the U.S. border. And then today, it was announced that Pena and Trump talked on the phone for about one hour but nothing new on a wall or how to pay for it.

White House spokesman Sean Spicer, in a not so internal monologue, told reporters Trump was considering a 20% tax on Mexican imports to pay for the wall’s construction; that was later corrected to be just one of a “buffet of options” on the table. Just a reminder, the US has a $68 billion trade deficit with Mexico and is our third largest trading partner.

Mexican billionaire Carlos Slim, who once opposed a Donald Trump presidency and later said it would be “very good for Mexico,” held a press conference today in Mexico City. Slim offered his services to help Pena negotiate with Trump and called on Mexicans from all political parties to unite behind President Pena in his discussions with Trump.

Slim says Trump’s plans to bring manufacturing jobs to the US would only result in higher prices for consumers. Slim is Mexico’s wealthiest man and one of the world’s richest people, with an empire that encompasses telecoms, mining, banking and construction.

Theresa May last night offered to help President Trump to prevent the West from being “eclipsed” by China as she urged him not to shirk his “obligation” to lead the world. The U.K. Prime Minister also hopes he can be an economic ally – after Britain’s divorce from Europe, she’ll need a trade deal with the US.

The pair met face-to-face today, making her the first foreign leader to step into Trump’s Oval Office, and then they held a very brief joint press conference. May said Trump had committed 100% to NATO. May said the UK was opposed to lifting sanctions on Russia. Trump said he believes in torture. They both said they thought they could have a friendly relationship.

The US is Britain’s biggest export destination after the EU, accounting for over 15% of the country’s exports. Last week, May confirmed that Britain would leave the EU’s single market and customs union, allowing it to sign trade agreements of its own after the process of exit is complete.

The process includes the “Brexit bill,” which Parliament must approve to empower the prime minister to start the two-year negotiation period for Britain to leave the 28-nation bloc. The EU is hanging tough on not starting any sort of Brexit talks until Britain pulls the Article 50 trigger. The EU treaty stipulates that departure happens in 24 months irrespective of whether an exodus includes neat and clean trade bills.

Pretty much everyone agrees that a Brexit by default rather than a negotiated Brexit would be worse for the UK. And while there is a mechanism for extension, it requires unanimous approval of the 27 remaining states. The UK is so widely disliked in the EU that no one expects an extension to be granted.

So, the importance of a UK-US trade deal becomes even more important, even though it can’t technically be negotiated just yet. At the very least, it means Prime Minister May is negotiating from a position of weakness.

Trump has scheduled a phone conversation with Russian President Vladimir Putin and German Chancellor Angela Merkel on Saturday – not a three-way call. Trump’s PR team has been laying the groundwork for possibly removing sanctions against Russia, imposed after Russia invaded Ukraine and annexed Crimea.  Today, Arizona Senator John McCain said easing sanctions was a “reckless course.”

Alphabet’s revenue beat analysts’ estimates, but its profits per share missed expectations due to the company paying a much larger tax rate than anticipated. Alphabet, along with Microsoft and Intel, which also reported results yesterday, continue to show that cloud services remain the biggest growth area in tech. Microsoft shares hit an all-time high in trading today, and market cap topped $500 billion for the first time in 17 years. Apple, Amazon, and Facebook report earnings next week.

Starbucks slashed its 2017 revenue forecast. Starbucks’ first-quarter results were mostly in line with estimates but said it saw 2017 revenue growth of 8% to 10%, down from its previous estimate of a double-digit rise.

Chevron missed profit and revenue estimates for the fourth quarter. CEO John Watson said the earnings reflect the low oil and gas prices during the past year. The company cut capital and operating costs by $14 billion in 2016.

In Europe, UBS Group kicked off a run of bank earnings releases this morning saying all its money-management units saw net redemptions in the last quarter. UBS investors pulled out $15.2 billion in the fourth quarter and margins at its wealth management business declined for a third straight quarter, even as rising stock markets and higher interest rates in the U.S. lifted earnings.

Sears tumbled more than 9% to under $8 per share on Thursday, sending the company’s stock to its lowest price since its merger with Kmart back in 2004. The decline piled on to a 7% drop in Sears’ shares a day earlier, when Fitch Ratings called attention to the chain’s “significant” cash burn. The company also ended up at the top of a Bloomberg Intelligence list of retailers with the highest risk of bankruptcy.

Iranian supertankers are sailing to Europe for the first time since sanctions were eased last year as one of the world’s biggest crude shippers moves to step up deliveries. While European refiners have been taking small cargoes of Iranian oil, these are the first vessels operated by the National Iranian Tanker Company rather than independent shippers. Each of the very large crude carriers can carry more than 2 million barrels.

Lunar New Year celebrations are underway. Markets in China and across much of Asia will be shuttered over the next week in celebration of the Lunar New Year.

Financial Review

Immovable v. Unstoppable

Sinclair Noe — January 4, 2017

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

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DOW + 60 = 19,942
SPX + 12 = 2270
NAS + 47 = 5477
RUT + 30 = 1387
10 Y un = 2.45%
OIL + 1.02 = 54.31
GOLD + 4.80 = 1164.10

What happens when an unstoppable force meets an immovable object? The Federal Reserve released the minutes from its December meeting; that’s the meeting where the Fed raised interest rates for only the second time in a decade.

Almost all Federal Reserve policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration and many were eyeing faster interest rate increases to counteract.

Trump’s promises of tax cuts, infrastructure spending and deregulation could boost inflation and might set the stage for a confrontation between a president seeking to boost economic growth and the Fed, which is tasked with keeping the economy from overheating. The minutes showed policymakers might signal an even more aggressive path of rate increases if inflationary pressures rose.

At the same time, Fed policymakers “emphasized their considerable uncertainty” about future economic policy changes. The Fed expects Trump’s election might result in slightly faster economic growth over the next several years, but it won’t happen right away and they see little chance of the boom times Trump has promised – so business as usual; which is a trajectory of 3 rates hikes in 2017, perhaps the most hawkish FOMC minutes in the past few years.

As for the unstoppable force versus immovable object debate, relativity proves there is no such thing as an immovable object and since we do not have a source of infinite energy to stop an object, there are no unstoppable objects. So, what happens when two massively infinite unacceleratable objects approach each other on a collision course and neither changes its velocity? They must pass right through each other with no effect on each other at all.

Short-term interest rate futures rose slightly after the release of the minutes but not enough to suggest altered expectations for the central bank’s rate hike path this year. The dollar backed off 14-year highs.

The rate banks charge each other to borrow dollars for three months rose above 1 percent on Wednesday for the first time since May 2009. The London interbank offered rate, or LIBOR, is a global rate benchmark for $350 trillion worth of financial products worldwide.

Mortgage interest rates came down slightly to end the year, but not enough. Mortgage application volume plunged 12 percent for last week, seasonally adjusted, from two weeks earlier. The Mortgage Bankers Association said mortgage application volume typically drops sharply over the holidays.

However, this year, as mortgage rates continued their upward climb reaching the highest levels in more than two years, overall application volume fell even more than the holiday slowdown would suggest. The average interest rate for conforming 30-year fixed-rate mortgages decreased to 4.39 percent from 4.45 percent, plus points.

Meanwhile, President Obama exhorted fellow Democrats to preserve Obamacare, as Republicans launched their bid to scrap it in what Vice President-elect Mike Pence called the “first order of business” of Donald Trump’s administration.

Actually, it would be the second order of business for the 115^th Congress, following a failed attempt to gut the ethics office. Pence met Republican lawmakers to plot the path forward on scuttling the law. Pence said Trump will work in concert with congressional leaders for a “smooth transition to a market-based healthcare reform system” through legislative and executive action.

During two news conferences, Pence, Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell offered few details on what a Republican-backed replacement for Obamacare would look like. And there’s the rub. Any attempt to repeal Obamacare will need a replacement stapled to that bill.

Auto sales for December trickled in through the trading day. US auto sales rose for an unprecedented seventh straight year in 2016, topping the record set in 2015. In December, sales rose at a seasonally adjusted annual rate of 18.4 million according to Autodata.

But the auto sales boom could be leveling off. Some automakers are trimming production because excess cars and trucks are sitting on dealer lots. Car prices are already at record levels. That is partly because buyers are shifting from less expensive cars to crossovers, SUVs and trucks, and partly because of demand for the latest safety and tech features, such as automatic braking and internet.

There is also growing concern about rising default rates on car loans, particularly among less creditworthy buyers. If lenders pull back, that will hurt car sales.

GM led year-on-year growth in December with an increase by 10%. GM said the average transaction price for its vehicles rose $740 from November to $36,386 in December, reflecting in part strong sales of large SUVs.

Ford said it sold 87,512 F-Series pickups in December, the lineup’s best overall sales month in 11 years. The F-series was the best-selling model line in the United States last year, for the 40th year in a row. Ford sales overall were up just 0.1% in December.

Fiat Chrysler sales slid 10%. Nissan sales rose 10%. Honda sales were up 6.4%. Toyota up 2%. Volkswagen posted a 20% gain in sales.

Tesla fell short of its goal for 80,000 auto deliveries in 2016. The electric car manufacturer delivered 76,230 cars in 2016. That’s still far more than the roughly 50,000 cars it delivered a year earlier. Tesla may face fresh competition; Faraday Future unveiled its “FF 91”, which it describes as the most technologically advanced luxury electric SUV. The car is expected to retail for $180,000 and you can reserve one with a $5,000 down payment.

Can you name the best-selling car in Sweden? (Volvo?) Wrong! For the first time in 54 years, the best-selling car in Sweden is not a Volvo. The Volkswagen Golf knocked Volvo’s most popular luxury models off the throne in 2016. Three of the top five models on the sales ranking were from Volvo, and the brand accounted for around one fifth of all vehicles sold in Sweden last year. Sweden is Volvo’s second biggest market after China.

Amazon.com delivered a record more than 2 billion items for sellers worldwide in 2016. Items shipped by Fulfillment by Amazon rose 50% in the holiday season, while deliveries to prime members numbered in the millions. The online retailer said active sellers using the Fulfillment by Amazon service increased more than 70% in 2016, and units shipped grew more than 80% outside the U.S. The number of sellers that reached $100,000 in sales rose by 30%. The company estimates that sellers have created more than 600,000 new jobs outside of Amazon.

Last week we reported that Sears had told employees to expect more store closures. Today Sears went public with the details. The company will shut down a total of 108 Kmart stores and 42 Sears stores by April – 150 stores total, although apparently, none in Arizona.

In the most recent quarter, Sears’ revenue fell 13%, to $5 billion, and its losses widened to $748 million from $454 million in the period last year. Same-store sales dropped 7.4%, including a 10% decrease at Sears stores and a 4.4% decrease at Kmart stores.

Both Kohl’s and Macy’s reported lower sales during November and December 2016 than the year before. Both retailers announced sales declines of 2.1% from the same two months in 2015. Additionally, both Kohl’s and Macy’s said that sales at owned and operated stores were down by 2.7% this holiday season. Following the news, Kohl’s was down over 10.5%, while Macy’s was down 5.5%.

A District judge in Texas almost halved the award in a December jury verdict that ordered Johnson & Johnson and its DePuy Orthopaedics unit to pay more than $1 billion to plaintiffs in six lawsuits who said they were injured by DePuy’s Pinnacle hip implants.

Around $500 million of punitive damages would be cut from the more than $1 billion awarded to the plaintiffs who are California residents that were implanted with the hip devices and experienced tissue death, bone erosion and other injuries they attributed to design flaws.

DCP Midstream Partners said it had acquired the assets of a joint venture between Phillips 66 and Spectra Energy, to create the largest natural gas liquids producer and gas processor in the United States. The combined company, which has an enterprise value of $11 billion, will be renamed DCP Midstream LP and will trade with the ticker symbol “DCP”.

A former Barclays trader pleaded guilty to US charges arising from a global investigation into the manipulation of foreign-exchange prices at major banks. Jason Katz’ plea came after Barclays and three other banks last year pleaded guilty to conspiring to manipulate currency prices. Barclays agreed to pay $2.4 billion to resolve various related U.S. and UK probes. Katz is the first person to admit criminal wrongdoing about the Forex rigging case.

According to a report quietly released by the U.S. Treasury’s Office of Financial Research “U.S. global systemically important banks (G-SIBs) have more than $2 trillion in total exposures to Europe. Roughly half of those exposures are off-balance-sheet…U.S. G-SIBs have sold more than $800 billion notional in credit derivatives referencing entities domiciled in the EU.”

When a Wall Street bank buys a credit derivative, it is buying protection against a default on its debts by the referenced entity like a European bank or European corporation. But when a Wall Street bank sells credit derivative protection, it is on the hook for the losses if the referenced entity defaults.

Regulators will not release to the public the specifics on which Wall Street banks are selling protection on which European banks. The OFR report also indicates that regulators still do not have access to adequate data from the biggest banks and insurers to assess the dangers in real time.