Financial Review

Transitioning

Sinclair Noe — November 10, 2016

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DOW + 218 = 18,807
SPX + 4 = 2167
NAS – 42 – 5208
10 Y + .04 = 2.12%
OIL – .91 = 44.36
GOLD – 19.20 = 1260.00

The Dow Jones industrial average hit a new all-time intraday high and a record high close. The Dow took out the old high from mid-August. Nearly every major tech stock was down. Apple, Google, Microsoft, and Amazon are all in the red, despite the broader market being up. Banks moved higher.

The Trump Transition website posted a statement: “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

Treasury yields haven’t been this high since the beginning of the year. Aggressive selling on yesterday ran Treasury yields up by more than 20 basis points at the long end of the curve and to their highest levels since January. That selling has carried over into today’s session with the 10-year yield up another 4 basis points at 2.12%. If Trump delivers on his pledge to give the U.S. economy a growth and inflationary shot in the arm from a multi-trillion-dollar package of tax cuts and infrastructure spending, the impact will likely be felt far beyond American borders. Bonds hate inflation.

The rise in the 30-year yield has been remarkable. It is up more than 30 basis points this week, on course for its biggest weekly rise since 2009 and among the biggest of the last three decades. This has led to a so-called “steepening” of the yield curve, where the gap between short and longer-dated yields widens. These shifts across global interest rate markets in response to the changing inflation outlook are being mirrored in commodity and equity markets too. Copper surged more than 5 percent to a 16-month high. Europe’s constructions and materials index hit a nine-year high.

St. Louis Federal Reserve President James Bullard today repeated his call that a single interest rate increase would be adequate for the foreseeable future. Bullard did not mention the U.S. election results or any possible effect on volatility or the economic outlook. In the current environment of low growth and low inflation, Bullard now feels a single rate increase would be appropriate, and the Fed could then remain on hold until growth, inflation, productivity and other aspects of the economy switch to a new “regime.”

The dollar index, which measures the U.S. currency’s performance against a basket of currencies, rose 0.3 percent to 98.8. The Mexican peso plunged 13% to the lowest levels in 2 decades, then pared losses, but officials held back from acting to support the currency. While Mexico’s Foreign Minister reiterated that Mexico will not pay for Trump’s proposed border wall, President Enrique Pena Nieto did call to congratulate him and agreed to meet before he takes office.

The election results sparked protests in several cities; marchers took to the streets in Philadelphia, New York, Chicago, Seattle, Oakland, and even Tempe; a dozen cities in total. More protests are planned.

Nevertheless, the transition has begun. Donald Trump met Barack Obama at the White House this morning to discuss the transition of power. The two men were scheduled to talk for about 10 minutes but ended up speaking, cordially, with each other for an hour and a half.  Both were vague on details about what was discussed.

After the meeting, Obama said, “My number one priority in the coming two months is trying to facilitate a transition that ensures our president-elect is successful.” At the end of the meeting, Trump called Obama a “very good man.” Also, as part of the transition, Pence met with Biden; Melania met with Michelle. Trump also met with Vice President-elect Mike Pence and Speaker Paul Ryan to discuss how they can hit the ground running in a Trump administration. Kris Kobach, the Kansas secretary of state and an ardent opponent of immigration, has been added to Mr. Trump’s transition team.

Republican congressional leaders have confirmed what might seem obvious – Obama’s far-reaching trade agreement with 11 Pacific Rim nations is dead. The Senate majority leader, Senator Mitch McConnell of Kentucky, said flat-out “No” when reporters asked if the pending Trans-Pacific Partnership,  the largest regional trade deal in history, would be considered in the lame duck Congress that convenes next week.

Speaking at a conference in New York, Mark Bertolini, Aetna’s chairman and chief executive said, “We started with a fresh piece of paper yesterday — we had no idea how to approach it.” When Aetna ran through post-election expectations, the idea that Trump would win the presidency and that Republicans would control both chambers of Congress seemed so implausible that it was not even in play. Bertolini says the health care firm is now working on the assumption that Obamacare will be repealed.

Still, he thinks a wipeout of the Affordable Care Act is unlikely. Twenty million people gained health care coverage through the law, and Bertolini said, “You can’t put them out on the street without insurance.” You may remember that this is the same Aetna insurance company that earlier this year sharply reduced its participation in the public marketplaces, pulling out of two-thirds of the counties in which it sold individual insurance. If only there was some way to make the system less reliant on corporations’ natural altruistic tendencies.

Obamacare enrollment had its best day yet on Wednesday with more than 100,000 enrollments. More than half a million people applied for coverage over the first four days, but not all of them followed through and selected a plan. Open enrollment started Nov. 1 and lasts until the end of January, or at least until January 20.

Pfizer is evaluating a potential sale or spinoff of its consumer health division that could value the unit at as much as $14 billion. Reuters reports an exit from the business, which includes Chapstick and Advil, would be one of the company’s biggest corporate moves since abandoning a $160 billion deal to buy Allergan earlier this year.

More spinoffs? Siemens is planning a public listing of its $15 billion healthcare business to refocus on its core strengths of electrification, automation and digitization. The German group announced the move as it reported fourth-quarter profits that comfortably beat expectations, but issued a cautious outlook for the current fiscal year as orders dropped amid geopolitical uncertainty.

ConocoPhillips, the largest U.S. independent oil producer, will sell up to $8 billion in natural gas assets and trim its capital budget by 4 percent next year. Conoco carries a $28.7 billion debt load.

Photoshop software maker Adobe Systems said it would buy advertising company TubeMogul for about $540 million, net of debt and cash, giving it a bigger presence in the rapidly growing online video market. Adobe’s $14 per share cash offer represents an 82.5 percent premium to TubeMogul’s Wednesday close.

Goldman Sachs is considering shifting some of its assets and operations from London to Frankfurt, according to Reuters, as it tries to secure access to the EU market when Britain leaves the bloc. Coming under the European Central Bank’s jurisdiction should allow it to continue selling its services to clients across the Eurozone and wider EU post-Brexit.

Navinder Sarao, the British financial trader accused of causing the 2010 “Flash Crash,” has become the second person convicted of criminally spoofing after pleading guilty in a Chicago court. Spoofing is rapidly placing orders with the intent to cancel them before they trade to trick other investors by creating the illusion of demand.

Shake Shack beats. The burger chain earned $0.15 a share on revenue of $74 million and said it expected full-year same-shack sales growth of 2% to 3%.

Shares of Taser up 13% on shockingly good earnings. Taser reported record revenue — up 43 percent from last year.  Scottsdale based Taser reported net income of $3.8 million, or 7 cents per share, up from $1.5 million or 3 cents in the year ago period.

Mylan whiffs. The maker of the EpiPen announced a net loss of $119 million for the third quarter because of a proposed $465 million settlement with the US Department of Justice and other government agencies.

Some Yahoo employees were aware that a state-sponsored hacker had breached its network shortly after a massive hack in 2014, casting a larger shadow over Verizon’s $4.8 billion deal to acquire the company. Yahoo said in September that an investigation had uncovered the theft of personal information associated with at least a half billion accounts, the largest data breach in history.

The oil market risks running another surplus in 2017 without an output cut from OPEC, according to the IEA’s monthly oil market report, which warned of “another year of relentless global supply growth like that seen in 2016.” Global supply rose by 800,000 barrels per day in October, led by record OPEC production and rising output from non-OPEC members like Russia, Brazil, Canada and Kazakhstan. The IEA also raised its forecast for non-OPEC supply by 111,000 barrels a day, with the increase led by Russian production.

The number of Americans filing for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 254,000 for the week ended Nov. 5. It was the 88th consecutive week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970.

The UK Economy Is Slowing Down After The Brexit Vote

Financial Review

Un-Zapped!

Sinclair Noe — August 10, 2016

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DOW – 37 = 18,495
SPX – 6 = 2175
NAS – 20 = 5204
10 Y – .04 = 1.51%
OIL – 1.28 = 41.49
GOLD + 5.20 = 1346.80

Job openings increased in June, and more people were hired. The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed there were 5.62 million openings, up from 5.51 million in May, but still a bit below the all-time high of 5.84 notched in April.

There were 5.13 million people hired during the month, also an increase from the 5.05 million in May. Slightly fewer people quit voluntarily, but the 2.91 million quits in June is nearly double the levels of the worst of the recession. Quits are tracked as a measure of worker confidence in job prospects.

The federal government’s budget deficit is up 10% so far this fiscal year. The government’s shortfall for the first 10 months of the year was $514 billion, up from $466 billion in the same period a year ago.

Lower-than-expected revenues recently led the Congressional Budget Office to increase its estimate of the 2016 deficit to $590 billion, up from $534 billion. That would be about $150 billion more than last year’s deficit. Spending is up only about 2%. The problem is gross corporate receipts have dropped 12% so far this budget year.

The Bank of England revived its crisis-era bond-buying program last week as part of a package of measures to support the economy in the wake of voters’ decision to exit the European Union. It said it would buy $78 billion of British government bonds, or gilts, over the next six months, a policy known as quantitative easing. The aim is to drive down long-term interest rates and prod investors into riskier assets, making borrowing cheaper and easier for businesses and households. Just one problem – they can’t find enough bonds to buy, as yield-hungry pension funds and insurers refused offers to sell gilts to the central bank. The 10- year gilt dropped to a record low yield of 0.54%.

The UK economy is slowing down after the Brexit vote. That’s according to the latest numbers from the National Institute of Economic and Social Research, which shows growth in the UK was 0.3% in the three months up to the end of July, compared with 0.6% growth in the three months to the end of June.

Oil prices started the session moving higher but it didn’t last. The American Petroleum Institute issued a report showing a build of 2.1 million barrels of crude but it also reported a drop of 3.9 million barrels in gasoline, much larger than analysts had forecast.  Saudi production has reached 10.67 million barrels per day, up 120,000 bpd on the prior month. While it is not unusual to see Saudi production ramping up in the summer given higher demand for crude to be used for power generation, what is unusual is that production is now at a record high, above the peak seen last summer.

Also comes word that next month’s scheduled OPEC meeting in Algeria to discuss a freeze on production may be dead in the water. Oman announced it would not participate in a meeting. Finally, despite draws to both gasoline and distillates from today’s weekly EIA inventory report, builds elsewhere have lifted total U.S. crude and product inventories to a new record at over 1.39 billion barrels. This number has risen by 200 million barrels in the last 17 months. Storage tanks are filled to the brim and summer driving season is coming to a close.

One reason why the Saudis have been pumping so much oil is to try to drive US drillers in the shale fields out of business. It’s working. Chesapeake Energy agreed to give away its Barnett Shale holdings to a private-equity backed operator, exiting the birthplace of the shale revolution to escape almost $2 billion in onerous pipeline contracts. Chesapeake will convey all interests in the Barnett region in North Texas. Quitting the gas fields will slash Chesapeake’s shipping and processing costs by $715 million between now and the end of 2017 and eliminate a total of $1.9 billion in long-term pipeline agreements. Shares jumped more than 6 percent.

Brazil’s Senate voted to move the impeachment trial against suspended President Dilma Rousseff to its final phase, as expected, setting the stage for a final vote that could oust her later in August, after the end of the Olympic Games in Rio de Janeiro.

Rousseff is accused of violating budget laws by delaying payments from the government to state-controlled banks, in effect forcing the lenders to provide short-term loans to her administration. She has denied any wrongdoing. Acting President Michel Temer, who was elected as Rousseff’s vice president, would complete the more than two years remaining in her term if she is convicted.

Shake Shack shares fell more than 8% in after-hours trading as the company reported slower same-restaurant sales growth as compared with a year ago.

Hamburger chain Wendy’s reported profit and revenue figures that beat analyst expectations, but those results were offset by 0.4% same-restaurant-sales growth, which fell below the consensus. Wendy’s management blamed a focus on health and wellness is keeping some would-be customers away from fast-food restaurants. Others might be staying away because of … the presidential election.

Uncertainty surrounding the election was one reason business stumbled during the second quarter, adding to the list of areas that claim the Clinton-Trump face-off has gotten people too nervous to spend their money. Todd Penegor, chief executive officer at Wendy’s said, “[W]hen a consumer is a little uncertain around their future and really trying to figure out what this election cycle really means to them, they’re not as zapped to spend as freely as they might have been a couple of quarters ago.”

Sure that sounds like a lame excuse, but really, be honest, haven’t you felt a little “un-zapped” lately?

SolarCity’s loss widened. The company lost $0.56 a share, more than double the $0.23 loss from a year ago. Taking into account onetime adjustments, non-GAAP, SolarCity’s loss grew to $2.32, but that was ahead of the $2.44 loss that analysts were expecting. Revenue surged 81% to $185 million, easily beating the Wall Street consensus of $146 million.

SunPower, the second-largest US solar panel producer told analysts it expects to lose as much as $175 million this year, a shift from May when it expected to earn as much as $50 million. The shares plunged the most in more than seven years. SunPower said demand for utility-scale solar projects is slowing, while competition in the panel market is dragging down prices. The guidance bombshell is leaving a crater in solar shares in today’s trading.

You remember the scandal involving VW? As part of its penalties for equipping hundreds of thousands of its diesel vehicles sold in the United States with software designed to cheat tailpipe emissions tests, VW is required to invest $2 billion in clean car infrastructure, such as a network of electric car charging stations. Now, 28 Electric vehicle charging companies are calling for independent oversight; they want to make sure VW does not gain an edge in the car charging space. While the companies called the money a potential “game changer,” they worry that if it is misspent, it could hurt competition.

What’s the fastest growing devices when it comes to wireless connectivity? Is it tablets, smartphones, or computers? Wrong. It’s cars and other stuff. Internet-connected cars and other everyday products have become the fastest-growing part of the US wireless industry. AT&T dominated revenue in connected devices, with the company connecting cars to its network at twice the pace of tablets.

AT&T should reach 10 million connected car subscriptions soon. For carriers, the Internet of Things – a world in which everything from garage doors to cars to light bulbs connect to the web – has become a major source of revenue growth at a time when phone-related business has slackened. Verizon has been a distant second to AT&T in connected cars, but is mounting a big entry in a related area – connected trucks. Last week, the company agreed to buy Fleetmatics for $2.2 billion.

You know the company Alphabet?  You certainly know its subsidiary, Google? Alphabet has a market cap of $539 billion; it is one of the biggest companies in the world, bigger than some nations. It is one-year-old-today.  The restructuring was supposed to allow Google to focus on the things it knows how to do well and make money on—search, advertising, Chrome, YouTube, the Android operating system—and shifted more pie-in-the-sky projects, like trying to cure death, build robots, and beam the internet from weather balloons, into a new division called “Other Bets.”

One year later, Google is still growing—its revenue last quarter was $21.3 billion, up 21% from a year earlier—but similar signs of life have not been seen in Other Bets. In the last four quarters, it’s lost over $3.7 billion, and only generated roughly $500 million in revenue, which works out to less than 1% of Alphabet’s quarterly sales. Oh well, it’s still young.

Delta Air Lines tried to return to normal operations after a power outage hit its computer systems, causing the cancellation of more than 1,600 flights over two days. But they still had about 300 cancellations today. Most of Wednesday’s delays and cancellations are the result of flight crews being displaced or running up against maximum allowed work hours. According to Georgia Power, Delta’s problems arose after a switchgear, which helps control and switch power flows like a circuit breaker in a home, malfunctioned for reasons that were not immediately clear. In other words, the backup plan failed, and they still don’t know why.

FINANCIAL REVIEW

One Foot on the Gas, One Foot on the Brake

Sinclair Noe — January 30, 2015

 

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

DOW – 251 = 17,164
SPX – 26 = 1994
NAS – 48 = 4635
10 YR YLD – .08 = 1.67%
OIL + 3.25 = 47.78
GOLD + 25.00 = 1284.10
SILV + .31 = 17.33

GDP growth slows. The Commerce Department reports fourth quarter gross domestic product grew by 2.6%, down from a very strong 5% growth rate in the third quarter. The results were below consensus estimates of 3% growth. For all of 2014, the economy grew 2.4% compared to 2.2% in 2013.

Consumer spending advanced at a 4.3% pace in the fourth quarter – the fastest since the first quarter of 2006 and an acceleration from the third quarter’s 3.2% pace. The final read on the University of Michigan’s consumer sentiment index was 98.1, down a tick from the 98.2 in the preliminary estimate. That’s still above the 93.6 mark in December and the best reading in 11 years.

Just as consumers were stepping on the gas, businesses were tapping the brakes. Business spending on equipment fell at a 1.9% rate. It was the largest contraction since the second quarter of 2009. The fourth-quarter weakness could reflect cuts or delays to investment projects in the oil industry. But it could also be payback after two back-to-back quarters of robust gains.

A wider trade deficit, as slower global growth curbed exports and solid domestic demand sucked in imports, subtracted 1.02 percentage point from GDP growth in the fourth quarter.

That’s how it works when the rest of the world is moving to QE. Worldwide central bank stimulus now totals over $10 trillion dollars. The new buzz phrase is currency wars, or you could just call it competitive devaluation. Countries are competing against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a currency declines, so too does the price of exports from the country and imports become more expensive. This allows domestic industry and employment to expand.

The downside of this is that price increases for imports can harm citizens’ purchasing power. A policy of competitive devaluation can also result in retaliatory action by other countries, which in turn, can lead to a general decline in international trade. For the US, the problem is that a stronger dollar is slowing GDP growth even as we see the benefits of lower oil prices to counter tougher export markets.

Inflation remains muted in the fourth quarter. In a separate report the Labor Department reports the personal consumption expenditures (PCE) price index fell at a 0.5% rate, the weakest reading since the first quarter of 2009. Excluding food and energy, prices rose at a 1.1% pace, the slowest since the second quarter of 2013. The strong pace of consumer spending in the fourth quarter was overshadowed by a drop in capital expenditure. The PCE is the inflation gauge used by the Federal Reserve, and it is telling the Fed not to rush into raising rates.

In Europe – Deflation. Eurostat today reported the largest decline in consumer prices in the eurozone since July 2009. Consumer prices were 0.6% lower than in January 2014, having fallen 0.2% on an annual basis in December.

European stocks slipped today on the deflation report, but the region’s equity benchmark was still on track for its best monthly performance in more than three years. The Stoxx Europe 600 is up 7.2% for the month of January, which would be its best since October 2011.

Russia’s central bank cut its key interest rate to 15% this morning, after announcing a surprise hike from 10.5% to 17% in December to shore up the weakening ruble.

European Union foreign ministers have extended existing sanctions against Russia, but held off on tighter economic measures for now. Last year’s travel bans and asset freezes will now continue until September. Any sanction require a unanimous vote by all the EU countries. There was some question about whether Greece would approve sanctions, but much of that was misreported. Greece did not oppose sanctions; the EU just never asked the Greeks, and the Greeks did not appreciate being neglected in that manner. It was really symptomatic of how the EU has dealt with Greece for several years now.

Meanwhile, Greece’s new, leftist government opened talks on its bailout with European partners today by flatly refusing to extend the program or to cooperate with the international inspectors overseeing it. Prime Minister Alexis Tsipras has repeatedly said he wants to keep Greece in the euro but he has also made clear he will not back away from election campaign pledges to roll back the terms of the bailout.

A funny thing happened today in the oil market, prices went up, and it was a fast move. There was a big drop in the number of US oil rigs. Baker Hughes reports petroleum producers took 94 oil-drilling rigs off the market in the United States this week as sub-$50 oil continued to wreak havoc on the oil industry. Prices jumped and then many traders probably decided to cover short positions on the last trading day of the month. This week’s drop left 1,223 oil units up, the lowest number in three years. It was the biggest one-week decline for oil rigs since 1987. That year, the oil industry had faced another oil bust that left hundreds of rigs idle or repossessed by banks, which sold them for scrap.

Earlier today, the Commerce Department reported investment in drilling rigs and wells climbed at an 8.9% pace in the fourth quarter after an 8.3% increase from July through September. Prices were going down in the fourth quarter and domestic oil producers were shrugging and pumping more. At least until just recently.

By the way, if you were wondering what lower oil prices mean for renewables, the quick answer is not much. Oil is for cars; renewables are for electricity. The two don’t really compete. The biggest limit to solar installations is the availability of panels. And even as gas prices have dropped, the price for electricity continues to go up. And that is the advantage of solar; as time passes, the efficiency of solar power increases and prices fall. It’s a technology, not a fuel.

And it would be crazy to believe oil prices will stay this low forever. The history of oil prices follows a golden rule: What goes down must come up. Goldman Sachs identified almost $1 trillion in investments in future oil projects that are no longer profitable with oil under $70 a barrel. American drillers are idling rigs faster than they have since 1991. Eventually, supply will shrink and prices will rise again.
Shares of solar and wind companies have been pulled down with oil prices. Still, global investment in clean energy increased 16% last year, to $310 billion. Fossil-fuel subsidies outpace renewable-energy subsidies by a factor of 6 to 1, and this represents a strain on government budgets, and not just here in the US. Reducing the subsidy gap is one of the cheapest ways to increase fuel efficiency and speed up the switch to cleaner energy.

And then that pesky problem of climate change isn’t going away. The U.S. and China reached a historic deal in November to rein in greenhouse gases. Pope Francis is preparing a papal encyclical on climate change, a letter to the world’s bishops that will formalize the church’s moral position on the issue for 1.2 billion Catholics.

With today’s move, oil prices are up 5.8% for the week, but still down 9.4% for the month.

For the week, the Dow was down 2.8%, the S&P was down 2.8% and the Nasdaq down 2.6%. For the month, the Dow was down 3.6%, the S&P fell 3.1% and the Nasdaq was off 2.1%. January marked the worst monthly performance for both the Dow and S&P since January 2014.The Dow has now dropped under support at 17,200 and the S&P has dropped under 2000.

Do you want to know how stocks might perform this year? A widely followed market theory, the January barometer, claims that as January goes, so goes the year. It worked two years ago; January 2013 was a positive month for stock prices, up 7%, and the market went higher for the year by 30%. January 2014, saw stock prices drop by 4%, and it didn’t work – prices were up last year by a little over 11%.

Interestingly enough, while an up January is generally bullish for stocks, a down January is not a reliable predictor of a weak year overall. In ten out of twenty-four weak January years, the stock market actually ended higher, often by a very substantial amount. Indeed, this has happened four times in the last decade alone.

Visa announced an 11.5% increase in profit during the quarter, as a strengthening U.S. job market and cheaper gasoline prices encouraged people to spend. Beating both top and bottom line estimates, net income rose to $1.57B from $1.41B, a year earlier. Visa also announced a four-for-one stock split, cutting its weight in the Dow from 9% to 2.5%.
(Here’s a little quiz. Q: Now that the weighting for Visa is dropping, which Dow Industrial stock has the highest price weighting? A: Goldman Sachs.) (Goldman Sachs and Visa both entered the Dow in September 2013, when the average was last reshuffled. Visa rallied 25% since it joined the gauge on Sept. 20, 2013, while Goldman Sachs gained 3.7%, compared with Dow’s 13% advance. So, Goldman has the highest weighting, due largely to underperformance.)

Shake Shack’s initial public offering priced well above expectations at $21 apiece, and in its first day of trading, the burger chain more than doubled to $48. Underwriters had set an expected price range of $17-$19 per share, up from an initial $14-$16 due to strong demand. At the IPO price, Shake Shack boasted a valuation of about $746 million. Following today’s gain, the market value is more than $1.7 billion. Shake Shack’s debut comes two days after a CEO change at McDonald’s Corp., which is mired in its worst US sales slump in more than a decade.
Next week brings more earnings reports including a slew of energy companies. Monday, we’ll get a report from the Institute for Supply Management. Auto sales are coming out on Tuesday. Next Friday we have the monthly jobs report.