Financial Review

Go Figure

Sinclair Noe — February 8, 2017

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DOW – 35 = 20,054
SPX + 1 = 2294
NAS + 8 = 5682
RUT – 2 = 1358
10 Y – .04 = 2.35%
OIL + .19 = 52.97
GOLD + 8.10 = 1242.50

Another record high for the Nasdaq Composite, its 12th all-time close of 2017.

The American Petroleum Institute reported crude supplies rose by 14.2 million barrels last week, undermining OPEC’s efforts to re-balance global markets. The Energy Information Administration said that the U.S. will pump the most crude next year since 1970, as OPEC cuts lift prices and benefit domestic producers.

And in its weekly report this morning, the EIA reported a larger-than-expected increase in crude-oil supplies—their fifth weekly rise in a row and the second-biggest on record, based on EIA data going back to 1982.

Crude inventories climbed by 13.8 million barrels in domestic crude-oil supplies for the week ended Feb. 3. Weekly crude stockpiles haven’t climbed by this much since the week ended Oct. 28. Crude oil prices reversed an earlier loss and eked out a gain on the day. Go figure. Best guess is that the report also showed gasoline supplies fell by 900,000 barrels. Sorry, but that’s about the best excuse I can come up with.

Intel will invest $7 billion to build a new chip factory in Arizona. Brian Krzanich (pronounced Krah-ZAN-nitch – you're welcome) the CEO of Intel says that tax cuts and deregulatory policies pushed by President Trump prompted the company to move forward with its plans to complete the Fab 42 plant.

The completion of Fab 42 in 3 to 4 years will directly create approximately 3,000 high-tech, high-wage Intel jobs for process engineers, equipment technicians, and facilities-support engineers and technicians who will work at the site. Combined with the indirect impact on businesses that will help support the factory’s operations, Fab 42 is expected to create more than 10,000 total long-term jobs in Arizona.

The 7-nanometer semiconductor manufacturing process targeted for Fab 42 will be the most advanced semiconductor process technology used in the world.

Japanese display maker Sharp Corp may start building a $7 billion plant in the United States in the first half of 2017, taking the lead on a project initially outlined by its Taiwanese parent Foxconn. Japanese Prime Minister Shinzo Abe is scheduled to meet President Trump in Florida this weekend. Abe will reportedly unveil a package of investments to create as many as 700,000 US jobs. The investment will be by a Japanese consortium that will also include manufacturing equipment makers.

Britain’s House of Commons gave its final approval Wednesday to a bill authorizing the government to start exit talks with the European Union, despite fears by opposition lawmakers that the U.K. is setting out on the rocky path to Brexit with a sketchy road map. The bill now goes to the House of Lords, which has the power to delay — but not to derail — the legislation; it should become law within weeks.

Volkswagen has launched a U.S. subsidiary designed to oversee $2 billion in investments to promote zero-emission vehicles, a commitment the German auto giant made in the wake of Dieselgate. The Electrify America unit will open more than 500 EV charging stations as it works toward building out a national network. VW will also launch a “Green City” initiative in a yet-to-be-identified California city to pilot future concepts.

According to a court filing, Takata will plead guilty on Feb. 27 to a single felony count of wire fraud to resolve a DOJ investigation into ruptures of its air bag inflators linked to at least 16 deaths worldwide. Last month, the auto parts firm agreed to the guilty plea as part of a $1 billion settlement in the world’s largest-ever recall.

Time Warner reported higher-than-expected fourth-quarter results, largely due to box office hits such as the “Harry Potter” spinoff “Fantastic Beasts.” Time Warner reported an 11.5% rise in quarterly revenue and said the planned $84 billion merger with AT&T remained on track to close later this year.

Swiss pesticides and seeds group Syngenta pushed back the expected closure of its agreed $43 billion takeover by ChemChina to the second quarter of 2017, but said it was making progress in winning regulatory approval for the deal.

Humana earned an adjusted $2.09 per share for its latest quarter, while revenue was slightly below projections. Humana said that it added members in its Medicare Advantage business, and that it would give an update on its transaction to be bought by Aetna by February 16. That deal was blocked in a court ruling last month.

Allergan earned an adjusted $3.90 per share for its latest quarter, beating estimates of $3.76 a share. Its revenue also came in above forecasts on increased sales of Botox and other therapeutic treatments.

Shares of Microchip Technology are up, continuing last night’s gains, after the chip maker yesterday afternoon beat fiscal Q3 expectations and topped consensus as well.

Shares of Panera Bread surged to a record high and the biggest one-day move in almost two years after the company gave an upbeat forecast and said technology investments at its restaurants were paying off.

Whole Foods Market reported revenues and comparable sales that fell short of Wall Street’s expectations. Whole Foods also lowered full-year sales and earnings guidance in wake of the weak results.

Alaska Air, the fifth-largest U.S. carrier, beat estimates by 16 cents a share, with adjusted quarterly profit of $1.56 per share. Revenue beat forecasts and the company also increased its quarterly dividend.

Canada’s government will provide $282 million in support for Bombardier to help fund two jet programs, including the C Series, the single-aisle plane that competes with Boeing and Airbus Group SE products. After landmark sales of the jetliner to Air Canada and Delta Air Lines in 2016, the company is now seeking new orders while also targeting the first delivery of the Global 7000, its largest business aircraft.

Bank of America is opening robo branches. The bank has opened three automated branches over the past month and has plans to roll out more over the next year. Customers can use ATMs and have video conferences with employees at other offices. BofA is set to open 50 to 60 new branches over the next year, but will also be closing some in certain markets, so they will not represent a net increase.

At its height, back in 2000, the US cash equities trading desk at Goldman Sachs’ New York headquarters employed 600 traders, buying and selling stock on the orders of the investment bank’s large clients. Today there are just two equity traders left. Automated trading programs have taken over the rest of the work, supported by 200 computer engineers.

The experience of its New York traders is just one early example of a transformation of Goldman Sachs, and increasingly other Wall Street firms, that began with the rise in computerized trading, but has accelerated over the past five years, moving into more fields of finance that humans once dominated.  Some areas of trading, like currencies and even parts of business lines like investment banking are moving in the same automated direction that equities have already traveled.

Today, nearly 45 percent of trading is done electronically, per Coalition, a UK firm that tracks the industry. Complex trading algorithms, some with machine-learning capabilities, first replaced trades where the price of what’s being sold was easy to determine on the market, including the stocks traded by Goldman’s old 600.

Now areas of trading like currencies and futures, which are not traded on a stock exchange like the New York Stock Exchange, are coming in for more automation as well. To execute these trades, algorithms are being designed to emulate as closely as possible what a human trader would do.

Goldman Sachs has already begun to automate currency trading, and has found consistently that four traders can be replaced by one computer engineer. Some 9,000 people, about one-third of Goldman’s staff, are computer engineers.

Goldman’s new consumer lending platform, Marcus, aimed at consolidation of credit card balances, is entirely run by software, with no human intervention. Next, will be the automation of investment banking tasks, work that traditionally has been focused on human skills like salesmanship and building relationships.

Though those “rainmakers” won’t be replaced entirely, Goldman has already mapped 146 distinct steps taken in any initial public offering of stock, and many can – and will – be automated. Reducing the number of investment bankers would be a great cost savings for the firm. Investment bankers working on corporate mergers and acquisitions at large banks like Goldman make on average $700,000 a year, per Coalition, and in a good year they can earn far more.

Financial Review

A Go Figure Bounce

Sinclair Noe — February 24, 2016

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DOW + 53 = 16,484
SPX + 8 = 1929
NAS + 39 = 4542
10 Y – .01 = 1.74%
OIL + .36 = 32.23
GOLD + 3.00 = 1229.40

Stock markets closed down in Asia and European shares dropped the most in two weeks. Investors continue to use oil prices as a gauge of the global economy. At an event in Houston on Tuesday, Saudi oil minister ruled out production cuts anytime soon, sending crude sharply lower despite talk of a mid-March oil producer meeting. New API figures showing a further build in U.S. stockpiles are also weighing on oil. Oil’s retreat, together with slowing growth in China, has dragged down global stocks about 8% since the start of the year.

Miners fell again, with Glencore and BHP Billiton losing more than 8% on the day. Statoil and Royal Dutch Shell were leading energy-related companies lower. Iran said the plan to freeze oil production was “ridiculous.”  Every member of the Stoxx 600 Banks Index declined.

For most of the session today, Wall Street was down. The Dow Industrial average started the morning with a 250-point drop, and was down about 150 points for most of the session, until the final hour of trade when suddenly and without much reason, stocks turned higher, oil turned higher, treasuries turned lower, and gold tanked. I wish I could offer some clear reason for the turnaround, but I haven’t really seen anything to explain the move. About 3 weeks ago we saw a turnaround that erased a 1.5% loss in the S&P; over the following week the index lost 3%. Go figure.

How low could the pound go? The British pound is worth less than $1.40 for the first time since 2007. While currencies move for a variety of different reasons, most speculate the drop this week is to do with uncertainty over the Brexit referendum in June. The pound fell hard on Monday after London Mayor Boris Johnson decided to support the UK leaving the European Union. Britons get to vote on whether the UK should stay in or leave the European Union in the EU referendum on June 23.

The dollar index is at 97.5, and trading in a range between 95.5 and 100. If the dollar can just hold steady at these levels. A stable dollar would be a boost to multi-nationals, commodity traders across the board, and almost everybody except American tourists. The strength of the dollar might well be determined by the direction of the Fed.

It is “still too early” to assess the implications of recent volatility in financial markets for the U.S. economy, so says Fed Vice Chairman Stanley Fischer. With regards to the FOMC’s upcoming policy meeting in March, Fischer said he couldn’t predict what officials are going to do “because, as I’ve emphasized in the past, we simply do not know.” Still, Fischer thinks there is a chance the recent sell-off on Wall Street may not damage the economy.

Meanwhile, Richmond Fed President Jeffrey Lacker said there is more room for the Federal Reserve to raise interest rates because the current level remains below the economy’s so-called natural real rate of interest. And Kansas City Fed President Esther George says it’s too soon to say whether the stock market selloff had “fundamentally” altered the outlook, and a rate hike should “absolutely” be on the table for mid-March. She even suggests that the Fed could surprise markets with a hike.

Investors currently view the probability of a single rate rise in 2016 at around 45 percent, according to trading in federal funds futures contracts. The FOMC next meets on March 15-16, and the best bet is that the Fed will hit the pause button.

For evidence, we look to the Fed minutes from the January FOMC meeting: “Almost all participants cited a number of recent events as indicative of tighter financial conditions in the United States; these events included declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility. Some participants also pointed to significantly tighter financing conditions for speculative-grade firms and small businesses, and to reports of tighter standards at banks.”

Purchases of new homes dropped more than forecast in January. Sales declined 9.2 percent to a 494,000 annualized pace after a 544,000 rate in December that was the strongest in 10 months. The supply of homes increased to 5.8 months from 5.1 months in December. There were 238,000 new houses on the market at the end of January, the most since October 2009. The median sales price of a new house declined 4.5 percent from January 2015 to $278,800.

Markit Economics’ monthly flash services purchasing manager’s index, a preliminary reading on the sector, fell into contraction for the first time in over two years. The tentative February index was reported Wednesday at 49.8. That’s below 50, the border between expansion and contraction. The services sector, which covers about two-thirds of the economy, is essentially having its worst month since the recession. The only exception is when the government shutdown disrupted business activity in October 2013.

The US is exporting liquefied natural gas. The first shipload is pulling out of port in Louisiana right about now. The United States expects to transition from a net importer of gas to a net exporter by 2017 as the nation’s shale gas production continues to grow. For now, prices remain low, around $2.61 per million British thermal units in 2015, the lowest annual average since 1999; and there is a glut. The first shipment is headed to Petrobras in Brazil.

Sugar futures on the Intercontinental Exchange staged their biggest daily gain in nearly 23 years, jumping 8.9% to settle at $0.139 a pound, after forecasts suggested supply may fall short of demand due to bad weather conditions. This year’s supply loss will be the first deficit in five years as harvests are hit by the El Nino weather phenomenon and heavy rain in Brazil, the world’s largest producer.

Brazilian police have charged the chief executive of Samarco – a joint venture between BHP Billiton and Vale – and six others with criminal homicide following the collapse of the miner’s dam last November that killed at least 19 people. The report concluded that the accident was caused by excess water in the dam, lack of proper monitoring, faulty equipment and failure in the drainage system. The police report also said that Samarco’s emergency plan to warn nearby villagers was insufficient.

New York State’s comptroller and four Exxon Mobil shareholders have asked the SEC to force the company to include a climate change resolution in its annual shareholder proxy. The move, the first since the Paris climate accord, ratchets up the tension between the oil producer and investors concerned that climate change or legislation designed to curb it will harm the business’s ability to operate profitably. It also comes as Exxon fights an inquiry by NY’s attorney general into whether it misled the public and shareholders about climate change risks.

Sharp’s board has begun a two-day meeting to decide if it should accept a $5.9 billion takeover by Taiwan’s Foxconn Technology. That figure is more than double the offer by the Innovation Network Corp of Japan, which was previously considered the more likely suitor for Sharp due to its government backing.

Viacom has launched a process to explore a strategic minority investment in Paramount Pictures, after being ranked last among Hollywood “majors” at the box office for four straight years. The news comes as the company faces pressure to consider spinning off assets from its core TV business.

Target posted a fourth-quarter profit of $1.4 billion, helped by a gain on the sale of its pharmacy and clinic businesses and lower overhead expenses.

Lowe’s said profit dropped in its latest quarter following its decision to exit an Australian joint venture, though adjusted earnings rose and the company offered upbeat guidance for the year. Last month, the home-improvement retailer said it would sell its 33.3% stake in an unprofitable Australian home-improvement store venture to Woolworths.

Chesapeake Energy reported its fourth-quarter loss widened and it unveiled further capex cuts and asset sales. The company said it had a net loss of $2.23 billion.

Airbus Group posted a 15% rise in profit for 2015 and reported sales grew 6%. Airbus and Boeing have enjoyed a prolonged period of high aircraft order bookings as airlines renew aging fleets and add planes to deliver growth. Investors have increasingly become concerned, though, the boom period may be nearing an end. Despite those worries, Airbus said it would lift production next year of the A330 wide body to seven planes a month from six.

The pharmaceutical group GlaxoSmithKline has been fined $3 billion after admitting bribing doctors and encouraging the prescription of unsuitable antidepressants to children. Glaxo is also expected to admit failing to report safety problems with the diabetes drug Avandia in a district court in Boston on Thursday.

The company encouraged sales reps in the US to misrepresent three drugs to doctors and lavished hospitality and kickbacks on those who agreed to write extra prescriptions, including trips to resorts in Bermuda, Jamaica and California. The company admitted corporate misconduct over the antidepressants Paxil and Wellbutrin and asthma drug Advair. GSK also paid for articles on its drugs to appear in medical journals and supposedly “independent” doctors were hired by the company to promote the treatments.

German luxury automaker Audi has topped the annual ranking of new vehicles by Consumer Reports despite the brand’s emissions-cheating scandal. In November, Audi admitted using separate software that allowed its diesel U.S. SUVs and larger cars to emit excess emissions.

Tesla’s Model S electric car was named Consumer Reports’ best overall car in 2014 and 2015, but this year the magazine opted not to name any best overall vehicle.