Financial Review

Quiet and Overbought

Sinclair Noe — June 7, 2016

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

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DOW + 17 = 17,938
SPX + 2 = 2112
NAS – 6 = 4961
10 Y – .01 = 1.71%
OIL + .74 = 50.43
GOLD – 1.50 = 1244.20

Fed chief Janet Yellen on Monday called last week’s U.S. jobs numbers disappointing and opted not to repeat her message that U.S. interest rates could rise again in the coming months. That was balanced, however, by her cautioning against attaching too much significance to the payrolls data in isolation and as she pointed to other more upbeat signals for the economy and indicated rate hikes this year would still be appropriate.

On Friday, when the jobs report came in at a very weak 38,000 jobs added, the markets were down slightly. Clearly the news from the jobs report had the effect of taking a June rate hike off the table. In the past, the markets would have rallied on that kind of news, but it made for terrible optics, and so we had to wait for Fed chair Yellen to not say anything. And besides, the markets had already priced in no rate hike in June. So, what’s going on here?

The S&P 500 has gone 42 trading days without a decline of 1% or more. That’s the longest stretch without a big drop since a 66-day period that ended in July 2014, according to FactSet. The U.S. stock market hasn’t dropped by 1% or more since April 7. During one particularly scary stretch in mid-February, the S&P 500 suffered three plunges of 1% or more on separate occasions in just five days. This slow steady advance leaves the market in extremely overbought territory.

Economic data remains weak; we just wrapped up another horrible earnings season; valuations remain expensive; we are moving into a seasonally weak time period; the yield curve is flattening; volume is weak.

Meanwhile, the bullish case for this market is tenuous at best. It might be bullish…, if the Fed keeps rates unchanged; if the economy bounces back in the second half (we’ve already given up on a second quarter bounce); if earnings improve (which is plausible given how low the bar is now set); if oil trades higher (even though higher oil prices will surely lead to higher supplies); if the dollar doesn’t firm up again; if there is no Brexit; and if the markets continue to ignore the data.

You get the idea. Still, it is possible to take out the old highs on the S&P, even without a bullish case. If that happens I would still be left wondering what is pushing the bullish case, other than a herd mentality that is not sustainable. Today, stocks moved to an 11 month high and then faltered on weak volume.

Productivity remains a key weakness of the economy and is especially evident during the low output of the first quarter. American workers were less productive again in the first quarter. The Labor Department productivity declined at an annual rate of 0.6 percent in the first quarter after a 1.7 percent drop in the fourth quarter.

The government first estimated that productivity fell at a 1 percent rate. Not only did hours exceed output, compensation rose at the same time, up 3.9 percent to lift unit labor costs by 4.5 percent, even faster than the 4.1 percent gain first reported. Though there seems to still be a belief that wage growth remains sluggish, in reality, wages have finally begun to move higher in earnest. The anecdotal and survey evidence has been pointing to rising wages for a while, but the data were slow to fall into line. Now they have.

CoreLogic’s Home Price Index (HPI) shows that home prices in the USA are up 6.2 % year-over-year (reported up 1.8 % month-over-month). Last month’s 6.7 % year-over-year gain was revised downward to 5.5 %. CoreLogic HPI is used in the Federal Reserve’s Flow of Funds to calculate the values of residential real estate.

Consumer credit growth cooled off a bit in April from a torrid pace in March, according to the latest government estimates. Credit growth rose $13.4 billion in April, or at a seasonally adjusted annual rate of 4.5%, the Federal Reserve said Tuesday. Economists had expected a gain of $18 billion in April consumer credit. This is down from a revised $28.4 billion, or 9.6% pace in March. That was the largest dollar gain in consumer credit on record. The Fed said credit-card debt rose at a 2.1% rate in April, down from 13.3% in the prior month, which was the largest gain February 2001.

Non-revolving debt, mainly car and student loans, which has powered credit growth in recent years, expanded at a 5.4% rate in April, below the 8.2% gain in March. As a result of the gain in April, total outstanding consumer credit reached an all-time peak of $3.6 trillion.

Even before Mario Draghi starts his corporate-bond buying program tomorrow, he’s pushed down borrowing costs in Europe toward unprecedented levels, with the average yield on euro investment-grade company notes tumbling to 1%. On Tuesday, a series of government bond yields tumbled to multi-month and all-time lows.

The ECB in March announced it would expand its asset-purchasing program to include corporate bonds in an effort to directly lower borrowing costs for businesses and to help lift persistently low inflation. One concern is that corporate buybacks might have some unintended consequences, such as stock buybacks and widening spreads between bonds that are eligible for ECB’s purchases and those that aren’t.

Second-round bids for Yahoo’s internet business were due yesterday. Verizon Communications reportedly planned to submit a bid worth about $3 billion for Yahoo’s internet business, according to the Wall Street Journal. The telecom giant reportedly isn’t interested in other Yahoo assets such as patents and real estate. The private-equity firm TPG and a team led by Quicken Loans founder Dan Gilbert are said to be among the other interested parties. Yahoo is projected to hold at least one more cycle of bidding, and the offers could change by the final round.

U.S. investigators are trying to determine whether Goldman Sachs violated the Bank Secrecy Act when it didn’t sound an alarm over a suspicious transaction involving Malaysia’s state fund 1MDB. After raising $3 billion via a bond issue for the troubled fund, Goldman sent the proceeds to a Swiss bank account controlled by 1MDB, with half of the money disappearing offshore within days and some reappearing in the prime minister’s bank account.

Royal Dutch Shell will exit oil and gas operations in up to 10 countries in a drive to cut costs as it weathers weak oil prices and has to pay down debt following its $54 billion acquisition of BG Group. The company is active in more than 70 countries and said it would like to focus on 13 important nations where it is making good returns, including Brazil, Australia and the United States. The move, which includes the sale of 10 percent of its oil and gas production assets, will make Shell a smaller company that offers investors access to a more gas-heavy portfolio than some of its rivals.

Shares of Biogen dropped this morning after an experimental drug for multiple sclerosis failed in a mid-stage trial. The drug missed both the main and secondary goals for treating the disorder. Biogen makes most of its money from drugs treating MS and has been seeking new treatments to accelerate growth.

Valeant Pharmaceuticals announced a loss of $1.08 a share, which was adjusted to a gain of $1.27 when factoring out one-time adjustments. Valeant cut its 2016 earnings and sales forecasts, marking a major reset point as the once high-flying company tries to get back on its feet.

First-quarter earnings — the last set of full results under former Chief Executive Officer Michael Pearson — gave investors the first detailed picture of the drug maker’s struggles to sell its products during the recent months of chaos. Two of Valeant’s key categories, dermatology and prescription ophthalmology, slumped by 43 percent and 30 percent, respectively. In dermatology in particular, the company has faced push-back from health insurers and pharmacy benefit managers after increasing its prices.

A U.S. District Judge  has found a pattern of misconduct by Merck including lying under oath and other unethical practices, freeing Gilead Sciences from paying damages for infringing on Merck’s patents with its hepatitis C treatments – Sovaldi and Harvoni. The ruling comes after a federal jury on March 24 ordered Gilead to pay $200 million in damages, based on findings that Merck’s patents were valid.

Samsung is considering introducing two new smartphone models that will feature bendable screens. One model is said to fold in half like a cosmetic compact, while the other has a 5-inch display that “unfurls” into a tablet-sized 8-inch panel. The devices using organic light-emitting diodes could be unveiled as soon as early 2017.

Leading European countries have decided not to extend the license for glyphosate, a herbicide used in Monsanto’s top selling weed killer. The EU is worried about growing public concerns it could cause cancer.

Daimler is laying off more than 1,200 workers at three plants in the U.S. and one in Mexico, the second such cut this year in response to falling demand for commercial trucks. Last month, Daimler projected a 15% decline in North America sales of medium and heavy-duty trucks, warning that a slump in the market would significantly lower its earnings before interest and tax in 2016.

Ralph Lauren announced a restructuring plan. The company also plans to cut 8% of its workforce in the current fiscal year. As of April, it employed about 26,000 people around the world, 11,000 of whom are part-time workers. The planned job cuts will be in addition to the 5% workforce reduction that the company already implemented in its last fiscal year. The company plans to close about 50 stores. The company currently has 493 stores, including 216 in the U.S.

Financial Review

Who Blinks First?

Sinclair Noe — February 4, 2016

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

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DOW + 79 = 16,416
SPX + 2 = 1915
NAS + 5 = 4509
10 Y – .02 = 1.86%
OIL – .52 = 31.76
GOLD + 13.00 = 1156.40

Equity markets were all over the place once again today as crude oil popped and then dropped.

Initial jobless claims rose in the last week of January but remained at a very low level. New claims rose by 8,000 a seasonally adjusted 285,000 in the seven days stretching from Jan. 24 to Jan 30. Any number below 300,000 is historically considered a sign of a robust labor market, but claims are no longer falling rapidly. In the last two weeks of January, for example, the number of new claims was slightly higher compared with the same two weeks in 2014. It’s the first time in three years that has happened for two weeks in a row.

The productivity of U.S. businesses fell at a 3% annual pace in the fourth quarter, marking the biggest decline in almost two years. Weak productivity growth has been a hallmark of the near-seven-year economic recovery. Productivity increased just 0.6% in 2015, less than one-third the average since the end of World War II. In the fourth quarter, employees put in more time on the job but output of goods and services barely rose. Output edged up a scant 0.1% while hours worked jumped 3.3%.

The European Commission trimmed its 2016 growth forecast for the euro area to 1.7 percent from 1.8 percent previously. At the same time, it slashed its 2016 inflation forecast, dropping it to 0.5 percent for the year, from 1.0 percent. In a speech at Germany’s Bundesbank this morning ECB president Mario Draghi said that weak global inflation would not stop the central bank from adding more stimulus at its March meeting. The euro currency did not seem impressed by his dovishness, rising to a three-month high versus the dollar.

Bank of England policymakers voted unanimously to keep interest rates on hold at 0.5%, raising the prospect that the UK’s record low rates will continue for at least another year.

The US Dollar Index was down again, for the fourth straight session; part of the recent dollar decline is due to soft economic data; part might be due to comments by Robert Kaplan, the new head of the Dallas Fed, who said the central bank should be “patient” on rate increases.

The recent weakness in the greenback has provided investors the incentive to take profits in successful trades against commodities and emerging markets, which had suffered after a run higher by the dollar. New York Federal Reserve Bank President William Dudley said that financial conditions have tightened since late last year and policy makers will take this into account when they meet next month to decide whether to raise rates again.

Analysts and strategists in a Bloomberg survey cut their forecasts for the Fed’s peak policy rate at the end of this tightening cycle, known as the terminal rate, to a median of 2.875 percent from 3.375 percent in a July poll. That compares with the Fed’s latest forecast of 3.5 percent published in December, down from 3.75 percent in June. That means the Fed’s rate outlook is out of sync with the markets. The question is who blinks first?

Small businesses stepped up hiring in January after taking a pause in December and many continued to point to difficulty finding qualified workers. The monthly survey of the National Federation of Independent Business showed that 52 percent of respondents said they were hiring or trying to hire, but a large share of those reported few or no qualified applicants for the jobs they were trying to fill. The average employment gain per firm was 0.11 workers compared with -0.7 workers in December.

The latest monthly report from the staffing firm Challenger, Gray and Christmas on planned layoffs showed that US employers in January reported 75,114 planned job cuts, up 42% year-on-year. Retailers moved the needle on this data point the most, particularly Walmart, which announced plans to close 269 stores across America. The staffing firm also said energy-sector layoffs continued to be a problem.

We see that in the latest earnings report from Royal Dutch Shell. They announced a near 60% slump in fourth-quarter profit, hit by sliding production and plunging global oil prices. Shell also announced it was cutting 10,000 jobs. Fourth-quarter profit dropped to $1.8 billion down from $4.2 billion a year earlier. Shell’s exploration and production business lost $5.7 billion last year, hit by write-offs, falling prices and lower volumes.

ConocoPhillips missed fourth-quarter profit expectations and lowered its dividend. The company reported a net loss of $3.5 billion, wider than a net loss of $39 million, or a loss of 3 cents per share, in the year-earlier period. The company lowered its 2016 capital expenditures and said: “While we don’t know how far commodity prices will fall, or the duration of the downturn, we believe it’s prudent to plan for lower prices for a longer period of time.”

Weatherford has announced in its fourth quarter earnings report that it’ll lay off another 6,000 employees and close nine manufacturing/service facilities before the end of the year. The latest round of cuts brings to 20,000 the number of workers who have been or will be released by the world’s fourth largest oilfield services supplier. Weatherford also set a capital expenditure target of $300 million for this year, about 56% lower than its 2015 spending.

Statoil slashed its capital spending budget but said it would keep its dividend steady after topping fourth quarter expectations.

Credit Suisse reported its first annual loss since 2008 as it wrote off billions of dollars in goodwill, set aside litigation provisions and suffered a trading downturn.

ING posted a better-than-expected Q4 and announced a full-year dividend.

AstraZeneca expects low to mid-single digit percentage drops in earnings this year, in part due to a flood of generic cholesterol drugs.

Vodafone met expectations with a 1.4% rise in revenue, its sixth consecutive quarter of growth.

Buffalo Wild Wings reporting light revenue. But the bigger problem, with Super Bowl Sunday just days away, the restaurant chain was blitzed with a potential crisis as 10 customers became ill after eating at one of its restaurants in Kansas.

GoPro’s quarter was ugly. The digital-camera maker announced an adjusted loss of $0.08 a share, worse than the $0.02 loss that was expected. Revenue for the crucial holiday quarter crashed 31.1%.

And Metlife reported earnings of $1.23 per share, missing analysts’ forecasts for earnings of $1.36 per share. Earnings during the fourth quarter were negatively impacted by lower variable investment income and a stronger dollar.

Philip Morris missed fourth-quarter revenue expectations and provided a downbeat profit outlook for 2016.

Yum Brands reported an 11 percent increase in adjusted earnings that topped analyst expectations, but its revenue came in just under Wall Street estimates.

Dunkin’ Brands posted better-than-expected results in its fourth quarter, despite declines in same-store sales, which dropped 0.8%. During the quarter the company opened 172 net new restaurants world-wide. Dunkin posted a loss of $8.9 million, or 10 cents a share, down from a profit of $52.5 million, or 50 cents a share, a year prior. You have to wonder if Dunkin is feeling pressure from McDonalds going to an all-day breakfast menu.

Sports Authority is preparing to file for bankruptcy. The retailer, once the biggest sporting-goods chain in the US, is in talks with lenders on a deal to reorganize in Chapter 11 bankruptcy proceedings. It’s also mapping out a plan to close as many as 200 of its more than 450 stores. Sports Authority skipped a $20 million dollar interest payment last month, and another $10 million payment is due in the next 10 days.

New tech acquisitions:  Cisco is purchasing “Internet of Things” service provider Jasper for $1.4 billion in cash, plus assumed equity awards and retention-based incentives.

Microsoft is buying iOS/Android keyboard developer SwiftKey for a reported $250 million. The company’s keyboard apps have over 300 million users and are declared to have “saved nearly 10 trillion keystrokes, across 100 languages” with the help of A.I. that learns a user’s typing tendencies to predict his/her next word.

There is a side story here. SwiftKey was started in 2008 by three young British guys: Jon Reynolds, Ben Medlock, and Chris Hill-Scott. It is tough to build a startup, and Hill-Scott grew weary of the long hours and low pay. He sold his stake to the other guys for a bicycle in 2008 and went to work for the British government. Reynolds and Medlock just pocketed about $35 million each for their shares.

Twenty-four hours after facing fraud charges in a federal court in Brooklyn, Martin Shkreli turned up in Washington after being subpoenaed by the House of Representatives oversight committee. Shkreli created and ran a firm called Turing Pharmaceutical, which is known for acquiring the rights to a drug called Daraprim, and then hiking the price 5,000% overnight, from $13.50 to $750 a pill.

The reason behind the hearing was to find out about the drug pricing. Shkreli did not provide answers; he invoked his Fifth Amendment rights, while smirking and smiling. Afterwards he tweeted “Hard to accept that these imbeciles represent the people in our government.”

Before invoking the Fifth today, Shkreli had said that he wasn’t alone in taking big price hikes on drugs. And that is true. A survey of about 3,000 brand-name prescription drugs found that prices more than doubled for 60 and at least quadrupled for 20 since December 2014.

Also at the hearing, Howard Shiller, interim CEO of Valeant Pharmaceuticals. Valeant has increased the price of numerous old drugs, but the House committee has focused on two heart drugs, Isuprel and Nitropress. Valeant acquired both a year ago and immediately raised the price of Isuprel by more than 500 percent and of Nitropress by more than 200 percent, provoking protest from the hospitals that buy these drugs.

Financial Review

Until Something Breaks

Sinclair Noe — October 29, 2015

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

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DOW – 23 = 17,755
SPX – 0.94 = 2089
NAS – 21 = 5074
10 YR YLD + .08 = 2.17%
OIL + .12 = 46.06
GOLD – 10.20 = 1146.50
SILV – .35 = 15.68

Gross domestic product, the value of almost everything a nation produces, rose at a 1.5% annual pace in the third quarter; that’s down from a 3.9% rate in the second quarter. The slowdown stemmed mostly from the biggest drawdown in inventories in three years. Companies cut spending on structures such as oil platforms and commercial buildings. Even as businesses showed more caution, consumers continued to spend money at steady clip.

Consumer spending, the single largest determinant of U.S economic growth, rose at a 3.2% annual pace following an even larger gain in the second quarter. Some parts of the economy are performing well; technology, health care, and finance are enjoying conditions that echo the booming 1990s or the housing bubble a decade ago. The energy sector is hurting and cutting jobs and closing down projects.

Shipping is a measure of the real economy. Shipments usually increase from August to September. They did this year too. The number of shipments in September inched up 1.7% from August, according to the Cass Freight Index. But the index was down 1.5% from an already lousy September last year, when shipments had fallen from the prior month, instead of rising. And so, in terms of the number of shipments, it was the worst September since 2010. September is in the early phase of the make-or-break holiday shipping season. But it’s not happening.

Yesterday the Federal Reserve FOMC wrapped up a two-day policy meeting, leaving interest rates unchanged near zero – no surprise. The Fed described the economy as expanding at a “moderate” pace and turned up the heat around a possible December rate hike. Today’s GDP report takes some of the starch out of the Fed’s resolve to raise rates. Maybe the Fed should just accept the idea that the economy is neither depressed and deflating nor overheated and inflating.

The stock market has been climbing almost since the Fed instituted Zero Interest Rate Policy; the economy has been adding jobs; inflation has flattened out, which seems the definition of price stability. Instead of all the hoopla over a possible rate increase, with attendant downside risks, there is a very real possibility the Fed could just stand pat for a very long time, or until something breaks.

Pending home sales fell 2.3% in September, the second drop in a row; still, the index of pending home sales is up 3% from the same level 12 months ago. The National Association of Realtors reported a shortage of available listings in the lower end of the market for first-time buyers.

The number of Americans filing new applications for unemployment benefits increased by 1,000 to 260,000, which is close to a 42 year low. It was the 34th straight week that claims were below the 300,000 threshold, which is normally associated with a fairly healthy jobs market.

John Boehner has officially resigned as Speaker of the House.  Paul Ryan has been elected as the 62^nd Speaker of the House. The House voted 266-167 to pass a two-year budget deal negotiated by Boehner, the White House and other congressional leaders that clears the decks for the new speaker and relieves market worries over a possible default next week. The plan extends the federal debt limit through March 2017 and eases automatic spending caps to add $80 billion in new discretionary spending over two years.

The budget accord raises spending caps on domestic and defense spending over the next two years while raising the debt limit until March 2017. There are also changes to eligibility requirement in the Social Security disability program, and changes to claiming strategies for Social Security. A provision to cut crop insurance subsidies by $3 billion to help pay for the deal was removed from the bill at the last minute. Farm-state lawmakers had objected to the cut.

There were also last-minute changes to the package in the House Rules Committee to recalibrate how the bill was scored with regard to money spent out of the Overseas Contingency Operations fund, an account that’s not subject to budget caps. There are many more details in the budget and there will likely be further changes; still, Senate leaders expect to pass the package next week.

After posting a €6 billion-euro net loss for the third quarter and scrapping its dividend for the next two years, Deutsche Bank has announced plans to exit 10 countries and reduce its workforce by 35,000 employees. The moves follow a recent writedown at its investment bank and the removal of three of the bank’s eight board members. A sanctions settlement may also be in the making. As early as next week, Deutsche is expected to pay at least $200 million to resolve investigations into its dealings with countries like Iran and Syria.

Following a better-than-expected earnings report, Samsung Electronics said it plans to buy back and cancel $9.9 billion of its stock over the next year in order to boost shareholder value. The tech giant’s operating profit jumped 82% to $6.5 billion during the quarter, its first year-on-year profit growth in two years, boosted by a recovery at its mobile division and strong semiconductor sales.

Royal Dutch Shell swung to a third-quarter loss after taking a $7.9 billion write-down on big ticket projects including an exploration venture in the Alaskan Arctic and a major oil sands endeavor in Canada. The company, however, is still moving ahead with its $70 billion acquisition of BG Group. Shell posted a quarterly loss of $6.1 billion, down from a profit of $5.3 billion a year earlier.

Volkswagen dealers across the country are offering hefty discounts on new gasoline models after the German automaker began more aggressive efforts to rebuild sales in the wake of its emissions scandal. According to an online survey, discounts of up to $7,000 are being offered on the Passat and Jetta, while gasoline-electric models such as the Jetta Hybrid have prices slashed by up to $6,000.

United Auto Workers leaders have approved a proposed contract with General Motors that promises raises, improvements in health care and a hefty signing bonus. Like a previous contract approved by Fiat Chrysler, GM’s agreement will also eliminate a two-tier wage system over eight years. The four-year deal will now be sent to GM’s 52,600 union workers for ratification.

Pharmaceutical giants Pfizer and Allergan are considering a merger. Allergan confirmed that it has entered into “preliminary friendly discussions” with Pfizer following an approach by the bigger drugmaker. No agreement has been reached. Stocks of both companies have been halted. Price could be an obstacle, as well as other issues including the extent to which Pfizer would want to lay off employees, close facilities and the general makeup of a combined management team. A tie-up between the two would create an entity with a market cap greater than $300 billion, and would be the biggest takeover announced this year.

It would also be the biggest ever U.S. tax inversion, a process by which a company shifts its legal address abroad to take advantage of lower tax rates and access to overseas profits, while keeping its operations in America. Allergan, for example, moved its legal address to Dublin, Ireland in a previous deal, while keeping its main executive offices in New Jersey.

The U.S. Treasury Department issued a proposal in September 2014 to try to stop inversions. The notice said the government would make it harder for U.S. companies to borrow against their foreign cash to finance inversions. It also tightened the calculations for when a deal triggers anti-inversion restrictions in the tax code and changed how passive assets would be counted in those tallies.

And it limited maneuvers by companies to shrink themselves by paying extraordinary dividends before a deal so they would escape the arithmetic tests in the anti-inversion law. While the rules aren’t final, they are retroactive and essentially in force, but that might not be enough to stop this deal.

In the past, the inversion threshold was 20%. Meaning that 20% of the new company had to be owned by a foreign entity in order to take full tax advantage of moving overseas. But the Treasury rule changes make it harder for U.S. companies to shift domestic earnings overseas at the 20% level. What’s more, companies can no longer use foreign cash tax-free to fund inversion deals if the deal ends up with just 20% foreign ownership. So the changes don’t eliminate the benefits of tax inversions. They just reset the threshold to 40%.

Pfizer’s market cap is roughly $220 billion. Shares of Allergan are up 17% today. That gives the company a market cap of almost $120 billion. For Pfizer to meet the 40% threshold, it would have to pay at least $147 billion for Allergan, or $27 billion more than what the market is currently guessing.

That might actually make sense. Pfizer currently has about $70 billion in cash overseas. If it were to repatriate that at the corporate 35% tax rate, then it would have to pay $24.5 billion in taxes. So the Treasury rules might not stop this inversion play, but we are also heading into an election year and this will not sit well.

Today is October 29^th, a rather notorious date also known as Black Tuesday, dating back to the Crash of 1929. The crash actually spread out over several days. It started in earnest on Thursday, October 24 with a 12% loss. The bankers and leaders of the stock exchange stepped in and tried to prop up the markets, with little success. The rout continued with 12% losses on Monday, Black Monday and then Black Tuesday; a two-day decline that remains the worst, in percentage terms, in US market history.

The market would not return to the peak closing of September 3, 1929 until November 23, 1954. The Wall Street Crash was widely considered as the start of the Great Depression. Say what you will about the current state of affairs but we can look back in history 86 years today and we should all count our blessings.

Financial Review

A Slightly Older Mindset

Sinclair Noe — August 18, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW – 33 = 17,511
SPX – 5 = 2096
NAS – 32 = 5059
10 YR YLD + .05 = 2.20%
OIL + .51 = 42.39
GOLD + .10 = 1118.50
SILV – .45 = 14.97

When Chinese markets catch pneumonia, US markets sneeze. That seems to be the trend lately. And once again, Chinese markets were under the weather as the People’s Bank of China took fresh steps to offset capital outflows prompted by its weakened currency. China’s central bank placed $18 billion worth of seven-day reverse repos into the money market during the session – the largest single day injection in almost 19 months. The latest rout raises fresh concerns that the Chinese economy is in dire need of stimulus. Shanghai -6.1%; Shenzhen -6.6%.

Across the Atlantic, European stocks didn’t perform well either. The German DAX dropped 0.2% and the French CAC fell 0.3%. The devaluation in China probably does not have the dire repercussions some have suggested, but it does fit within the broader narrative of a slowing global economy, with less support from emerging markets. And that, in turn, would indicate rising market volatility. At its peak last week, the VIX Index, which measures volatility of the S&P 500 Index, was up 50% from the previous week’s low. There are bigger moves beneath the surface. During the recent earnings season, more than 5% of stocks in the S&P 500 had a move of three standard deviations or more, roughly double the percentage from a few years ago. Still, for now, volatility remains below long-term averages.

The Greek government appears likely to call a confidence vote in the next few days, casting a shadow over the country’s third bailout program. Although the majority of the Greek parliament backed the bailout deal last Friday, Prime Minister Alexis Tsipras had to rely on opposition parties’ support to get the reforms approved. As such, his position as leader would be in doubt if a confidence vote occurs. Meanwhile, Greece has agreed to sell to a German company the rights to operate 14 regional airports. The deal is the first in a wave of privatizations the government had until recently opposed but needs to make to qualify for bailout loans.

Housing starts edged up 0.2% last month to an annual rate of 1.21 million. That marks the highest level since October 2007 but still below the pre-recession peak of 2 million starts per year. Most of the new construction in July took place in the South. Construction tapered off in the Northeast and the West.

Meanwhile, building permits fell 16.3 percent in July to a 1.1 million-unit pace, that followed three straight months of hefty increases. Single-family building permits slipped 1.9 percent in July. Multi-family building permits tumbled 31.8 percent.

Since the housing market bottomed out in April 2009, construction on multi-unit projects has skyrocketed 466%. Work on single-family homes, which historically have accounted for the bulk of new housing, barely doubled over the same span. What’s more, the percentage of multi-unit buildings under construction has risen to a 29-year high of about 35%. Shortly before the onset of the last recession, they only accounted for about 20% of all new housing stock. The desire to rent can be seen through home-ownership rates collected by the U.S. Census Bureau. The percentage of Americans who owned their own homes at the end of the June fell to 63.5% — the lowest level since the government started to keep track in 1980.

Home Depot reported a better-than-expected rise in quarterly same-store sales. Net income rose about 9 percent; net sales rose 4.3 percent. The company also raised its full-year sales and profit forecast.

Walmart reported weaker-than-expected quarterly earnings and lowered its full-year forecast. Walmart said that reduced reimbursement rates from pharmacy benefit managers were hurting margins in its pharmacy business and cited an increase in “shrink,” an industry term for losses due to theft in the store. Profits have also been weighed down by a decision announced in February to invest $1 billion to lift workers’ pay, or as the company describes it, they are improving employee retention and improving customer service. Same store sales increased 1.5% in the last quarter. Walmart still claims more than 11% of all retail sales in the US.

TJX Cos, the owner of off-price retailers TJ Maxx and Marshalls, reported a better-than-expected rise in quarterly comparable store sales as more bargain-hungry shoppers visited its outlets.

A new survey from CorporateCounsel.net shows CFOs believe that in any given year 20% of companies intentionally misrepresent their earnings using discretion within GAAP. The magnitude of the typical misrepresentation is quite material — about 10 cents on every dollar. While most misrepresentation results in the overstatement of earnings, a full one-third of firms that are misrepresenting are intentionally lowballing their earnings.

Travel from the U.S. to Cuba has already increased 35% since the beginning of January, and the Obama administration is now working on a deal that would allow scheduled commercial flights by the end of 2015. Presently, Americans must take charter trips to Cuba, and their visit must fall into one of 12 authorized categories due to a congressional ban. The new move would loosen the terms of those categories, permitting direct commercial flight bookings between the two countries.

Federal regulators have granted Royal Dutch Shell the final permit it needed to drill in the Arctic off Alaska’s northwest coast. The permit was granted after the company brought in a vessel carrying a device needed to stop a potential well blowout. Shell has spent $2.1 billion on leases in the Arctic and up to $7B on exploration.

Petrobras is expected to face penalties of $1.6 billion or more as part of an investigation by U.S. authorities in a corporate corruption investigation. Petrobras’ settlement may still be a while away. The process is likely to take another 2-3 years.

The two explosions in the Chinese port of Tianjin last week could generate total insurance losses of $1.5 billion. Over 8,000 vehicles worth about $625M were destroyed in the blasts, including cars made by Volkswagen, Toyota, Renault, Hyundai and Mitsubishi, while damage is still being assessed in other sectors. Zurich Insurance, Allianz and other groups say they have already received insurance claims but could not provide an estimate of potential losses.

Petco is going public, again. According to The Wall Street Journal, Petco has filed for an initial public offering nearly one decade after it was taken private. The offering is expected to raise approximately $100 million and give the company a $4 billion valuation. The company previously went public in 1994 and 2002.

Target said it has reached an agreement with Visa card issuers to reimburse up to $67 million in costs related to a data breach at the retailer in 2013. The breach during the holiday shopping season compromised at least 40 million credit cards and may have resulted in the theft of personal information from as many as 110 million people. The agreement comes three months after a proposed $19 million settlement between Target and Mastercard fell through. Financial institutions have sued Target, saying they have spent billions of dollars to replace compromised cards and beef up customer service operations because of the data breach.

Google is getting into the router business. The cylinder-shaped router, named OnHub, can be pre-ordered for $199. The router comes with in-built antennas that will scan the airwaves to spot the fastest connection. With the router, users will be able to prioritize a device so that they can get the fastest Internet speeds for data-heavy activities

California’s worsening drought will cause the state’s economy to lose as much as $2.74 billion and nearly 21,000 total jobs this year-and ripple effects of the 4-year-old drought will likely continue through at least 2017. The $2.74 billion figure reflects the cost to all economic sectors and when multiple effects are considered. According to a new report by the University of California, Davis Center for Watershed Sciences, also revealed that direct costs to the state’s agriculture economy will total $1.84 billion and 10,100 direct seasonal jobs. The 2015 drought will result in the fallowing of 542,000 irrigated acres, mostly in the state’s Central Valley. Total crop revenue losses are projected to reach $902 million this year, and the study estimates that total gross revenue losses from crops under a continued drought will increase to nearly $940 million by 2017. Additionally, drought-related losses for the state’s dairy industry are expected to reach $250 million this year and another $100 million for the livestock sector. It doesn’t look like the report includes the costs of fighting wildfires.

Necessity may be the mother of invention but invention may be the red-headed stepchild of funding. We know that the drought in the Southwest, and especially California, has been a severe problem, but apparently not enough to attract venture capital. From 2010 to 2014, venture firms invested $1.4 billion worldwide in 405 companies working in the area of water technology, that according to data from CleanTech Group i3. Last year, $281 million was invested globally in 66 water technology startups, up 19% from in 2013. By comparison, $20 billion was invested in 1,812 software companies in the US alone in 2014, according to the PriceWaterhouseCoopers MoneyTree Survey.

Each year about this time college students head to campus, and each year about this time we look at the passage of time. According to the Beloit College “Mindset List”, most of the kids heading off to college this year were born in 1997. That was the same year the movie “Titanic” was released, Dolly the Sheep was born, Princess Diana was killed in a car crash in Paris, and the first Harry Potter book was published. Incoming college freshmen believe that Wi-Fi is an “entitlement” and that email is the “new formal communication,” while texts and tweets are considered casual. They have never licked a stamp. There has always been Google and cell phones. “Smartphone shuffles” have always slowed down traffic between classes. Hybrid automobiles have always been mass produced. Surgeons have always used “super glue” in the operating room. “The Lion King” has always been on Broadway. Good luck to the class of 2019 and their teachers.

Financial Review

Goodbye Patience

Sinclair Noe — April 8, 2015

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

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DOW + 27 = 17,902
SPX + 5 = 2081
NAS + 40 = 4950
10 YR YLD un = 1.89%
OIL – 3.05 = 50.93
GOLD – 5.50 = 1203.20
SILV – .32 = 16.61

We start today with a big acquisition in the oil industry. Royal Dutch Shell agreed to buy BG Group for about $70 billion in cash and shares, the oil and gas industry’s biggest deal in at least a decade; since 2004 when Royal Dutch Shell was created. This is the biggest acquisition this year and the 10^th biggest M&A deal overall, and the fourth biggest deal overall in the oil industry. The merged company will boast a market value twice the size of BP, and even larger than Chevron. ExxonMobil is still the 800 pound gorilla with market cap north of $350 billion.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant buyback of $25 billion from 2017 to 2020. Shell investors reacted coolly to the deal. Shell’s B shares, the class of stock being used to finance the deal, fell about 7% percent in London. For BG it represents a 50% premium.

BG Group is the exploration part of the former state owned British Gas that was privatized by Margaret Thatcher in the 1980s. British Gas was split into BG and Centrica. The new company will be the largest producer of liquefied natural gas, or LNG, among international oil companies. Shell pioneered the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal. The deal will still need antitrust approvals from regulatory agencies in Australia, China, Brazil and the EU.

This is a very interesting deal for many reasons, not the least is the downturn in oil prices over the past year, which has been devastating for smaller or less strategically positioned companies in the oil industry. Case in point: Noble Energy just announced it is cutting 220 jobs across the U.S., with around 100 losses at the oil company’s Houston headquarters and another 100 or so at its Colorado operations. The cuts represent 10% of Noble’s 2,200 U.S. employees. The news comes after the firm said earlier this year that it was planning to slash spending by 40%.

The roughly 50% premium paid for BG Group would make sense with oil priced at $90 a barrel, which is not the current price. Of course we could see oil prices skyrocket; the situation in Yemen is a stupid mess and that is right at a chokepoint to the Red Sea; and that is just one of many potential hotspots. Absent a geopolitical flare-up, the price of oil is not likely to zoom in the face of excess supply and moderate demand.  Saudi Arabia is reporting it raised oil output to 10.3 million barrels a day in March, the highest in at least 12 years, and intends to keep producing 10 million barrels per day despite low crude prices. The Saudi oil minister says he believes oil prices will rise in the “near future”; maybe, but right now there is a glut.

America’s oil in storage just hit another record after rising by the most since March 2001. Stockpiles rose by almost 11 million barrels, or 2.3%. Analysts had expected an increase of 3.25 million barrels. The EIA report today showed the amount of oil the U.S. is cranking out also edged up slightly, to a rate of 9.4 million barrels a day. Investors have been closely watching the oil gather in storage tanks, which has been rising steadily since the oil-price crash started last year. U.S. crude production has been at the highest in decades even as drillers have made unprecedented reductions in the number of oil rigs out drilling new wells.

The last time we saw deals of this size was in 1999 when Exxon and Mobil merged at a cost of $83 billion and BP bought Amoco for $48 billion. Back in 1998, oil was priced closer to $12 a barrel, and the deal making marked a trough in prices. Shell CEO Ben van Beurden said the deal is “not a bet on the oil price.” You can believe that if you wish, but I doubt they would have made the deal if they thought oil was going to $30 a barrel for an extended period.

So oil prices are important but not the only thing. In the past 12 months, the oil majors have had to deal with the consequences of events in Ukraine and the Crimea as well as western government sanctions on Russia and the effects these sanctions have had on the profitability of their assets exposed to those sanctions. Shell was likely attracted by BG’s deepwater assets in Brazil and its LNG portfolio. BG Group is one of the world leaders in LNG and recently completed a $20 billion facility in Australia. The combination of Shell and BG will result in a portfolio that controls roughly 16% of the global LNG market. The LNG market is crucial for Europe; if Russia can’t or won’t meet Eurozone needs, this is an opportunity for Shell to seize market share. So, it looks like Shell is diversifying away from its core oil business, at a time when oil and gas exploration is becoming increasingly expensive in terms of profitability.

Earnings season is back. Alcoa unofficially kicks of quarterly earnings; a traditional thing; the aluminum company used to be one of the Dow 30 stocks; ticker symbol AA; they go first. Alcoa beat earnings estimates by a couple of cents per share but posted a slight missed on revenue projections. Overall, S&P 500 earnings for the first quarter are forecast to have dropped 2.8% from the year ago quarter, which would be the worst performance since the third quarter of 2009.

The Federal Reserve has released minutes from the FOMC policy meeting in March. That was the meeting where the Fed dropped the term ”patient” from the language surrounding policymakers’ approach to future interest rate hikes. At the time, Janet Yellen said that axing patient “does not mean we are going to be impatient.” Today’s minutes reveal that some policymakers are indeed impatient, ready to raise rates in June; others are very patient indeed, and a couple don’t like the idea of rate hikes at all. So, not much new in the minutes. As we suspected the Fed has not made up its collective mind about rate hikes even as they take a very small step closer to a hike. Uncertainty at the Fed is a recipe for volatility in the markets.

In other words, we could see markets moving in multiple directions, and some of the moves might even seem contrarian. While higher target rates from the Fed would likely slow economic activity by making borrowing costs higher, it would also signal that the economy is stronger and it would push the dollar higher. That would signal the world to bring their money to America – the safe haven play.

Switzerland today became the first country ever to issue 10-year debt that gives investors a yield under 0%. Several European countries inside and outside the Eurozone have sold government debt with up to five years of maturity at negative yields, which means investors effectively pay for the privilege of buying it. But no other country has previously stretched this out as long as 10 years. For Eurozone investors they have the option of paying Switzerland to park their cash, or coming to the US, letting the Treasury pay, plus arbitrage on a strengthening dollar.

So, it is possible that rates could move lower, even as the Fed moves closer to hiking rates. And some people argue that the Fed doesn’t really set interest rates, the bond market does. There is another old saying: “don’t fight the Fed.”

What does that mean for you? Well, if or when rates go up, investors will be able to buy newly issued bonds generating higher streams of income in the not so distant future. That means bonds go down in price, and bond funds go down.

It also means that personal debt becomes more expensive. Take a look at the makeup of your debt, too. Is your mortgage a floating rate loan? Do you have any other floating rate debt? If so, this might be the right time to lock it in place at a low rate. Mortgage rates are the lowest that many lenders have witnessed in their lifetimes; given the Fed’s clear signals, do you really want to delay acting on this? If you’ve been contemplating taking out a loan to make some home improvements, to buy a second home, or for some other purpose; and assuming that you’re in a financial position to handle the payments of course; this is probably a good time to think about the timing of your plans.

It might already be happening. The Federal Reserve reports consumer credit grew at a seasonally adjusted annual rate of 5.6%, for a gain of $15.5 billion in February. This is the fastest pace of growth since October. All of the increase came from non-revolving debt, like car and student loans, which grew at a 9.4% rate up – from a 5.8% rate in January. This is the fastest pace since February 2013. Revolving, or credit-card, debt declined at a 5% rate in February, after a 1.4% decline in the prior month. This is the biggest decline in credit card loans since April 2011. So, in a strange twist, the threat of higher rates is starting to cause increased credit activity; but that is likely temporary.

Over the longer term, higher rates mean less affordable homes and cars. Higher rates mean anything financed costs more. Higher rates mean a higher dollar and that means less profit for multinationals. The direction is clear, and most of us can see it. A CNBC All America Economic Survey shows 27% of Americans judge the economy as excellent or good, the highest level in eight years, up from 16% at this time last year. Looking forward, only 28% of Americans believe the economy will get better in the next year, well below the post-recession high of 36% in March 2012. Things are pretty good now but the road ahead is not so certain. Goodbye patience, hello uncertainty and volatility.

FINANCIAL REVIEW

Good Luck With That

Sinclair Noe — January 29, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW + 225 = 17,416
SPX + 19 = 2021
NAS + 45 = 4683
10 YR YLD + .02 = 1.75%
OIL + .09 = 44.54
GOLD – 25.20 = 1259.10
SILV – 1.04 = 17.02

Yesterday, the Federal Reserve said it would remain “patient” on raising rates, but indicated it saw the U.S. economy getting stronger. The Fed also said it has seen inflation decline, and it may decline further, but that low oil prices are probably temporary. The FOMC statement said that economic activity has expanded “at a solid pace” and that labor market conditions have improved.

That was certainly the case last week. The fewest Americans in almost 15 years filed applications for unemployment benefits during a holiday-shortened week that typically makes the data more volatile. Jobless claims dropped by 43,000 to 265,000 in the week ended Jan. 24, the lowest since April 2000. No state reported an increase of more than 1,000 in claims for the week ended Jan. 17.

The National Association of Realtors reports its index of pending home sales fell 3.7% in December, though the year-on-year gain was 11.7%, the highest since June 2013. Pending sales measures contracts signed but not yet closed.

The Census Bureau reports the number of owner-occupied households fell by 354,000 from a year earlier as the homeownership rate dropped to its lowest level since 1994. The ownership rate for people under age 35 fell to 35.3%, down 1.5 percentage points from a year earlier and the lowest level in Census data going back to 1982. The number of renter-occupied residences grew by 2 million last year. Vacancy rates for rentals fell to 7% in the fourth quarter, the lowest since 1993. Total households increased 1.66 million. This means that younger people are finally entering the housing market, even if it is as renters rather than owners. That’s good news for landlords, better news for parents.

Denmark’s central bank cut interest rates today to negative 0.5%. Denmark’s rates were already negative, now more so. Denmark operates a currency peg with the euro, which has come under increasing pressure as the single currency has weakened with the recently announce quantitative easing plan.

The German economy has slipped into deflation for the first time in more than five years, and may not see inflation again before the year is out. Prices dropped by 0.3% in the year to January. Eurostat is due to publish inflation figures for the euro area as a whole on Friday. Economists expect these will show prices have fallen faster still, at 0.5% in the year to January.

The Bloomberg Commodity index, which tracks the global prices of 22 different commodities such as gold and oil, dropped to the lowest level since August 2002. The strength of the US dollar has hit commodity prices hard. Because most commodities traded in international markets are quoted in US dollars. When the dollar rises they become more expensive and this hits demand. The US dollar index, which tracks the price of the US dollar against the world’s currencies, has increased by more than 18% within the past six months.

Oil is near a 6-year low as stockpiles surge. The Energy Information Administration reported record-high inventories in the U.S. and raised more anxieties about the global oil glut. Domestic crude inventories rose by almost 9M barrels last week to reach nearly 407M, the highest level since the government began keeping records in 1982.

At the same time that oil price has been declining, we’ve also observed big drops in the price of other commodities like copper, the yield on 10-year US Treasuries, and the value of other currencies relative to the dollar. Certainly part of the reason for the decline in oil is because global demand has dropped, even as supplies remain high, but that isn’t a full explanation for the other commodities dropping.

Markets have been volatile in January. The S&P 500 dropped 1.4 percent Wednesday, bringing its slide this month to 2.8 percent, the most since January 2014. The Chicago Board Options Exchange Volatility Index jumped 32 percent in the previous two days, its biggest gain in almost seven weeks. Earnings season is in high gear as 52 of the S&P 500 companies post results today. Of those that have reported profit so far, 76 percent have exceeded estimates, while 57 percent topped sales projections.

Google posted fourth quarter numbers after the close of trade. They missed on the top line and the bottom line. Revenue (minus traffic acquisition costs) was $14.4 billion versus $14.6 billion estimates. Adjusted EPS was $6.88 vs $7.08 expected. Google’s share of the online-ad market is coming under pressure as more users spend time on smartphones and tablets. The average price of ads fell 3% in the quarter, following a decline of 2 percent in the previous period.

Also after the close, Amazon reported fourth quarter profits. That’s right, a profit not a loss of $214 million, or 45 cents per share, beating estimates of 18 cents. Revenue came in at $29.3 billion, missing estimates of $29.6 billion. Amazon forecast first-quarter sales of $20.9 billion to $22.9 billion, falling short of analysts’ average projection of $23 billion.

Alibaba Group’s quarterly revenue fell short of analysts’ expectations, showing signs of a slowdown in the Chinese e-commerce company’s growth during the holiday shopping season. Revenue rose 40% to $4.2 billion in the December quarter, missing the average analyst estimate of $4.4 billion. But margins increased to 58% from 50% in the prior quarter.

ConocoPhillips, the largest independent oil and gas company, reported a quarterly loss and again slashed its 2015 capital expenditures, citing lower crude prices. ConocoPhillips said its fourth-quarter loss was $39 million or 3 cents per share; excluding one-time items related, ConocoPhillips had a profit of 60 cents. In December, ConocoPhillips announced plans to cut spending 20% including eliminating a $6.5 billion plant in Qatar; now they say they expect to spend $11.5 billion, down from a prior projection of $13.5 billion.

Royal Dutch Shell posted Q4 profit of $4.2 billion, compared with $2.2 billion for same quarter a year earlier, although it said it would lower capex in 2015 and curtail overall spending by a total of $15 billion over the next 3 years.

More than 30,000 job cuts have been announced across the oil industry as companies shrink budgets. Exploration and production spending is expected to fall by more than $116 billion, or 17%.

Qualcomm reduced its outlook for fiscal 2015, saying it expects its newest Snapdragon mobile chip to not be used in a “major customer’s” flagship smartphone. The company also blamed increased competition in China for the reduced guidance. Still showing surprising growth for its latest quarter, Qualcomm reported that first-quarter net income rose 5% from a year ago to $2 billion.

Nokia reported stronger-than-expected quarterly profits this morning lifted by robust sales of latest-generation wireless telecom equipment in North America. Net profit in the three months to end-December quarter was €443M. However, the company stuck to a forecast for weakening profitability.

Confirming the firm’s first annual earnings decline in three years, Samsung Electronics said that October-December profit fell 28% from a year earlier, as strong chip earnings failed to make up for weakness in its mobile division (its fifth consecutive quarter of decline). Samsung issued a statement saying: “Uncertainties for global business conditions will likely grow further in 2015 due to the slowing Eurozone economy and financial risks in emerging countries.”

Deutsche Bank, has a boatload of legal problems and even more investigations but they posted a surprise Q4 net profit today after cutting the reserves it set aside to cover upcoming legal action and on higher investment banking revenue. Net profit of €438M beat expectations of a €289M loss forecast by analysts.

One of those legal investigations involves rigging the $5.3 trillion-a-day foreign exchange markets. Deutsche Bank and 11 other major banks are under investigation. A judge in Manhattan says investors can proceed with their anti-trust lawsuit accusing the big banks of a long running manipulation of closing spot prices, also known as the Fix. According to the 2013 lawsuit, these banks have held an 84 percent global market share in currency trading, and were counterparties in 98 percent of U.S. spot volume. The lawsuit is separate from criminal and civil probes worldwide into whether banks rigged currency rates to boost profit at the expense of customers and investors.

If you go to a restaurant today, chances are the food came from either Sysco or US Foods. The approval for an $8.2 billion Sysco-US Foods deal is being delayed again after the FTC sent a subpoena to a third-party food distributor this week asking for more information. Antitrust concerns are focused on whether the Sysco deal will drive up costs, as the two are the only ones with geographic reach to offer nationwide contracts for a wide variety of goods.

The FCC voted today to classify broadband internet as connections that provide download speeds of at least 25 megabits per second (Mbps) and upload speeds of 3 Mbps. That’s a good move. Those speeds are a lot faster than many people probably get from their internet provider (ISP). By definition, ISPs won’t be able to say they provide broadband unless they can give you at least those speeds.

Market Depending on the Kindness of Strangers

To paraphrase Blanche DuBois from “A Streetcar Named Desire”, the Tennessee Williams 1948 Pulitzer Prize winner for Drama for a play, which later became a 1951 movie nominated for 11 Academy Awards, winning four Oscars, the stock market this past week, as well as for the month of July, was beholding to the kindness of strangers. And the primary stranger for the stock market was the gyrating price of oil. Other commodity prices continued to recede from their late June/early July highs, too. The secondary stranger was a dastardly set of economic data that perturb the market in an unkindly manner.

Break out the Dramamine and the Bourbon because after a roller coaster ride like this, six flags has been scratched off my things to do list for the remainder of the summer of 2008. Much of it had to do with short covering, end-of-the-quarter window dressing, and good old fashion profit taking.

The last week in July displayed an intense market; a triple digit decline for the DJIA Monday of 239.61, followed by Tuesday and Wednesday gains of 266.48 and 186.13, respectively, and a triple digit decline Thursday of 205.67. Finally, dry heaves Friday ended the day down 51.70. For the full week, the Dow lost just 44 points stopping at 11,226.32. The S & P 500 closed at 1,260.31 and NASDAQ finished the week at 2.310.96. Both were down for the week as well.

The auto industry had to come clean last week. General Motors (GM) led the way by reporting a $15.5 billion loss or $27.33 per share for the second quarter on revenues of $28.2 billion. GM also mismanaged to lose $39 billion in the third quarter of 2007.

The entire auto industry recorded dismal sales in July; Toyota (TM) was down 18.7 percent, Ford (F) was down 21.5 percent, General Motors was down 32.4 percent, Chrysler was down 34.2 percent, and Honda (HMC), winning the brass ring, was down 9.2percent. Total car sales in July were tracking at 12.55 million annual units, a million units below June. Truly ugly numbers for an economy not headed into recession.

Not to beat a dead horse, the S & P/Case Shiller Index for May reported a 15.8 percent YOY drop in housing prices. This was more than the 15.2 percent drop reported for April. Bank regulators shut down First Priority Bank of Florida on Friday. SunTrust Banks Inc. (STI) agreed to take over the insured deposits and to reopen the six branches on Monday. The deleveraging of America continues unabated.

Speaking of non-surprises, Exxon Mobil (XOM) only managed to save a lousy $11.6 billion on gross sales of $138 billion. Royal Dutch Shell PLC (RDS.A) pocketed $11.56 billion in profits from $131.42 billion, when they reported their second quarter earnings. This works out to almost $1 Billion in net profit each week or every 7 days. Wow. If only the U.S. government owned oil.

Second quarter Gross Domestic Product [GDP] advance report came out at 1.9% which proved that the economy is still expanding although the fourth quarter 2007 was revised down to a negative .2 percent from a positive .6 percent. It was a magnificent work of fiction. That second quarter GDP figure includes the $160 billion stimulus package rebate that was spread throughout the country beginning April 17th. The price of oil closed on June 30th at $140 a barrel which means the pain felt in the economy from the zenith in crude prices was fractionally captured in the 1.9 percent data. Do we need an asterisk next to this GDP figure like Barry Bonds homerun record? Juicing is juicing. The unemployment rate rose to 5.7 percent while an additional 51,000 jobs were lost; the seventh consecutive month for fewer jobs in the economy.

There was improvement in Treasury prices last week, the Two Year Note yield moved down 20 basis points to 2.51 percent and the benchmark Ten Year Note ended the week at 3.94 percent, down 16 basis points. The Ten Year Note auction will be held Wednesday August 6th and the Thirty Year Bond auction is scheduled for Thursday August 7th. The Federal Open Market Committee meets Tuesday, August 5th to review monetary policy. Rates are expected to remain at 2 percent.

August 4th, June Personal Income, June Personal Spending, and June Factory Orders will be announced. August 5th, the July Institute for Supply Management [ISM] Non-Manufacturing Composite Index comes out. August 6th, MBA Mortgage Application Survey Refinancing Index is due. August 7th, Initial Jobless Claims, June Pending home Sales and June Consumer Credit is revealed. August 8th, 2Q preliminary Nonfarm Productivity and Unit Labor Costs are reported.

Batman has now earned $400 million in domestic ticket sales in just 17 days. The caped crusader has still sold fewer tickets than the all time box office champ, the 1996 released “Titanic” that grossed $600 million, domestically. Batman ticket prices are also 50 percent higher than they were for the champ. That’s called inflation.