Financial Review

Let’s All Go to the Movies

Sinclair Noe — January 24, 2017

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DOW + 112 = 19,912
SPX + 14 = 2280
NAS + 48 = 5600
RUT + 21 = 1369
10Y + .07 = 2.47%
OIL + .31 = 53.06
GOLD – 8.90 = 1209.80

The S&P 500 and Nasdaq set record highs.

It was a busy first day for President Trump. Here are some of the highlights: Withdrew from TPP, promised to renegotiate NAFTA, placed a hiring freeze on federal employees, discussed slashing business regulations by 75%, reinstated the Mexico City policy on banning foreign aid groups from providing abortion counseling and vowed to stop the seizure of South China Sea islands. Trump had breakfast today with the heads of GM, Ford and Fiat Chrysler, as he pressures the Big Three car-makers to boost U.S. employment.

Australia has called for the Trans-Pacific Partnership to go ahead without the U.S. following President Trump’s withdrawal from the 12-nation trade agreement. China’s foreign ministry declined to say whether Beijing would consider any invitation to join the TPP, but a spokesperson instead cited rival trade pacts.

President Trump signed two orders today to move forward with construction of the Keystone XL and Dakota Access pipelines. Trump campaigned on promises to increase domestic energy industry production and before taking office indicated he supported completion of the Dakota pipeline and revival of the Keystone XL project.

Environmental activists broadly opposed the Keystone XL pipeline and campaigned against it for more than seven years. Shares of ETP, the company building the 450,000 barrel-a-day Dakota line, rose 3.5 percent. Trump owned ETP stock through at least mid-2016, per financial disclosure forms, and ETP’s chief executive, Kelcy Warren, donated $100,000 to his campaign. U.S. Energy Secretary nominee Rick Perry was until recently on ETP’s board.

Coincidentally, the Canadian government today reported a pipeline spill in the western Canadian province of Saskatchewan has leaked about 52,000 gallons of oil. The spill came seven months after another major incident in Saskatchewan, in which a Husky Energy Inc pipeline leaked 60,000 gallons into a major river and cut off the drinking water supply for two cities.

Trump’s administration has also asked the Environmental Protection Agency to temporarily halt all contracts, grants and interagency agreements pending a review.

Rex Tillerson has been cleared by the Foreign Relations Committee. President Trump’s pick for secretary of state received backing with an 11-10 vote along party lines that “all but assures Senate confirmation,” according to the Associated Press. Meanwhile, the Senate confirmed Representative Mike Pompeo as President Donald Trump’s CIA director.  A U.S. Senate committee swiftly approved Wilbur Ross,Trump’s nominees for commerce, and Elaine Chao for transportation secretary by voice vote, signaling that they will face little resistance to approval by the full Senate.

On Jan. 11, Tillerson said China should not be allowed access to islands it has built in the contested South China Sea. Today, China responded, saying it had “irrefutable” sovereignty over disputed islands in the South China Sea after the White House vowed to defend “international territories” in the strategic waterway.

China claims most of the South China Sea, while Taiwan, Malaysia, Vietnam, the Philippines and Brunei claims parts of the sea that commands strategic sea-lanes and has rich fishing grounds along with oil and gas deposits. China’s Foreign Ministry spokeswoman said “the United States is not a party to the South China Sea dispute”.

White House press secretary Sean Spicer met the press again today, hilarity ensued. Spicer says Trump will announce a pick for the Supreme Court next week. Spicer confirmed that President Trump believes millions of people voted illegally in November’s election, despite a total absence of evidence to support this view.

The dollar slumped to the weakest level in six weeks yesterday after U.S. Treasury Secretary nominee Steven Mnuchin said an “excessively strong dollar” could have a negative short-term effect on the economy. The Dollar Index has reversed those declines this morning, moving back above 100.

The UK government lost its Article 50 case. The decision handed down by the UK’s top court says the government must receive parliamentary approval before it can trigger Article 50, the mechanism that would begin the UK’s exit from the European Union.

The proposed merger of health insurers Aetna and Humana has been blocked on antitrust grounds. A federal judge said the tie up would threaten competition and would’ve resulted in higher prices and reduced services for seniors who buy Medicare Advantage. Aetna will owe Humana a $1 billion breakup fee.

You may recall that Aetna threatened the government last summer with pulling out of 11 of the 15 states where it participated in the Obamacare individual insurance markets, claiming it was a “business decision.” The threat was made while the Department of Justice was investigating the merger but before it filed its antitrust lawsuit. After the lawsuit was filed, Aetna followed through on its threat.

However, in an opinion on the case, the judge wrote that it wasn’t just a “business decision”, there was more to it: “Aetna tried to leverage its participation in the exchanges for favorable treatment from DOJ regarding the proposed merger.” Aetna then tried to cover up that connection between the threat to pull out of those markets and the antitrust investigation to the point where the “repeated efforts to conceal a paper trail about the decision-making process” bordered on “malfeasance,” he wrote.

US District Judge Bates determined that there was “persuasive evidence that when Aetna later withdrew from the 17 counties, it did not do so for business reasons, but instead to follow through on the threat that it made earlier.”

There is still a lot of uncertainty about the impact the Trump administration’s trade and business policies will have on the economy and markets. But all this was backdrop for earnings reports, which were pouring in throughout the session. Earnings are coming in generally better than expected.

Profits of S&P 500 companies are estimated to have risen 6.7 percent in the latest quarter, marking the strongest growth in two years. The S&P 500 is trading at about 17 times forward 12-month earnings, compared with the 10-year median of 14.2.

Powered by strong chip and display panel sales, Samsung Electronics’ operating profit jumped 50% to $7.9 billion in the fourth quarter, helping the company bounce back from its costly Note 7 debacle.

BT Group saw its stock drop as much as 19 percent this morning – wiping out $9 billion in market cap – after the company cut its outlook for the coming years and revealed “inappropriate behavior” in its Italian unit had forced a tripling of provisions for losses there.

DuPont reported fourth quarter earnings beat estimates, while revenue missed estimates. DuPont also said it expected its merger with Dow Chemical to close during the first half of the year.

Verizon missed earnings estimates by 3 cents a share. Revenue beat Street forecasts. Verizon saw year-over-year revenue fall 5.6 percent as it added far fewer wireless subscribers than analysts had expected.

After the closing bell yesterday, Yahoo reported better-than-expected quarterly profit and revenue, and said the sale of its core internet business to Verizon would be delayed but  should be completed in the second quarter.

Travelers insurance company posted earnings well above estimates. Revenue also beat forecasts. Travelers did see underwriting results fall in its auto insurance sector, but that was more than made up for by improvements in other lines.

Johnson & Johnson — J&J reported earnings of $1.58 per share for the fourth quarter, 2 cents a share above estimates. Revenue came in slightly below forecasts. The medical device maker also gave a full-year forecast that falls below analysts’ estimates.

3M reported quarterly profit of $1.88 per share, 1 cent a share above estimates. Revenue was in line with estimates. The company also affirmed its full-year forecast.

Alibaba Group posted a 54 percent rise in third-quarter revenue, beating analyst estimates, helped by higher sales during its Single’s Day shopping event and increased earnings in its cloud and digital media ventures.

Lockheed Martin beat estimates for fourth-quarter revenue and earnings, but last year delivered fewer-than-forecast F-35 jets. The Pentagon’s No. 1 weapons supplier also said internal controls for financial reporting were ineffective at its Sikorsky helicopter business.

D.R. Horton, the largest U.S. home-builder, reported its highest growth in orders in more than a year. Orders rose 14.6 percent to 9,241 homes in the quarter ended Dec. 31. The average selling price for the quarter was $297,000, up 2 percent from a year earlier. Horton reaffirmed its 2017 revenue forecast.

Homebuilders gained after a report showed that U.S. home resales fell more than expected in December as the supply of houses on the market dropped to levels last seen in 1999. The National Association of Realtors reported sales decreased by 2.8% at a seasonally adjusted annual rate of 5.49 million in December.

Lawrence Yun, NAR chief economist, wrote: “Housing affordability for both buying and renting remains a pressing concern because of another year of insufficient home construction… It’ll take more entry-level supply; continued job gains and even stronger wage growth for first-timers to make up a greater share of the market.”

Rio Tinto — The mining company sold its Australian coal unit to Yancoal Australia for up to $2.45 billion in cash. Yancoal is an entity controlled by the Chinese government.

Nominations for the Oscars were announced this morning.  “La La Land” has landed a record-tying 14 Academy Awards nominations, matching it with “Titanic” and “All About Eve” for most nominations ever. The other nominees for best picture are: “Moonlight,” ”Arrival,” ”Manchester by the Sea,” ”Hell or High Water,” ”Lion,” ”Fences,” ‘Hidden Figures” and “Hacksaw Ridge.” Now, that I think about it – it might be good to go to the movies.

Celebration: New Highs for the DJIA and the S&P 500

Financial Review

Milk and Cookies: New Highs for the DJIA and the S&P 500

Sinclair Noe — July 12, 2016

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DOW + 120 = 18,347
SPX + 14 = 2152
NAS + 34 = 5022
10 Y + .09 = 1.52%
OIL + 2.04 = 46.80
GOLD – 21.90 = 1333.70

It was a record high close for Dow industrials and S&P 500 today. Dow Jones Industrial was up 120 points to 18,347, taking out the old record from May of 2015. S&P 500 up 14 to 2152, second consecutive record high close for the S&P 500. Nasdaq up 34 to 5022.

Japan’s Nikkei extended gains overnight,  rising 2.5% to almost recapture its pre-Brexit level, after Prime Minister Shinzo Abe ordered a new round of fiscal stimulus. The yen had its biggest two-day slide since 2014. Former Federal Reserve Chairman Ben Bernanke met with Prime Minister Shinzo Abe Tuesday. Bernanke noted during the face-to-face meeting that Japan’s central bank still has a range of monetary easing measures at its disposal. Brushing aside a view among Japanese economists that BOJ policy has reached its limit, Bernanke’s assessment added to speculation that Tokyo will unleash new rounds of fiscal and monetary stimulus to reboot Abenomics, Abe’s growth plan. It sounds like Bernanke is giving instructions on how to use the helicopter to make it rain yen.

The European Commission has slashed its U.K. and Eurozone growth forecasts following the Brexit vote, stating the cumulative negative impact for British GDP would be about 1%-2.5%, and the euro area between 0.2%-0.5%, by 2017. For the first time in more than seven years, analysts are finally expecting some action on UK interest rates from the Bank of England when it meets for its first post-Brexit policy decision on Thursday. The central bank is widely seen as reducing its key interest rate to 0.25% from a current record low of 0.5%, where it has stood since March 2009.

So, a fresh round of stimulus from Japan, plus lower interest rates in the UK, plus decent economic news from the EU and a high probability of stimulus from the ECB. Also, China performed a stealth devaluation of the yuan to support its economy. Around the world, there is a push for more stimulus or QE, and in the US, the Fed seems to have abandoned the idea of rate hikes, even as last Friday’s jobs report showed a strong rebound. Central bank policy, essentially throwing money at the markets, works – at least it works to lift the financial markets. Just in case you missed what was happening the last 8 years.

Global stocks erased losses sparked by the UK’s Brexit vote. The MSCI All-Country World Index capped a 7.6 percent rally from its post-Brexit low to reach the highest level in a month. The pound rose the most since the vote. US crude oil surged the most in three months. Treasuries fell in the biggest 2-day sell-off this year.

The IMF said in its formal annual review of the U.S. economy and policies that the June 23 “Brexit” vote has prompted a rise in the dollar that has been less than feared, up about 1% in nominal effective terms, while stock markets have recovered losses incurred right after the vote. Meanwhile, a safe-haven rush into U.S. Treasuries has lowered yields, and home and business financing costs, considerably. The IMF’s conclusion: “The net effect on growth is pretty negligible.” The IMF kept unchanged its previous U.S. economic growth forecasts of 2.2 percent for 2016 and 2.5 percent in 2017.

However, the IMF said a “more complex and harmful” downside risk is that the potential growth rate may be lower than previously estimated, with a smaller output gap. The United States faces a confluence of forces that will weigh on future gains, including a rising share of the U.S. labor force shifting into retirement, aging basic infrastructure, low productivity gains and labor markets and businesses that appear less adept at reallocating human and physical capital. It said growth in future years under this scenario could settle at well below 2 percent.

U.S. wholesale inventories barely rose in May as automobile stocks recorded their biggest drop in more than 2-1/2 years, suggesting inventory investment likely remained a drag on economic growth in the second quarter.  The Atlanta Federal Reserve’s GDPNow forecast model shows the US economy likely expanded at a 2.3 percent annualized rate in the second quarter following the latest data on wholesale trade. The latest GDP estimate was slightly lower than the 2.4 percent figure calculated on July 6

Job openings in the U.S. fell in May to the lowest of the year. The Labor Department’s JOLT survey shows job openings fell to a seasonally adjusted 5.5 million in May from a record 5.85 million in April. That’s the biggest decline in openings since last August. The fewer number of jobs available could be a blip that gets reversed in June. The economy added a whopping 287,000 jobs last month after just a meager 11,000 gain in May.

What is clear is that hiring has slowed in 2016. The hiring rate among private sector companies slipped to 3.8% in May to mark the lowest level in more than two years. The quit rate was unchanged at 2%, which is actually a negative; people quit their jobs in order to take new jobs, so more quits are seen as more mobility in the labor force.

Small-business sentiment rose for the third straight month in June, but remained muted compared to its long-term average. The optimism index from the National Federation of Independent Business rose 0.7 to 94.5. Only three of ten components declined in June, and the biggest jump was in the number of people who expect the economy to improve. Still, the index has spent most of the economic expansion well below its long-term average of 98.

A new commercial data pact between the European Union and the United States has been approved and companies such as Google and Facebook can sign up by the end of the month. The new agreement that will allow the transfer of online data across the Atlantic; this includes everything from social media posts and search queries to information about workers’ pensions and payroll. The pact, known as the EU-U.S. Privacy Shield will underpin over $250 billion dollars of transatlantic trade in digital services annually. The previous such framework, Safe Harbor, was struck down by the EU’s top court in October on the grounds that it allowed U.S. agents too much access to Europeans’ data.

An arbitration court ruled that China has no historic title over the waters of the South China Sea and has breached the Philippines’ sovereign rights with its actions. China boycotted the hearings at the Permanent Court of Arbitration in The Hague and vowed to ignore the ruling and said its armed forces would defend its sovereignty and maritime interests. China claims most of the energy-rich waters through which about $5 trillion in ship-borne trade passes every year. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

Amazon.com said this morning that some customers were reporting difficulty with checkout after making purchases in its highly publicized “Prime Day” shopping event. The glitches seem to have been worked out. The one-day sale, for members of Amazon’s $99 per year Prime subscription service, is expected to generate up to $1 billion in sales, more than double the amount last year.

Amazon devices such as Echo, Fire TV, Fire TV Stick and Fire tablet are available at big discounts as are a host of other products from high-end televisions to shoes and toys. Big U.S. retailers such as Wal-Mart and Gap are also offering midsummer promotions online to cash in on the hype around Amazon’s Prime Day sale. For Amazon, it is a chance to grow its base of prime customers; who then end up spending more than twice as much each year compared to non-subscribed customers. Users who subscribe to Amazon Prime membership are promised 100,000 special bargains by the e-commerce platform, launching the kind of purchasing frenzy that saw more than 34.4 million items sold last year.

To move all that stuff, Amazon has a sprawling logistics network, designed to deliver most Prime products in just 48 hours. In some warehouses, known as “Fulfillment Centers,” robots have even been introduced to shorten the “click-to-ship” gap to just 15 minutes.