Financial Review

Up and Down the Chain

Sinclair Noe — June 23, 2017

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DOW – 2 = 21,394
SPX + 3 = 2438
NAS + 28 = 6265
RUT + 10 = 1414
10 Y – .01 = 2.14%
OIL + .43 = 43.17
GOLD + 6.60 = 1257.60
BITCOIN + 0.27% = 2745.66 USD
ETHEREUM – 3.55 % = 329.50

Energy stocks led the S&P 500 higher, posting its only positive session of the week. Overall, U.S. stocks closed little changed for the week, with the Dow and S&P posting small gains in the period.

The Nasdaq posted a 1.8% gain for the week. Health care stocks pulled back about 0.1 percent today, but the sector still notched a weekly gain of 3.7 percent to outperform the other spaces.

Today is a Russell Rebalancing Day. That is the annual reconstitution of the Russell Indexes, where the index provider makes rule-based changes to composition of its indexes, to ensure that changes in market value or investment styles, like shares of companies deemed value or growth, for example, are properly accounted.

Total market capitalization for Russell components increased more than 10% to around $27 trillion since last year. Rebalancing day typically results in a little extra trading volume but not much effect on price action for the overall market.

Yesterday, the Senate unveiled its version of Trumpcare, or the Better Care Reconciliation Act. Four GOP senators announced they would not support the bill. Rand Paul, Ted Cruz, Mike Lee, and Ron Johnson said the legislation did not go far enough in its repeal of Obamacare.

Today, Nevada Senator Dean Heller said he would not support the legislation. Heller is up for reelection in 2018 in a state won by Hillary Clinton in last year’s presidential election. Nevada also expanded the Medicaid program under the Affordable Care Act, or Obamacare, and the Senate bill would phase out that expansion starting in 2020. Heller said he can’t support a bill “that takes insurance away from tens of millions of Americans and hundreds of thousands of Nevadans.”

Several other senators are leaning toward opposition, including Portman of Ohio, Murkowski of Alaska, and Collins from Maine. Look for lots of deal making and arm twisting.

Sales of newly-constructed homes rebounded in May, and government data was revised to show a stronger spring selling season than had been previously reported. New-home sales ran at a seasonally adjusted annual rate of 610,000. That was 2.9% higher than in April and 8.9% higher than a year ago.

So far in 2017, 271,000 new homes have been sold, which is 12% higher than during the same period last year. The median sales price in May was $345,800, up from $310,200 in April and $296,000 in May 2016. At the current pace of sales, it would take 4.6 months to exhaust available supply.

About a week ago, Amazon it would acquire Whole Foods, then followed that with news it will start selling Nike products directly online. Once again, Amazon is shaking up the retail universe. Amazon stock has been on a nice run the past week, adding $18 billion in market capitalization.

In contrast, $31 billion in competitor market cap has been wiped out in the same period. Walmart and Costco have been hit the hardest, both losing more than $8 billion in value since the Whole Foods deal was announced on June 16. Whole Foods stock has been trading above Amazon’s offer of $42 a share, however, signaling that investors believe a bidding war could emerge and drive up the final price for Whole Foods.

Competitors like Target, Costco, and Kroger have been rumored as potential suitors, and they would do anything to make this deal harder for Amazon. Walmart is probably the only retailer that can truly compete with Amazon, but today they said they will not bid.

At the same time, Morgan Stanley said in a research note that the retail drug space could experience a wave of M&A action as companies try to outflank Amazon. Basically, any link in the supply chain is now subject to the influence of Amazon.

Meanwhile, outdoor gear retailer Eddie Bauer has hired investment banks to explore strategic alternatives, including a potential sale of the company. Also, today, Sears Holdings is closing an additional 20 money-losing stores. The move includes 18 Sears stores and two Kmart stores. Sears is hardly the only retailer shuttering locations.

There have been about 5,300 store closing announcements so far, this year, according to Fung Global Retail & Technology, a retail think tank.

Meanwhile, Amazon has filed for a patent for beehive-like towers that would serve as multi-level fulfillment centers for its delivery drones to take off and land. The facilities would be built vertically to blend in with high rises in urban areas. Amazon envisions each city would have one. The patent application features several drawings of these buildings, such as the beehive, a cylinder-shaped center and one that looks like a UFO.

The Brexit vote happened one year ago. Britain’s stock market, the FTSE 100, has gained nearly 17% since the UK’s June 23, 2016, vote to leave the European Union. The divorce talks between Brussels and Britain finally kicked off this week, but the outcome of the final agreement remains extremely uncertain.

The government will be working against the clock to hammer out a deal before the deadline of March 29, 2019, two years after UK Prime Minister Theresa May triggered the so-called Article 50 that officially set off the Brexit process. Little progress has been made in the three months since the Brexit clock started ticking. The UK is in a weak negotiating position.

And nobody is sure what Brexit means or what it will ultimately look like.

Qatar has 10 days to meet 13 demands from the Gulf states. Qatar is being ordered to reduce diplomatic ties with Iran, sever ties with terrorist organizations, and shut down Al Jazeera and affiliated networks, among other things, before the Gulf states will lift their blockade on the country.

Another day of Fedspeak. Cleveland Federal Reserve Bank President Loretta Mester said that recent inflation weakness was likely temporary and it should not delay another interest-rate hike this year, even though there is no “immediate need” to tighten policy. Mester is considered one of the more hawkish policymakers.

St. Louis Fed president James Bullard says the Fed can afford to stop raising short-term interest rates and wait and see how economic developments and Washington policy debates play out in coming quarters. Bullard says optimism about the economy has faded since March with economic data surprising to the downside. Bullard is considered one of the more dovish policymakers, calling for rates to remain flat through 2019.

By raising interest rates for the second time this year, Federal Reserve officials doubled down on their long-held belief that inflation will level out at their 2% target, even though the numbers hint at another story.

The Fed has been singing the same tune on inflation for nearly the entirety of this decade, and one could be forgiven for wondering how much inflation is really playing into the Fed’s decision-making process at this point. Yellen and friends made the move to lift rates to between 1% and 1.25% even though most inflation readings have drifted away from its long-run target of 2% in recent months.

Instead, it seems that a marginally improved labor market, and a desire for more wiggle room to cut rates for a slowdown that is becoming increasingly mathematically inevitable, are motivating the push to tighten policy. That includes the Fed’s outline for reducing its balance sheet, the manner of which but not the timing, was unveiled alongside the rate hike.

Treasury yields have fallen from their 2017 highs recently, with the benchmark 10-year yield trading around 2.15 percent. In March, it traded around 2.6 percent. The bond market doesn’t see inflation coming in the near term, and so far, it’s been right.

Adding to the deflationary ledger – oil prices dropped about 4% this week.

Today, SpaceX successfully fired up a Falcon 9 rocket for the eighth time this year, matching its flight total for all of last year. Its next launch is scheduled just two days later, with the ramped-up cadence putting the company on track to achieve the 20 to 24 total missions it’s targeting for the year.

The launch used a “flight proven” Falcon 9 rocket booster, which means it’s flown to space previously and been returned and refurbished. The rocket carried a Bulgarian communications satellite destined for geostationary orbit.

It launched from the historic 39A pad at NASA Kennedy Space Center in Florida, where Neil Armstrong left from before landing on the moon in 1969. On Sunday, SpaceX will launch 10 satellites for Iridium Communications from Vandenberg Air Force Base on California’s central coast.

Remember Blackberry? Once upon a time, about 8 to 10 years ago, Blackberry was the mobile phone of choice. The company reported earnings of $0.02 per share, compared to an estimated zero, but revenue fell to $235 million from $400 million from the year before. The company outsourced the manufacturing of Blackberry hardware in late 2016 in order to focus on software and services. Shares were up about 50% this year, until today – down 12%.

If you use Google’s Gmail, you may have noticed a that anything in your emails is likely to pop up as an ad. It’s not just a coincidence. Gmail scans and analyzes emails – or at least they did. They will stop the practice, due to privacy concerns and the general creepiness.

But this doesn’t mean you won’t see targeted ads in Gmail. Instead, they’ll be personalized with information gleaned from other sources. For example, Google collects data about you based on the YouTube videos you watch or the searches you make.

Financial Review

Peace Out

Sinclair Noe — February 17, 2017

DOW + 4.28 = 20,624
SPX + 3.94 = 2351
NAS + 23.68 = 5839
RUT + .73 = 1399
10 Y – .03 = 2.42%
OIL + .04 = 53.37
GOLD – 5.60 = 1236.00

Starting Presidents’ Day a bit early, so today’s review is a bit on the light side. Thanks for your patience.

US stocks have spent the past week setting new record after new record. The S&P 500 and the Nasdaq posted 5 consecutive record high sessions before slipping yesterday. The Dow managed to hang on for a small gain and a sixth straight record.  European markets are sinking in early trading. The majority of Asian markets closed the week with small losses.

Samsung’s chairman is in jail. Jay Y. Lee will be indicted tomorrow, per South Korea’s special prosecutor, after he was arrested over his alleged role in the nation’s widening corruption scandal. It throws the firm into a leadership crisis for the first time in its corporate history, and is a huge blow to Samsung Electronics, the key unit where Lee serves as vice chairman. Other Samsung executives may also be arrested.

All that remains of Hanjin Shipping will be liquidated following a South Korean court order which pulled the plug on the company. Previously the world’s seventh-largest container shipper, Hanjin applied for court receivership in late August after its creditor banks halted further support.

Eurozone finance ministers and the International Monetary Fund seem likely to miss next week’s deadline to agree on a €7-billion-euro bailout for Greece. The two sides remain at loggerheads over an IMF demand that Athens be granted debt relief and easier surplus targets, meaning a pact may now be months away. While Greece won’t face bankruptcy trouble until July, Eurozone officials were racing to strike a deal so the drama wouldn’t be forced into the upcoming Dutch and French elections.

Complications in restructuring Saudi Arabia’s state-owned oil company and segregating its finances from those of the government are slowing the march toward what is expected to be the biggest IPO in history. The Wall Street Journal reports the listing of a minority stake in Saudi Aramco is now unlikely to happen until late 2018 at the earliest.

S&P Global said it could cut its rating of Toshiba credit by several notches should the Japanese firm receive financial support that includes debt restructuring.

Unilever has rejected a proposed $143 billion-dollar merger offer from Kraft Heinz, saying the bid was too low and it fundamentally undervalues the company.

Mmm, Mmm, NOT good. Campbells Soup said earnings for the latest quarter fell to $205 million, or 33 cents per share, from $414 million, or 85 cents per share in the year-earlier period. Revenue also fell. Topline was a miss; bottom line was a beat.

Deere & Company posted better than expected earnings, even as revenue slipped. Agriculture and turf and construction and forestry sales topped expectations. Deere shares have rallied about 20% in the past 3 months.

Wells Fargo will give investors a peek into its efforts to rebound from its fake account scandal when it releases monthly customer account numbers and holds a conference call later today. The bank has reported a dramatic decline in consumer checking account openings in recent months. It’s now looking to shut more than 400 branches.

The Justice Department has joined a 2011 lawsuit accusing UnitedHealth of gaming the Medicare program and fraudulently collecting hundreds of millions of dollars by claiming patients were sicker than they really were.

The five-year investigation, unsealed yesterday says UnitedHealth, the nation’s largest Medicare Advantage insurer, allegedly collected payments from false claims that it treated patients for conditions they didn’t have, for more severe conditions than they had, conditions that had already been treated, or diagnoses that didn’t meet the requirements for risk adjustment.

General Motors chief Mary Barra visited Opel’s German headquarters and gave assurances the GM unit would remain independent and current management would remain in place in any deal with Peugeot parent PSA Group. The two companies previously said they were in talks regarding a PSA purchase of GM’s European car operations.

AT&T opened its unlimited wireless data plan to all customers, a few days after a similar move by Verizon. Previously, AT&T had only offered such plans to customers of its DirecTV service. The move leaves all four national wireless carriers, including T-Mobile and Sprint, offering similar unlimited plans and leaving price and network claims as the major differences.

A muzak-streaming service launched its global offensive. The Spotify-backed “Soundtrack Your Brand” plans to push into global markets with its own music catalog and $22 million in fresh, outside funding. It already has deals to pipe its music into McDonald’s and Tag Heuer stores, and is now going up against Canada’s Mood Media, the market leader in commercial background music.

Amazon was awarded a patent earlier this week for a system in which a package would be “forcefully” propelled from a drone, and would be helped to land by measures including a parachute.

SpaceX launches a Falcon 9 rocket on Saturday. The mission, taking off from the Kennedy Space Center in Florida, will carry a Dragon supply ship to the International Space Station.

US markets will be closed Monday in observance of Presidents Day.

Financial Review

Mars Looks Pretty Good

Sinclair Noe — September 27, 2016

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

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DOW + 133 = 18,228
SPX + 13 = 2159
NAS + 48 = 5305
10 Y – .03 = 1.56%
OIL – 1.00 = 44.93
GOLD – 10.90 = 1328.00

A CNN poll showed that 62 percent of voters who watched last night’s presidential candidate’s debate felt that Democratic nominee, Hillary Clinton, won. In markets, the Mexican peso seems to agree, with the currency rallying as much as 2 percent after the head-to-head concluded, any other correlations to the markets are hypothetical.

Last night’s debate was all over the place. That’s not a commentary on the candidates, rather on the broadcast itself. Unlike the primaries, the networks do not take turns running the general election debates. Instead, the non-partisan, non-profit Commission on Presidential Debates runs the show and hands out sets of keys to whoever wants them.

That means in addition to every major network, other platforms like Facebook, Twitter, and Yahoo were able to broadcast their own streams. The early estimates are that 81 million people watched the debate on one of the 12 TV networks and about 2.5 million watched live streaming. Although about 90% of the people probably tuned in just to see if the roof would collapse.

Top social media platforms steered hundreds of thousands of users to voter registration websites over the weekend in an effort several states said set new records for registration activity. Facebook, Instagram, Snapchat and other social media networks began reminding users over the age of 18 to register to vote. Users on Facebook were directed to a federal website that would then direct them to sites in their home states.

Today is National Voter Registration Day; it is not the last day you can register to vote, just a day to encourage everyone to register. In Arizona, you have until October 8 to register by mail, or October 10 to register online.

Before we get to the actual election, the government might shut down. The federal budget runs through Friday. We need a new budget to keep running; that is not going to happen. Typically, the politicians come up with a continuing resolution, an extension on the deadline for a budget; that might not happen either. The stopgap funding bill under consideration would keep the federal government running through Dec. 9, as well as provide funds to combat the Zika virus. It also includes disaster-relief aid for flooding in Louisiana and other states.

Senate Democrats are demanding federal aid for residents of Flint, Michigan to deal with their poisonous water problem. Senate majority leader Mitch McConnell is talking about removing aid to flood victims in Louisiana in exchange for aid to Flint.

That deal may or may not fly. But then there is another rider on the stop gap budget, the inclusion of a poison pill policy rider to keep political money from big corporations a secret. The rider would block the Securities and Exchange Commission (SEC) from working on a rule to require publicly traded companies to disclose their political spending. This rider is one of the main sticking points standing in the way of a deal to keep the government open. The deadline for a budget deal is Friday.

Iran is unwilling to freeze its oil production at current levels. The nation’s oil minister also said the country doesn’t intend to strike an agreement with other crude producers in Algiers this week. Iran will increase output from 3.6 million barrels per day to 4 million.

OPEC’s decision to hold informal talks this week has fanned speculation that it might be about to deviate from a two-year-old policy of pumping without limits, which succeeded in hurting rival suppliers but also sent prices into free-fall. Energy Ministers are now calling the gathering a “consultative meeting,” saying “it wasn’t time for decision-making.” A formal OPEC meeting will take place in Vienna on Nov. 30, when a supply agreement may be reached.

The World Trade Organization has cut its forecast for global trade growth this year by more than a third. The new figure of 1.7%, down from its April estimate of 2.8%, would be the slowest pace of trade and output growth since the 2009 financial crisis. It is also the first time in 15 years that international commerce has been left trailing behind the world economy.

The downturn reflects the slowdown in countries such as China and Brazil and lower levels of imports into the US. Trade has grown 1.5 times faster than gross domestic product over the long term – but the WTO say it will only grow 80% as fast this year. That would be the first reversal of globalization since 2001 and only the second time this has happened since 1982.

Global bonds moved higher as renewed concerns over Europe’s banks spur demand for safe assets. Germany’s 10-year yield fell to the lowest since July and Finland’s dropped below zero for the first time. Spain’s 10-year yield dropped to a record low. The outlook may be different for Treasuries, as Blackrock, the world’s biggest money manager, warned of the risks of holding Treasuries as the Federal Reserve moves towards raising rates.

Single-family home prices rose slightly less than expected on an annual basis in July, and the year-over-year gain was smaller than in the prior month. The S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5 percent in July on a year-over-year basis, down from 5.1% in June. In Phoenix, existing home prices were up 0.8% from June to July, and up 5.2% over the past 12 months.

A key measure of consumers’ attitudes increased in September, to its highest level since the recession. The Consumer Confidence Index hit 104.1 in September, up from August’s revised reading of 101.8. The survey measures confidence toward business conditions, short-term outlook, personal finances and jobs.

A federal appeals court has ruled that American Express could stop merchants that accept its cards from encouraging customers to use rival payment cards that charge the stores lower transaction fees. The decision reversed a lower court’s 2015 ruling that such restrictions violated federal antitrust law. The decision is a major victory for American Express, which wants to ensure that its customers, who pay higher-than-average membership fees, do not encounter any barriers to use.

The ruling means that American Express can continue to enforce provisions in its contracts with merchants that prohibit them from steering customers toward other forms of payment. Credit card costs are largely invisible to consumers, but retailers pay a fee each time a credit or debit card is used. Amex charges higher so-called swipe fees, or interchange fees, than Visa or MasterCard, and some consumer advocates argue that those costs can get unfairly passed on to shoppers in the form of higher prices.

Samsung Electronics has recovered more than 60% of all recalled Galaxy Note 7 smartphones sold in South Korea and the US. Samsung announced on Sept. 2 a global recall of at least 2.5 million Note 7s in 10 markets due to faulty batteries causing some phones to catch fire.

Caesars and its creditors have agreed on a restructuring to get the casino’s operating unit out of bankruptcy. Creditors will receive about 70% of the fully diluted equity in the new structure, while second lien noteholders and unsecured creditors will get paid $0.66 on the dollar.

Walt Disney is working with a financial adviser to evaluate a possible bid for Twitter. Twitter has started a process to evaluate a potential sale. Salesforce.com is also considering a bid and is working with Bank of America on the process. No deal yet, just speculation.

Last year, the Environmental Protection Agency finalized a far-reaching rule that would, for the first time ever, regulate carbon dioxide emissions from America’s existing coal- and gas-fired power plants, which are a major source of pollution. The Clean Power Plan set specific emissions targets for each state and gives them plenty of flexibility in deciding on how to meet the goals. If all goes as intended, the plan would reduce power plant emissions roughly 30 percent below 2005 levels by 2030.

Various oil and coal companies, along with 27 states led by West Virginia, have sued to overturn the Clean Power Plan. Many of these states could meet the plan’s targets fairly easily, but they are opposed to any expansion of EPA powers. In response, the Supreme Court halted implementation of the Clean Power Plan until the court challenges were finished.

Today the litigants presented oral arguments to the DC Circuit Court. A ruling is expected in either late 2016 or early 2017. Whatever the outcome, the next stop for this case is the Supreme Court, which has been split 4-4 between conservatives and liberals ever since Justice Antonin Scalia’s death this year. If there’s a 4-4 SCOTUS split on this case, then whatever the DC Circuit Court rules will stand.

SpaceX has successfully tested a new rocket engine it plans to use to take people to Mars within the next 10 years. CEO Elon Musk tweeted about the successful first firing of the Raptor engine and included photos. Musk said he expects SpaceX to make an unmanned mission to Mars by 2018, using existing technology. He plans to use the Raptor engine for a manned Mars mission by 2025.

SpaceX has yet to carry humans into outer space, but it has won a contract from NASA to carry U.S. astronauts to the International Space Station as soon as next year. Today Musk laid out his plans for Mars colonization. The idea is reusable rockets, somehow making fuel on Mars, refueling stations in space, spaceships carrying about 100 passengers per flight to Mars to inhabit a city of 1 million. All this within the next 10 years.

Financial Review

Probably a Preview

Sinclair Noe — September 14, 2016

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

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DOW – 31 = 18,034
SPX – 1 = 2125
NAS + 18 = 5173
10 Y – .04 = 1.69%
OIL – 1.26 = 43.64
GOLD + 4.20 = 1323.60

Wall Street edged lower, and trading seemed calm compared to the past few days. The S&P 500 remains down almost 3 percent from before a steep selloff on Friday, even though interest rate futures indicate expectations for a rate hike at the Fed’s Sept. 20-21 meeting are still low. What we are seeing is probably a preview for what will happen when the Fed does raise rates.

Monsanto has finally agreed to a takeover offer from Bayer, valuing it at $128 per share or a total of more than $66 billion, ending months of wrangling after increasing its bid for a third time. The deal would be the largest all-cash transaction on record and put a quarter of the combined world market for seeds and pesticides under one roof. Bayer has also settled on a $2 billion break-up fee for the deal, which could close by the end of 2017.

The Monsanto-Bayer deal will face anti-trust scrutiny. Last year Monsanto tried to buy Syngenta, but the Swiss company fended off the attempt, only to agree later to a takeover by China’s state-owned ChemChina. Elsewhere in the industry, U.S. chemicals giants Dow Chemical and DuPont plan to merge and later spin off their respective seeds and crop chemicals operations into a major agribusiness.

Here’s why it matters to you: the consolidation of two big industry players into one of the world’s largest agrochemical firms may limit farmers’ choices and bargaining power, with increasing seed prices expected to be passed on to the grocery aisles. Regulators are likely to take a dim view of so many Big Ag deals happening at once.

If the 3 deals go through, it would result in just 3 companies selling 59% of all the globe’s seeds, with Monsanto/Bayer control 30% of the total; and 64% of the world’s pesticides. There will be strong opposition in the US and around the globe. Regulators will likely demand the sale of some soybeans, cotton and canola seed assets as a condition for approving the deal, at the very least. And it is possible that all three deals will be shot down.

Vitae Pharmaceuticals shares more than doubled to $20.85 after Allergan said it would buy the company for $639 million.

U.S. import prices fell for the first time in six months in August on declining petroleum and food costs. The Labor Department says import prices decreased 0.2 percent in August after an unrevised 0.1 percent gain in July. Last month’s drop was the first since February. Import prices have been constrained by a strong dollar and cheap oil.

That, together with sluggish wage growth have left inflation persistently running below the Fed’s 2 percent target. Imported petroleum prices declined 2.8 percent last month after decreasing 3.6 percent in July. Import prices excluding petroleum were unchanged after climbing 0.5 percent in July. The report also showed export prices fell 0.8 percent in August.

You’ve heard that old line “we fought a War on Poverty, and poverty won.” Well, maybe poverty hasn’t won, but it is still too high. New data from the Census Bureau shows median middle-class wages rose 5.2% between 2014 and 2015, the first annual increase since 2007. But the median household income was still lower than it was in 2007.

The official poverty rate decreased to 13.5 percent for last year, a drop of 1.2 percentage points. That represents 3.5 million people who are no longer in poverty and is the largest annual percentage point drop since 1999. And the uninsured rate continued to fall. The percentage of Americans without health insurance for the entire year dropped by 1.3 percentage points, to 9.1 percent.

Since 2013, the uninsured rate is down 4.3 percentage points. Still, the Census Bureau reports that 11.2 million individuals were pushed below the poverty line last year because of medical expenses. The latest data found that 29 million people went uninsured last year, including 3.7 million children, and that deductibles and other out-of-pocket costs have continued to rise well after the Affordable Care Act (ACA) went into law in 2010. The quickest path to the poor house is to get sick.

Americans all grew richer pretty much across the board last year, but they also stayed relatively unequal. The Gini coefficient, which the Census uses to track the gap between the rich and poor, was unchanged in the last year, despite all those wage gains and declining poverty. In fact, it’s up 5.5% since 1993, when the government first began tracking the data.

Women might be earning more today, but the gap between what they earn and what men expect to earn hasn’t narrowed significantly since 2007. Despite the many positive trends in the report, there are also still lingering signs of an uneven recovery. To date, only one income group is actually earning any more than they were in 2007: the top 5%.

In his annual State of the Union speech, European Commission President Jean-Claude Juncker warned the EU was facing an “existential threat,” but insisted that Brexit doesn’t mean “the disintegration of the European Union.” He also said the U.K. could not expect access to the EU’s internal market without the free movement of people.

European officials will unveil new technology rules today aimed at reining in many of the world’s largest tech firms. Under the proposals, which will take years to complete, European publishers may be given powers to charge internet companies whenever their content shows up in online results or other services. Chat apps will also be more heavily policed by extending rules which currently only cover telecoms providers.

With plans to launch by the end of October, Facebook and Twitter have joined a network of over 30 companies to tackle fake news and improve the quality of reporting from social media. Google-backed First Draft Coalition will create a voluntary code of practice, promote news literacy among social media users, and establish a platform where members can verify questionable stories.

Walmart is working on a self-driving shopping cart that customers would be able to hail like an Uber – possibly through a smartphone app. Not only has the retailer filed a patent for a cart that has a motor and video cameras, but it would be able to return itself from customers’ cars to the store. The system may also help Walmart manage inventory by scanning store shelves to ensure products are there.

Ford Motor CEO Mark Fields says that all of the company’s small-car production would be leaving U.S. plants and heading to lower-cost Mexico. Ford also rolled out plans today to expand into robo-taxi fleets and other autonomous-car services. Ford says the move into new business services will deliver 20% profit margins once rolled out — far higher than the low single-digit return typical for car manufacturers. Ford told investors that its 2017 financial performance would decline from this year’s levels.

Uber launched its self-driving pilot program in Pittsburgh today; the unveiling of the company’s secretive work in autonomous vehicles and the first time self-driving cars have been so freely available to the U.S. public. But it is not as if robots are taking over the Steel City. There will be only four self-driving vehicles available to passengers, to start, and two people will sit in the front to take over driving when the car cannot steer itself.

Uber’s Pittsburgh fleet consists of Ford Fusion cars outfitted with 3D cameras, global positioning systems (GPS) and a technology called lidar that uses lasers to assess the shape and distance of objects, mounted somewhat crudely to the vehicle’s roof. The company is also outfitting Volvo SUVs that will be added to the fleet.

SpaceX hopes to start launching its rockets again in November, a mere three months after the company’s Falcon 9 exploded on a launch pad at Cape Canaveral. But given the significant repairs needed for Launch Complex 40 – the site of the explosion – SpaceX’s next flight will likely take off from the Vandenberg Air Force Base or an alternate launch site at the Kennedy Space Center.

The Hanjin Shipping Co. terminal at South Korea’s largest port used to be one of the world’s busiest. Dozens of container carriers would line up to ferry boxes to and from the giant cranes that loaded and unloaded the world’s biggest ships. Last week the terminal, as big as 100 football fields, came to a virtual standstill. Whatever capital is tied up in those containers isn’t moving, any more than the container are. Hanjin is not alone. Of the biggest 12 shipping companies that have published results for the past quarter, 11 have announced huge losses. Several weaker outfits are teetering on the edge of bankruptcy.

Apple’s stock hit a 2016 high today, with its market value peaking above $600 billion for the first time since April. Reports of strong early orders for the iPhone 7 as well as arch-rival Samsung Electronics’ widely-publicized recall of potentially exploding Galaxy Note 7 smartphones, pushed shares of Apple up 10 percent in the past three days.

JPMorgan is now the biggest bank in the world by market capitalization. Shares of Wells Fargo slid 3.3% on Tuesday, giving the company a market capitalization of $239.7 billion, compared with JPMorgan’s $242.8 billion. Federal prosecutors are investigating Wells Fargo in connection with the bank’s sales practices after it agreed to pay $185 million in fines for opening more than 2 million unauthorized accounts. According to a report in the Wall Street Journal, the probe by U.S. Attorneys in New York and San Francisco is in its early stages and could lead to a criminal inquiry

Financial Review

Manufacturing Breaks Bad

Sinclair Noe — September 1, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 18 = 18,419
SPX – 0.09 = 2170
NAS + 13 = 5227
10 Y un = 1.57%
OIL – 1.18 = 43.52
GOLD + 5.10 = 1314.60

The Institute for Supply Management said its manufacturing index in August fell to 49.4% from 52.6% last month, below expectations for a 52% reading. Any reading below 50% indicates contraction, and the index was below that level for the first time since February.

Today’s ISM report is one of the most important data releases. The ISM index is a leading indicator, which tells us what is going to happen. In other words, it is leading both economic news and stock prices. New orders are down 7.8 points, production is down and employment is contracting faster.

Overall, manufacturing is contracting again. Only six out of 18 industries were able to report growth. Eleven reported contraction. Cyclical industries like machinery and transportation equipment continue to underperform.

The poor ISM report comes on the heels of another weak report. Earlier, the government announced a steeper-than-initially expected decline in worker productivity, in what has been the longest dip in productivity since the 1970s. Nonfarm business productivity fell at a 0.6 percent seasonally adjusted annual rate in the second quarter, from an earlier estimate of a drop of 0.5 percent.

But the Labor Department also reported a surprise jump in labor costs, with the annual rate of unit labor costs rising to 4.3 percent at nonfarm businesses. The initial estimate was a 2 percent pace. Hourly compensation in the second quarter grew at a rate of 1.1 percent on an inflation-adjusted basis, from an earlier estimate that it had declined at a 1.1 percent rate.

The crummy data comes a day before the important August employment report, expected to be a major indicator for whether the Fed could raise rates in September. While some traders speculated the manufacturing report was a one-time blip, the data definitely subdued some talk that the economy was strong enough for the central bank to hike.

The number of Americans who applied for unemployment benefits last week rose 2,000 to 263,000. The average of new jobless claims over the past month, meanwhile, fell by 1,000 and also totaled 263,000. The less volatile four-week average is seen as a more accurate measure of labor-market trends. New claims fell below the key 300,000 threshold in early 2015 and have remained there for 78 straight weeks, the longest stretch since 1970.

The number of announced layoffs by U.S.-based companies fell in August to the lowest level since May. Global outplacement consultant Challenger, Gray, and Christmas reports US employers announced they planned to hand out 32,188 pink slips last month, a 29 percent decline from July.

The August total was also 22 percent below the number of job cuts at this time last year. The computer sector was the biggest job-cutter, with Cisco Systems accounting for most of its 6,103 payroll reductions. The industrial goods sector – which includes the oil patch – was also hard hit, losing 3,073 jobs.

Wal-Mart said it will cut about 7,000 back-office jobs, mostly in accounting and invoicing positions at its U.S. stores, continuing a program it announced in June of cutting such jobs on the West Coast. Wal-Mart will now cut back-office workers in all its approximately 4,600 stores over the next several months. The retailer employs about 1.5 million people in the United States.

US auto sales fell 4.2% in August as some major automakers said a long-expected decline due to softer consumer demand had begun. The top three sellers, GM, Ford, and Toyota reported declines of at least 5%. Of the seven top manufacturers by sales, only Fiat Chrysler Automobiles reported a gain versus a year ago. Auto sales account for about one-fifth of all retail sales. Look for car companies to offer incentives to entice buyers.

A barrel of West Texas Intermediate for October delivery has been trading under the $44 a barrel level, with the commodity dropping about 7.5% this week. Russia’s Energy Ministry said it sees no need for talks on capping production with oil prices around $50 in a statement ahead of OPEC talks in Algiers later this month.

Russia, the world’s biggest energy exporter, was a key negotiator in talks on an oil-output freeze with Saudi Arabia and other OPEC producers in April. That proposal failed after Iran declined to attend the meeting in Doha and Saudi Arabia refused to proceed with the deal without the participation of its Persian Gulf rival.

With gasoline prices rising at the pump as the summer driving season draws to an end, drivers can take solace in the fact that they shelled out less for the fuel this summer than they have in over a decade and that prices will fall back soon as fuel demand drops.

The U.S. national average for a gallon of gasoline is likely to end the summer driving season at about $2.24, and that means drivers enjoyed the cheapest summer at the pump since 2004; and it’s a big drop from Labor Day 2012 when the average price was $3.86 a gallon. Now, with the usual drop in gasoline consumption following the Labor Day holiday, drivers can expect to prices decline as demand softens.

What Brexit effect? British manufacturing staged one of its sharpest rebounds on record in August as factories recovered from the initial shock of June’s vote to leave the European Union. The Markit/CIPS purchasing managers’ index for the sector soared to 53.3 from July’s figure of 48.3. Data over the past couple of weeks has further shown consumer demand holding up in the face of the referendum result.

More than $7 billion was wiped off the market value of Samsung Electronics today after it delayed shipments of its Galaxy Note 7 phone. Samsung announced the delays after several people posted images and videos of charred Galaxy Note 7s online and said their phones had caught on fire. Several South Korean media reports, without citing direct sources, said Samsung will soon announce a plan to recall affected Note 7 phones and replace their batteries as opposed to giving the users a new device.

The collapse of South Korea’s Hanjin Shipping is sending ripples through world supply chains, as manufacturers scramble for freight alternatives to the world’s seventh-biggest shipping line. Hanjin’s bankruptcy is the biggest ever in container shipping history. Hanjin filed for court receivership after its banks decided to end financial support, and ports across the globe have refused entry to its vessels in what is traditionally the industry’s busiest season ahead of the year-end holidays. Another theory is that Hanjin’s ships are staying out of port to avoid being confiscated.

The Securities and Exchange Commission fined RBC Capital Markets for $2.5 million for allegedly making materially false and misleading disclosures in its fairness opinion valuation analysis for a proxy statement for Rural/Metro Corporation’s sale in 2011 to a private equity firm. An SEC investigation found that RBC’s presentation as the lead financial adviser to Rural/Metro, a medical transportation services provider, contained allegedly materially false and misleading statements which made the bid look more attractive.

The investment bank that advised SolarCity on its $2.6 billion sale to Tesla made a “computational error” in its analysis that discounted the value of the solar company by $400 million. Despite the mistake by Lazard, the companies agreed it would not change their view of the deal. SolarCity has until September 14 to actively seek other acquisition proposals, at which time its “go-shop period” ends. The filing also revealed that in recent weeks, 15 institutional investors passed on either acquiring SolarCity or injecting equity into it. The company is having difficulty tapping the public markets amid the proposed merger and is facing a liquidity squeeze.

SpaceX’s Falcon 9 rocket has exploded as part of a test on a launch pad in Cape Canaveral, Florida. The company was scheduled to do a static test-fire of the rocket, which it previously landed safely on a ship in April after it delivered supplies to the International Space Station. So, this would have been the first recycled rocket.

The first step in Facebook’s grand vision to connect the entire world to the internet, or at least connect to Facebook, has gone up in flames. That SpaceX rocket that exploded was carrying a satellite that Facebook planned to use in its internet.org initiative. Facebook had planned to lease some of the bandwidth on the satellite, Amos 6, from its operator, the Israeli company SpaceCom, to beam internet to sub-Saharan Africa.

The satellite was intended to fill in until Facebook’s more ambitious plans for internet access are ready, including developing and launching massive solar-powered drones that use lasers to beam internet to the ground. This is the first time Facebook had planned to use a satellite.

It’s been a rough week for Facebook. Last Friday, it fired the entire editorial staff on its Trending news team, and replaced them with an algorithm, which has since promoted fake news and could potentially be gamed into promoting hate speech. At the same time, CEO Mark Zuckerberg is insisting the company is not a media company, even though many of its 1.7 billion users rely on it to get their news. He also made a voice-activated thermostat for his house that doesn’t respond to his wife’s voice.

The last hurricane to strike Florida was Wilma in 2005; that’s about to change. Hermine will soon hit the northern Gulf coast packing winds around 75 miles per hour, and dumping too much rain, possibly up to 20 inches in some parts of the state. Isolated tornadoes and storm surges as high as 8 feet were also forecast.

Towns, cities and counties along the Gulf Coast have been hastily preparing shelters for people and pets, setting up centers where residents could fill sandbags for personal use and placing electric line repair crews on standby ahead of the storm. Water spilling from rough seas already was inundating roads in some waterfront communities in the Tampa Bay region.

Financial Review

Heating Up

Sinclair Noe — June 16, 2016

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DOW + 92 = 17,733
SPX + 6 = 2077
NAS + 9 = 4844
10 Y – .04 = 1.56%
OIL – 1.84 = 46.17
GOLD – 11.30 = 1281.20

Well, this was a strange day. The major market indices started the session lower and looked ready to slide into a sixth consecutive loss, but after about an hour of trade, prices started moving higher. Even with the weakness we have seen over the last week or so, the S&P 500 is still only a little more than 2% off its 2016 closing high for the year. From that perspective, can you recall a time when the S&P 500 was this close to a high for the year but where there was this much angst on the part of investors? At one point, the Dow was down almost 170 points, with a 280-point range from sessions low to session high.

Yesterday, the Federal Open Market Committee left the fed funds rate unchanged at 0.25% to 0.50%, as expected. And the Fed’s economic forecasts are even more pessimistic now than they were just a few months ago. Fed chair Janet Yellen held a press conference and mentioned the weak labor market, low business investment and productivity, and concerns about a possible Brexit next week. The Fed’s own forecast sees U.S. growth topping out at 2% in the long run, well below the nation’s historic 3.3% growth rate. Looming in the background is persistently weak global growth. Today, other central banks delivered their policy messages.

The Bank of Japan kept monetary policy steady and lowered its inflation forecast, stating the consumer price index’s year-on-year change is likely to be slightly negative or flat for the time being. The yen surged against the dollar following the news, sparking speculation on whether Japanese policymakers would intervene to halt the strengthening currency, while the Nikkei tumbled 3.1%.

Reiterating its warning that the franc is significantly overvalued, the Swiss National Bank left its negative interest rates unchanged at record lows, conserving ammunition ahead of a British vote on EU membership. As expected, the SNB held its deposit rate at negative-0.75%.

The Bank of England kept its key interest rate at a record low of 0.5% and made no changes to its 375-billion-pound asset-purchase program. The decision marked the last before the June 23 referendum in the U.K. on whether the country should stay or exit the European Union. And the bank warned that a Brexit “could materially alter the outlook for output and inflation.”

“Leave” has surged to a 6-point lead in an important Brexit survey. A new Evening Standard newspaper poll, conducted by the reputable polling firm Ipsos MORI, shows that 53% of respondents favor Leave while 47% favor Remain. This was the first time a poll conducted by Ipsos MORI poll had favored Leave. But both sides of the Brexit campaign have temporarily stopped campaigning after Jo Cox, a Member of Parliament was shot and killed while meeting with constituents in a library. The motive behind the shooting is unknown but many people think it might be Brexit related.

Investors continued to buy up investments considered safe in times of economic uncertainty: United States government bonds, and stocks with high dividends. The yield on the benchmark 10-year Treasury note dropped to 1.52% in intraday trading; the lowest since 2012.

The number of people seeking U.S. unemployment benefits rose last week, but to a low level that indicates employers are still cutting relatively few jobs. Weekly applications rose 13,000 to a seasonally adjusted 277,000, the highest in four weeks. The less volatile four-week average declined slightly to 269,250.

Consumer prices, or prices at the retail level, rose 0.2% in May largely because of higher gasoline prices and rising rents. Although the cost of most goods and services aren’t increasing much, fuel has become more expensive. The energy index climbed 1.2% in May. Rents also jumped 0.4% in May to mark the largest monthly gain since February 2007. And they are rising at the fastest 12-month pace in almost nine years: 3.4%.

Overall price pressures are still muted, however, as the price of groceries dropped 0.6% in May, and prices are now down 0.7% in the past year. The consumer price index has risen just 1% in the past 12 months. The core rate that excludes food and energy has risen at a sharper but still low 2.2% annual pace.

Confidence among U.S. homebuilders climbed to a five-month high in June. The National Association of Home Builders/Wells Fargo builder sentiment gauge rose to 60 from 58. Home builders report cheap borrowing costs and steady improvement in the labor market have bolstered Americans’ abilities to buy homes. Builder sentiment in the West reached a five-month high.

The Philly Fed index rebounded into expansionary territory in June, with the headline index rising to 4.7 from -1.8. The key forward-looking indicators all moved in the wrong direction, with sentiment on new orders, employment, unfilled orders, inventories and capital expenditure intentions all weakening, while the hours worked sub-index remained firmly in contractionary territory in June.

Arizona’s seasonally adjusted unemployment rate increased one-tenth of a percentage point from 5.5% in April to 5.6% in May. The U.S. seasonally adjusted unemployment rate decreased three-tenths of a percentage point from 5.0% in April to 4.7% in May. A year ago, the Arizona seasonally adjusted rate was 5.8% and the U.S. rate was 5.5%.

Arizona lost 19,400 Non-farm jobs in May. Three of the eleven sectors posted gains, one remained unchanged, and seven sectors posted losses. The gains were recorded in Manufacturing, Construction, and Trade, Transportation, and Utilities.  The losses were recorded in Financial Activities, Information, Education and Health Services, Leisure and Hospitality, Professional and Business Services (-5,400 jobs); and Government (the big loser -13,100 jobs). Natural Resources and Mining remained unchanged.

Disneyland debuts in Shanghai. The theme park, which cost $5.5 billion and took five years to build, opened its doors today. Disney hopes it can tap into China’s growing middle class, as 330 million people live within a three-hour drive or train ride from the park.

California’s insurance commissioner called on the U.S. government to block Anthem’s $48 billion takeover of rival health insurer Cigna, saying the deal would limit competition in the state’s health-insurance market. While Commissioner Dave Jones doesn’t have legal authority to block the merger, his opposition, plus a 22-page letter he sent to the U.S. Justice Department, adds an influential voice to the debate. The takeover would give the combined Anthem-Cigna a greater than 50 percent market share in 28 counties in California, and a market share exceeding 40 percent in 38 counties.

Volkswagen  unveiled a major restructuring today, the broadest overhaul of the company in decades. VW announced plans to deliver 30 electric plug-in models by 2025. The product overhaul and pledge to cut $9 billion in spending come as VW is already facing a bill of more than $18 billion to cover the costs of its emissions scandal.

The company rigged some 11 million diesel cars worldwide with software to cheat emissions standards. The admission triggered a litany of government investigations, a U.S. sales slump, and a management shakeup. This also follows a mandate from the German government that as of 2030, all new cars registered in Germany must be emissions free. The plan is to add one million hybrid and all-electric cars by 2020 and 6 million by 2030.

After three successes, a leftover SpaceX rocket booster crashed Wednesday while trying to land on an ocean barge. In fact, the rocket’s failed landing was, according to a Twitter post by Elon Musk, “Maybe [the] hardest impact to date.” The attempt came minutes after the Falcon 9 rocket successfully launched two satellites into orbit from Cape Canaveral, Florida.

Facebook founder Mark Zuckerberg’s philanthropy venture has made its first major investment, leading a funding round in a startup that trains and recruits software developers in Africa. Google Ventures was also part of the $24 million funding round. The startup, which has nearly 200 engineers currently employed by its Nigeria and Kenya offices, will use the funds to expand to a third African country by the end of 2016.

Philadelphia is set to become the first major American city with a soda tax despite a multimillion-dollar campaign by the beverage industry to block it. The City Council is expected to give final approval today to a 1.5 cent-per-ounce tax on diet and regular soda, iced tea, energy drinks, juice drinks with less than 50% juice, and other sugary beverages.

Microsoft is getting into the marijuana business, announcing a partnership to begin offering software that tracks marijuana plants from “seed to sale,” as the pot industry puts it. The software is meant to help states that have legalized the medical or recreational use of marijuana keep tabs on sales and commerce, ensuring that they remain in the daylight of legality. But until now, even that boring part of the pot world was too controversial for mainstream companies. It is apparent now, though, that the legalization train is not slowing down: This fall, at least five states, including the biggest of them all — California — will vote on whether to legalize marijuana for recreational use.

Get ready, here it comes. An excessive heat watch has been posted for California and Arizona, warning of temperatures that could hit 119-degrees this weekend. The forecast calls for record highs and record high-lows. High lows can sound a bit funny to say but what they translate to is misery: Temperatures stay so warm overnight that there is little relief from the heat even after the sun has set. The only consolation is that we are not expected to break the all-time record high of 122-degrees from June 26, 1990. Small consolation.

Financial Review

A Weak Week

Sinclair Noe — April 8, 2016

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

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DOW + 35 = 17,576
SPX + 5 = 2047
NAS + 2 = 4850
10 Y + .03 = 1.72%
OIL + 2.46 = 39.72
GOLD – 1.90 = 1239.40

Fed Chair Janet Yellen says the economy is on “a reasonable path” and the rate hike in December was not a mistake. Yellen said, “We think a gradual path of rate increases will be appropriate” given the progress the economy has made and is likely to continue to make. Yellen said she doesn’t think there is a bubble, even though the market rally is stretching into year 7. And she’s still worried about the rest of the world. She said the U.S. is “suffering from a drag from the global economy.” And that is the main reason the Fed didn’t raise rates in March and almost certainly won’t do it at its next meeting in April

Meanwhile, in a speech this morning, New York Fed President William Dudley, who gets a vote at every Federal Open Market Committee meeting, said the risks to the economy are more to the downside than the upside. “The low levels of energy and commodity prices may signal more persistent disinflationary pressures than I currently anticipate, while renewed tightening of financial market conditions could have a greater negative impact on the U.S. economy. Given my outlook and risk assessment, I judge that a cautious and gradual approach to policy normalization is appropriate.” Dudley said the Fed had to be cautious about lifting rates because of the “limited” ability to reduce them.

Fed jawboning should have been sweet music to Wall Street, and stocks started the session with triple digit gains but it took a rally in the final 30 minutes to hold onto gains for the day. The major averages declined more than 1 percent for the week, the worst since Feb. 5 for S&P 500 and NASDAQ composite and the worst since Feb. 12 for the Dow Jones industrial average. The S&P 500 clung to year-to-date gains in the close after briefly erasing them as the major averages temporarily turned lower in afternoon trade.

Next week kicks off the earnings reporting season as Alcoa reports after the close on Monday. The relevance of Alcoa’s results and outlook is fairly limited; it doesn’t tell us much beyond what may be useful for the broader industrial metals space. Q1 estimates fell sharply over the last three months and are continuing to come down. Total earnings for the quarter are expected to be down -11.1% on -2.3% lower revenues. The negative earnings growth in Q1 will be the fourth quarter in a row of earnings declines for the S&P 500 index.

The headwinds remain unchanged from other recent periods, essentially a combination of Energy sector weakness, the dollar strength and global growth constraints. Please note that Q1 earnings growth would still be in the negative even on an ex-Energy basis. The magnitude of negative revisions that Q1 estimates suffered over the last three months has been the highest of all recent quarters in the comparable periods.

Fresh weakness in oil prices at the start of the period was no doubt a big driver of pushing estimates down. And there is a good chance things won’t get much better. Total 2016 Q2 earnings are currently expected to be down -5.5% on -2.1% lower revenues, a growth pace that will go down more in the coming days as companies report Q1 results and guide lower for Q2.

Oil prices jumped over 6% today, posting their largest weekly gain since February – up 8% – as draw-downs in U.S. crude stockpiles fed hopes that a punishing global oversupply may be nearing tipping point. Gasoline and diesel prices rallied along with crude, rising more than 5 percent each. Crude stockpiles fell by nearly 5 million barrels last week versus analysts’ forecasts for a build of 3.2 million barrels.

The shutdown of the Keystone crude pipeline that delivers oil to Cushing also contributed to a drop of more than 480,000 barrels at the Oklahoma delivery point for U.S. crude futures. The pipeline leak was discovered on Saturday and forced a key section of the controversial pipeline to be shut down. TransCanada initially told regulators the spill totaled about 187 gallons of oil but on closer examination they now say the leak in South Dakota is up to 16,800 gallons. Oilfield services firm Baker Hughes reports the number of oil rigs operating in US oil fields fell by 8 to a total of 354 in the previous week. At this time last year, drillers had 760 oil rigs online.

Japan’s Finance Minister has described the dollar’s recent fall vs. the yen as “one-sided movements” and vowed to intervene if necessary to continue the country’s fight against deflation. The greenback sank to a 17-month low. The dollar has tumbled nearly 10% against the Japanese currency this year. The dollar lost more than 3 percent for the week against the yen, its worst week since the one ended Feb. 12. The dollar index was slightly lower with the euro near $1.14, and the index ended the week 0.4 lower for its fifth negative week in six.

The World Trade Organization has revised its 2016 global trade forecast downward by more than one percentage point, warning that a slowdown in China and broad market volatility continue to threaten growth. In September, the WTO estimated that global trade would rise by 3.9% this year, but it now sees a figure of 2.8%, the same rate as 2015 and the fifth year in a row it has been below 3%.

Wholesale inventories declined by 0.5% in February, marking the fifth drop in five months and offering more evidence that first-quarter growth will be weak. Wholesale inventories for January were also revised down sharply to show a 0.2% decline instead of a 0.3% increase. Wholesale sales, meanwhile, slid 0.2%. Companies have cut back on production to get inventories in line and avoid an excess buildup. While that’s good in the long run, it also means weaker growth now and suggests companies overestimated how well the economy was performing.

The Panama Papers scandal has claimed its first banking chief executive with the resignation of Michael Grahammer, CEO of Austrian lender Hypo Landesbank Vorarlberg. With new details of offshore accounts surfacing, more high profile and political figures are looking to come clean. U.K. Prime Minister David Cameron has admitted to benefiting from a fund of his late father, but said that it was not set up to avoid taxes, and he himself paid state dues on the shares he sold.

The US government has filed an appeal of a federal judge’s decision to rescind the Financial Stability Oversight Council’s determination that MetLife is a systemically important financial institution. Earlier, Treasury Secretary Jacob Lew blasted the ruling in a statement, saying it would leave MetLife will even less oversight than before the financial crisis.

General Motors has settled a lawsuit that would have been the third bellwether case to go to trial over its faulty ignition switch linked to nearly 400 injuries and multiple deaths. The first case that went to trial earlier this year was dismissed after GM uncovered evidence the plaintiffs committed fraud, while a second trial ended with the jury determining the ignition switch wasn’t to blame for a crash despite the part being defective. GM has now paid more than $2 billion to the Justice Department, shareholders and thousands of consumers.

Saying the deal could adversely affect the country’s national defense, the U.S. military has raised concerns with a federal rail regulator over the voting trust Canadian Pacific proposed as part of its takeover bid for Norfolk Southern.

Yahoo has extended the deadline to bid for its businesses by a week to April 18. Yahoo has launched an auction of its core Internet business, which includes search, mail and news sites, after abandoning its plan to spin-off its stake in Chinese e-commerce giant Alibaba. Verizon Communications is reportedly ready to make a bid for Yahoo’s Web business, and hopes to make a merger more successful by also making an offer for a stake in Yahoo Japan.

Adobe Systems is issuing an emergency update to its widely used Flash software for Internet browsers after researchers discovered a security flaw that was being exploited to deliver ransomware. The company says more than the 1 billion users of Adobe Flash on Windows, Mac, Chrome and Linux computers should update the product as quickly as possible. Ransomware schemes have boomed in recent months, with increasingly sophisticated techniques and tools used in such operations.

SpaceX just made history by landing its Falcon9 rocket back on a barge in the middle of the ocean. The spacecraft delivered supplies to the International Space Station, then the rocket landed on a barge in the Atlantic. They had tried this maneuver 4 times before without success. Building reusable rockets that are able to land back on Earth is critical to keeping future spaceflight costs down.

The US Postal Service announced Thursday that it will drop the price of postage stamps starting this weekend; the first time it has lowered the postage rate in 97 years. The cost of a stamp to mail a standard letter will decrease from 49 cents to 47 cents this Sunday. The price of sending a postcard will also drop by a penny, to 34 cents, while international mail will go down by a nickel, to $1.15 per letter instead of the current $1.20.

Bad news if you bought a boatload of “Forever” stamps. However, this might be a good time to sit down with paper and pen and write something, and then drop it in the mail. It tends to have a much greater impact than an email or text, both for the writer and the reader.

Financial Review

Tug of War

Sinclair Noe — January 19, 2016

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DOW + 27 = 16,016
SPX + 1 = 1881
NAS – 11 = 4476
10 Y un 2.04%
OIL – 1.13 = 28.29
GOLD – 1.30 = 1088.50

Just a reminder that last Friday saw the Dow drop 390 and the S&P too down 41, taking out the August lows of 1867 with an intra-day low of 1857. This morning Wall Street started the session with a bounce, but it didn’t hold; in the afternoon the major averages turned negative; the S&P went back down to test support at 1865. We are seeing an important level of support at 1857 to 1867 on the S&P.

We told you on Friday that we would need to see confirmation in the form of a close below 1867. It did not happen today. The Nasdaq Composite did close below the September low of 4487. The Dow Industrials are still above the August lows off 15,666. You don’t even want to look at charts of the Russell 2000 index or the Dow Transports; they are just ugly.

And then if you move away from Wall Street, the economy doesn’t look too bad: 70 consecutive months of job growth, the unemployment rate at 5%, GDP growth probably around 2% to 2.5% (not great but compared to the rest of the world it looks decent), oil prices falling, which should be a big positive for the largest consumer of energy in the world.

Back on Wall Street, everything we know about everything is reflected in price. And prices have been shocked. Eventually prices will drag down the broader economy or the broader economy will lift prices. Right now, it is a tug of war. In time we will see which side carries the most weight.

Global markets were mainly higher, including Japan, most of Europe and the UK. The Shanghai Composite gained 3.2% today. China’s economy grew at its weakest pace in a quarter of a century last year. Growth for 2015 as a whole hit 6.9 percent after the fourth quarter slowed to 6.8 percent. There was relief in the markets, however, that growth at least matched forecasts, and a growing expectation that the People’s Bank of China would provide further stimulus.

China’s slowdown, along with the slump in commodity prices, prompted the International Monetary Fund to cut its global growth forecasts again on Tuesday, and it said it expected the world’s second-largest economy to see growth of only 6.3 percent in 2016. The IMF expects the global economy to grow at 3.4 percent in 2016 and at 3.6 percent in 2017. The numbers for both the years are 0.2 percentage points less than what IMF had estimated in October.

The International Energy Agency says unseasonably warm weather and rising supply will keep the crude oil market oversupplied until at least late 2016. The IEA left its estimate of growth in global demand for 2016 unchanged from its previous monthly report at around 1.2 million barrels per day.

The US and other major powers have removed sanctions on Iran’s exports after the previously isolated Islamic republic complied with the nuclear deal. According to Reuters, the sanctions removed about 2 million barrels per day of production, dropping Iran’s output to just more than 1 million barrels a day. On Monday, Iran issued an order to increase its production by 500,000 barrels a day.

I’ve talked with you about the idea that oil in the ground might be worth-less at some point in the future. It has happened (much faster than I imagined). Bloomberg reports Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude. It had previously posted a price of negative 50 cents for a barrel.

This is for a low quality of crude that is expensive to refine and it comes from an area where it is expensive to transport, but still this sends a pretty clear message to oil producers to shut down their wells, or at least some of them. Producers outside the US are also feeling pain. The price for Canadian bitumen – the thick, tar-like oil at the center of the debate over the Keystone XL pipeline – fell to $8.35 last week, down from as much as $80 less than two years ago.

Puerto Rico is running out of money faster than expected, leaving an increasing hole in the amount needed to operate and pay back investors. According to an updated fiscal plan, the island now estimates it is $16 billion short of the money it needs to cover debt payments over the next five years, a 15% bigger figure than the one released in September. The gap over 10 years is almost $24 billion, even with planned fiscal adjustments.

Earnings reporting season this week will feature a bunch of the big tech names, including:  IBM, Verizon, SAP and Apple. Netflix and IBM reported after the closing bell today.

Netflix posted fourth-quarter adjusted earnings of 7 cents per share, down from 10 cents a share in the previous year, but they still beat analysts’ estimates of 2 cents. Revenue was $1.8 billion compared to $1.4 billion a year ago. Netflix added 5.5 million total net subscribers in the quarter, up from 4.3 million additions in the previous year, beating expectations. Netflix has been popular, up 124% over the past year.  NFLX up 3.85 today, and in after-hours it gained 7.36 to 107.89.

IBM reported fourth quarter earnings of $4.84 a share on $22.06 billion in revenue; topping estimates for profit and revenue, even though earnings were down 17% from the year earlier period.  IBM’s cloud, analytics, mobile, social and security businesses grew 26 percent to $29 billion in 2015; those units now represent 35 percent of IBM’s total revenue. IBM down 1.92 and then down another .91 in after-hours at 127.20

UnitedHealth earned $1.22 billion in the final three months of the year, down from $1.51 billion in the previous year’s quarter. Earnings totaled $1.40 per share, topping estimates by 3-cents. Total revenue jumped 30 percent to $43.6 billion, beating estimates.

UnitedHealth is struggling to make money on the ACA health exchanges, but they are making up for it with their Optum division where earnings jumped 50% in the quarter. Optum runs the company’s pharmacy benefits management business. UNH up 3%

Johnson & Johnson is planning to cut about 4% to 6% of the global workforce in its medical devices business over the next two years, as part of a restructuring that aims to save $800 million to $1.0 billion by the end of 2018. JNJ gained 50 cents to 97.50.

Although it expects “tougher market conditions” in 2016, Unilever reported fourth-quarter sales that beat estimates amid higher prices for its goods in Latin America. Revenue rose 4.9%, while core operating profit increased 12%. UNL up 3.9%.

Morgan Stanley posted earnings of $908 million, or 39 cents a share. That compares with a loss of $1.6 billion, or 91 cents a share, in a year-earlier period that included a $2.6 billion settlement over the sale of mortgage bonds. Profit and revenue beat estimates. Morgan Stanley previously announced big cuts to their fixed income business; today they announced the cuts will be even deeper. MS up 1.1%

Bank of America said its fourth-quarter profit rose to $3.3 billion, or 28 cents a share. Revenue rose to $19.5 billion. Profit and revenue beat estimates. Bank of America said its provision for credit losses in global banking increased by $264 million in the quarter ended Dec. 31, mainly due to higher energy-related charge-offs and reserve increases for energy exposure. The bank has $21.3 billion in energy-related loans, representing about 2 percent of total loans. BAC down 1.5%.

Already troubled by lawsuits and official investigations, Deutsche Bank is facing another challenge – it’s about to be sued in British court for using high-speed trading software. That lawsuit asserts the lender used a platform known as Autobahn to take advantage of millisecond changes in exchange rates to give clients worse prices than they were entitled to. Deutsche Bank has denied the claims.

WhatsApp is scrapping its subscription fee and will explore other ways to allow businesses to interact with its users (but will not introduce third-party ads) to make up for the lost revenue. The Facebook-owned app had previously charged an annual renewal fee of $0.99 for all users after their first year.

For the third time in roughly a year, Elon Musk’s SpaceX on Sunday failed to successfully land the main part of a spent rocket on a floating ocean platform, although it came pretty close. The booster maneuvered back to its destination as intended, but touched down harder than planned, causing it to tip over and explode. Last month, SpaceX made a successful, first-of-its-kind return of a used booster that hurtled back from space and made a pinpoint touchdown on land without incurring any significant damage.

French carmaker Renault will recall more than 15,000 vehicles to tweak their engines to ensure that they comply with emissions standards. The company committed to the recall after it was found that the filtration system in some of its vehicles did not comply with emission standards under real world conditions. The announcement comes after French investigators raided Renault’s headquarters near Paris earlier this month. French authorities widened their probe following the Volkswagen emissions cheating scandal, and later found discrepancies between real-world tests and lab results in four Renault models.

The world’s political and business leaders, plus the usual smattering of celebrities are heading to Davos, the Swiss Alpine resort where the World Economic Forum’s annual conference begins this evening. The official theme of the 2016 meeting is “mastering the fourth industrial revolution.” In WEF-speak, that means the “fusion of technologies that is blurring the lines between the physical, digital and biological spheres.” Which raise the question: Has anything worthwhile and meaningful ever come out of the World Economic Forum in Davos?

Glenn Frey, the prolific guitarist, singer, songwriter and founding member of the Eagles, died on Monday at age 67. Frey and Don Henley co-founded the Eagles in 1971 in Los Angeles after playing backup for rock singer Linda Ronstadt. The Eagles album, “Their Greatest Hits 1971-1975,” is the second-best-selling record of all time in the United States.