Financial Review

Carry On

Sinclair Noe — September 6, 2017

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DOW + 54 = 21,807
SPX + 7 = 2465
NAS + 17 = 6393
RUT + 2 = 1402
10 Y + .04 = 2.11
OIL + .55 = 49.17
GOLD – 5.90 = 1334.50

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	4,535.4	$74.84B	$2.01B	33.87%	1	-1.17%	-1.56%
	Ethereum	ETH	326.69	$30.59B	$925.72M	15.61%	0.0713257	-3.16%	-14.52%
	Bitcoin Cash	BCH	626.82	$10.25B	$735.94M	12.41%	0.136414	-3.34%	6.35%
	Ripple	XRP	0.22301	$8.48B	$146.48M	2.47%	0.00004871	-3.23%	-2.85%
	Litecoin	LTC	78.720	$4.09B	$735.92M	12.41%	0.0170777	-3.38%	20.23%
	NEM	XEM	0.29171	$2.63B	$3.85M	0.06%	0.0000645	-3.47%	-6.32%
	Dash	DASH	339.22	$2.55B	$33.61M	0.57%	0.0745771	-3.04%	-8.44%
	IOTA	MIOTA	0.70690	$1.95B	$33.70M	0.57%	0.00015468	-4.40%	-20.62%
	Monero	XMR	118.70	$1.77B	$58.20M	0.98%	0.0259621	-3.50%	-13.37%
	Ethereum Classic	ETC	18.4400	$1.72B	$193.02M	3.25%	0.00397381	-4.45%	14.47%

The major stock indices did what they have been doing all year – shrugged off worries and continued the trend. In the background, the economy continues to slog along with good, not great growth. Companies continue to report good earnings.

Expectations for tax reform and infrastructure spending are diminishing but on the bright side we are not engaged in a nuclear war with North Korea, so it all kind of balances out. Bank of America Merrill Lynch, for one, thinks investors should be more confident on equities. The firm said in a research note that it recommends being bullish given that the first synchronized upswing in the global economy since 2007 is a strong tailwind for earnings.

By its reckoning, the firm figures that global corporate profits are running 13.5 percent higher than last year. That’s in line with the gain in the benchmark MSCI All-World Country Index, suggesting stock prices have not gotten ahead of themselves. To be sure, there are plenty of other issues on the horizon to worry about, but for now the trend is in place until something blows up.

In a rebuke to Republican leaders, Trump backed Democrats’ plan to support a deal that would fund Hurricane Harvey aid but only raise the debt ceiling for three months. Those two items would also be tied to a measure to keep the government open through the end of December, setting up a hugely complicated year end crush of must-pass items. Republicans would have preferred a longer extension to avoid another fight in December.

Democrats could use the opportunity as leverage to attach a provision aimed at codifying into law the Deferred Action for Childhood Arrivals program. Nothing signed yet, but it looks like the debt ceiling crisis has been kicked down the road for now. I’m not sure we can call it bipartisanship but it’s not a debt default.

Debt ceiling jitters were particularly high Tuesday when the Treasury Department auctioned $20 billion of one-month bills at a rate of 1.30 percent, which was higher than the 1.23 percent yield on two-year Treasury notes. Those who were brave enough to buy at those rates saw the value of the bills soar today as the rate dropped to 1.02 percent.

On the stump for tax reform in North Dakota this afternoon, Trump repeated one of his favorite campaign claims: that Americans pay more in taxes than any other country. Except that’s not true.

In fact, the US ranks in the middle of the pack when compared with the roughly three dozen developed countries tracked by the Paris-based Organization for Economic Cooperation and Development. And our tax rate, is ranked fourth from the bottom, among the very lowest.

Stanley Fischer, the vice chairman of the Federal Reserve, announced today that he would resign in mid-October. Fischer joined the Fed’s board in 2014 after a distinguished career as an academic economist and an international policy maker.

Fischer brought a hawkish voice to Fed deliberations on monetary policy, arguing that the Fed should be raising interest rates more quickly, sparring with Janet Yellen, the Fed chair. But he provided reliable support for measures strengthening financial regulation.

Trump has not been in a rush to refill the Fed’s board. There were two vacancies when he took office, and a third seat opened in the spring. So far, the White House has put forward only one candidate, Randal Quarles, a Utah investor who was nominated in July.

Fischer’s departure is unlikely to shift monetary policy in the near term. The Fed is widely expected to announce after its next meeting in mid-September that it will begin to reduce its holdings of Treasuries and mortgage-backed securities.

The Federal Reserve’s latest Beige Book report, which collects and presents anecdotes on economic trends from policy makers’ business contacts around the country. All 12 Fed districts reported moderate to modest economic growth. Companies aren’t passing along higher input costs to consumers in the form of more expensive products and services. Instead, they’re accepting lower profit margins.

Most districts reported limited wage pressures and modest to moderate wage growth. The Fed said that consumer spending increased in most districts and that many contacts were becoming worried about a prolonged slowdown in the auto industry.

The Beige Book, based on information collected on or before August 28, said there was not enough time to gauge the full extent of the flooding from Hurricane Harvey.  The Atlanta and Dallas Fed banks reported the storm created broad disruptions to economic activity along the Gulf Coast.

Economic reports today show the trade deficit rose slightly in July, keeping the U.S. on track to post a larger gap in 2017 than in 2016. The deficit edged up to $43.7 billion in July from $43.5 billion in June.

A reading on services activity, meanwhile, came in better than expected, providing an added lift to the outlook for the health of the U.S. economy. ISM services were at 55.3 in August, compared with 53.9 in the prior period. A reading of at least 50 indicates expansion.

Hurricane Irma has hit a few islands in the Caribbean – including St. Martins and St. Thomas – and is now closing in on Puerto Rico. The imminent threat of a natural disaster comes as the territory deals with a massive economic disaster.

In May the commonwealth filed the biggest municipal bankruptcy in US history. Puerto Rico has $74 billion in debt, and another $50 billion in pension obligations on the books.

The Federal Emergency Management Agency already has about 400 people in Puerto Rico and the U.S. Virgin Islands to help with hurricane preparation and response. Puerto Rico will surely need and get federal assistance. A severe disaster could exacerbate some of the commonwealth’s adverse economic trends, including migration to the U.S. mainland.

The official forecast path shows that Irma’s center could track along or either side of the Florida peninsula. Where Irma turns north will be critical for determining what part of Florida experiences the most dangerous impacts from Irma. Regardless, conditions in South Florida may go downhill as soon as midday Saturday.

Irma is a Category 5 and it is a very large hurricane, wider than the state of Florida; so, despite the uncertainty in its track, there is a threat of rainfall flooding and strong winds capable of triggering power outages, downing trees and perhaps some structural damage will likely occur to some degree well inland from wherever Irma makes landfall into a swath of the Southeast early next week.

And just a side note; the NFL season kicks off Thursday night but I would like to nominate J.J. Watt as the league MVP. The Houston Texan defensive player put together a fund-raising effort for Hurricane Harvey relief, and he has already raised $27 million.

And while we’re at it, a tip of the hat to Oklahoma. The Sooner state has offered aid to burnt orange country. Volunteers from agencies in Oklahoma, such as the American Red Cross, Children’s Disaster Services, Convoy of Hope, Mercy Chefs, the Salvation Army, Southern Baptist Disaster Relief and Operation BBQ will be going to Texas.

Just in case you’re wondering – Operation BBQ is a real thing. It started in 2011, when Joplin Missouri was hit by a tornado.  Volunteers from competition BBQ teams from eight states answered the need to help feed displaced families, police, fire, National Guard and emergency personnel. They served over 120,000 meals over 13 days. Operation BBQ – you may know it by its other name: Ribs Sans Frontieres.

The Gap plans to close about 200 “underperforming” Gap and Banana Republic locations. There are currently about 2,000 Gap and Banana Republic stores worldwide, so the closures would likely impact about 10% of them. Gap declined to specify how many of each brands’ stores will close or where the soon-to-be shuttered stores are located.

One bright spot for Gap has been Old Navy – its less expensive clothing brand. When Gap reported earnings last month, Old Navy outperformed the other brands once again. While comparable sales at Gap fell by 1% and Banana Republic’s sales were down 5%, Old Navy saw a 5% increase.

The company added that it plans to continue making “significant” investments in its online operations, including in artificial intelligence technology. Shares of The Gap were up 7.4% today. Closing 200 stores and the stock jumps higher – no, it doesn’t make sense.

Restoration Hardware announced a forecast for third-quarter and full year adjusted earnings that flew past its previous expectations, sending its shares 30% higher in extended trading. The stock is heavily shorted and the big move looks like a short squeeze.

Intel has won a point in its antitrust battle with the European Commission — and the American technology industry may be feeling a little victorious as well. The Court of Justice of the European Union ordered a lower court on Wednesday to re-examine the 1.6 billion euro, or nearly $1.3 billion, fine imposed on Intel in 2009 for abuse of its dominant position in the computer chip market.

This does not mean Intel is in the clear, just getting a second chance to present their side of the case. The decision is considered a setback for the European Union antitrust authorities who have been investigating American tech giants like Google and Qualcomm.

T-Mobile upped the mobile phone carrier war on Wednesday, announcing an exclusive partnership to offer free Netflix Inc. subscriptions to T-Mobile One family plan customers.

The best selling electric car is the Nissan Leaf, and today, Nissan announced it has updated the car for the first time since it was introduced in 2010. The biggest change – a 200-mile range.

Financial Review

End of Easy

Sinclair Noe — March 3, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 2 = 21,005
SPX + 1 = 2383
NAS + 9 = 5870
RUT – 1 = 1394
10 Y + fraction = 2.49%
OIL + .58 = 53.19
GOLD + .30 = 1234.30

The S&P 500 and Nasdaq posted their sixth consecutive week of gains this week. The S&P gained 0.7% for the week. The Nasdaq ended the week with a 0.4% gain. The Dow finished the week 0.9% higher, booking a fourth consecutive weekly gain.

Janet Yellen delivered a key speech in Chicago. This was the Fed chairwoman’s last chance to shift market expectations before a mid-March Fed meeting. There will be essentially a blackout period on policymakers' public appearances.

Under Yellen’s leadership, the Fed has always given the markets clear guidance when it was going to raise interest rates and has not moved unless there is at least a 70% chance of a move being priced in by futures markets. Yellen was straightforward, she expects to raise rates this month, barring any unpleasant economic surprises.

Rates remain at a low level by historical standards, supporting economic growth by encouraging borrowing and risk-taking. But Fed officials have increasingly concluded that the economy is nearing the end of its recovery from the 2008 financial crisis, and that maintaining low rates could increase growth to an unsustainable pace. In the past week or so, we have had a steady stream of Fed officials making hawkish calls.

Fed Vice-Chair Stanley Fischer also delivered a speech, effectively putting a cherry on top of the rate hike message. Fischer was asked about comments by other Fed officials this past week that have boosted market odds of a March rate hike. He replied: “If there has been a conscious effort (to raise expectations for a rate hike) I’m about to join it.”

Just to refresh your memory; the Fed does not raise interest rates at the beginning of a business cycle, rather it comes at the latter stages of the cycle, and you could argue that the higher rates hasten the end of the cycle, but that is a chicken-egg debate, the point is that the business cycle has not been repealed and the current cycle is old.

We have seen recessions following tightening cycles, most recently in 2000 and 2008, but it doesn’t hold that tightening cycles cause recessions. What does follow tightening cycles is a period of market indecision and traders and investors digest the implications of higher rates – this usually plays out over about a 12-month period. The last 2 rate hikes were so small and so gradual that they barely registered, but that looks like it could change this year.

Financial stocks posted strong gains this week because rising rates tend to boost bank profits – not like they really need the help. American banks raked in record profits last year. Not only did the banking industry notch its third year of record profits in the past four, but FDIC statistics published this week showed that loan growth was strong and the number of “problem banks” fell to a seven-year low.

Yellen told Congress last month that US banks are “quite profitable” and considered “quite strong relative to their counterparts.’ Yellen credited the fact that American banks quickly built up capital after the crisis, “because of our insistence they do so.”

The Institute for Supply Management said its non-manufacturing index rose to 57.6% last month from 56.5% in January. Any reading over 50% signals that more businesses are expanding instead of contracting.

Attorney General Jeff Sessions said he’ll recuse himself from any current or future investigations related to President Donald Trump’s election campaign amid backlash over his testimony about contacts with Russia. Sessions said he did nothing wrong by failing to disclose that last year while he was a senator and Trump’s campaign ally, he met Russia’s ambassador.

Vice President Mike Pence regularly used personal email to conduct public business while serving as governor of Indiana. The private email account was first reported by the Indianapolis Star, which also reported that the AOL account was compromised last year by hackers. The paper cited emails obtained through a public-records request. Pence used that account to discuss matters ranging from security at his residence to how the state was responding to terror incidents around the world.

The White House is proposing to cut a quarter of the EPA’s budget, targeting climate-change programs and those designed to prevent air and water pollution like lead contamination.

Mexico’s economy minister went to Detroit today. In a speech to the Detroit Economic Club, Ildefonso Guajardo said NAFTA needed to be updated. He doesn’t agree, however, that the US auto industry has gotten the short end of the stick. Topics including labor and environmental standards are among those Guajardo is ready to renegotiate.

However, Mexico will not accept any tariffs passed by the US regarding the exchange of goods across the border. The Mexican peso rallied after U.S. Secretary of Commerce Wilbur Ross said a new mechanism should be created to stabilize the exchange rate. Ross said the peso could recover “quite a lot” if the US can reach a sensible agreement with Mexico on the NAFTA.

Visa, don’t leave home without it. The European Parliament has passed a nonbinding resolution calling for the reintroduction of visa requirements for American citizens, raising the stakes in a long-running battle over the United States’ refusal to grant visa-free access to citizens of five European Union countries.

European lawmakers played tit-for-tat in their dispute with the United States, demanding restrictions on American travelers unless the Trump administration lifts travel requirements for citizens of Bulgaria, Croatia, Cyprus, Poland and Romania.

The Scottish National Party is calling for a second referendum to vote on staying in the Euro Union, a move that could potentially break up the United Kingdom, which is moving ahead with Brexit.

Today, British Prime Minister Theresa May took aim at Scotland’s ruling party, accusing nationalists of sacrificing not only the United Kingdom but also Scotland with its “obsession” with securing independence. May said: “A tunnel vision nationalism, which focuses only on independence at any cost, sells Scotland short.” Remarkably, May delivered her speech in Glasgow without any sense of irony.

Samsung Group leader Jay Y. Lee will go on trial for bribery and embezzlement on Thursday, for his role in a corruption scandal that has rocked South Korea and led to the impeachment of the president. Lee, the 48-year-old third-generation leader of the country’s top conglomerate, was indicted Tuesday on charges including pledging $37 million in payments to a confidante of President Park.

Spotify hit 50 million paid subscribers. The streaming music service said it grew 25% in less than six months, extending its lead over its closest rival Apple Music, which had about 20 million subscribers in December. Stockholm-based Spotify remains unprofitable.

Snap Inc. had a monster debut. Shares of the social-media company shot up 44% in their market debut to close at $24.48 a share, giving Snapchat’s parent company a market cap of more than $33 billion. Snap is now bigger than Macy’s ($10 billion), Twitter ($11.3 billion), American Airlines ($23.6 billion), and Target ($32.9 billion).

The Snap IPO made many people very rich yesterday; the company’s two founders are now worth an estimated $5.3 billion. And a high school in Mountain View, California also had a big day. Four years ago, Saint Francis, a private Catholic school invested $15,000 in the L.A.-based tech company. That investment was sold yesterday for about $24 million.

Costco reported fiscal second-quarter net income that missed estimates, and Costco shoppers will have to pay more. Starting June 1, annual membership fees for individual, business and business add-on members in the U.S. and Canada will rise $5 to $60. Executive memberships in the U.S. and Canada will increase from $110 to $120. Overall, the fee increases will affect around 35 million members.

Boeing has accepted 1,880 voluntary layoffs from its union workers in the Seattle area, as part of the plane maker’s drive to cut costs through job reductions and other measures.

Daimler, parent of Mercedes-Benz, says it is bringing the latest concept version of its first pickup to the Geneva Motor Show later this month as a luxury midsize model. It will likely become the coolest new pickup truck that Americans won’t ever be allowed to buy – the Mercedes-Benz X-Class. When it hits showrooms later this year, X-Class will be sold in what Mercedes says are a bunch of “key markets,” and the U.S. isn’t included (for the moment).

About 308,000 Mercedes-Benz vehicles across the United States will soon be recalled because of a potential fire hazard. The problem has been linked to 35 car fires. Daimler, determined that there’s an issue with an engine part that can cause an electrical fire. The recall will include certain C- and E-Class vehicles, as well as CLA, GLA and GLC vehicles.

The Financial Stability Oversight Council met late on Thursday afternoon to review its designation of a non-bank firm as “too big to fail,” per a statement from the Treasury Department. While it didn’t name the firm, only three non-bank companies have been labeled as SIFIs to date: American International Group, Prudential Financial and MetLife.

Earlier this week, much of the internet ground to a halt when the servers that power them suddenly vanished. The servers were part of S3, Amazon’s popular web hosting service, and when they went down they took several big services with them. Amazon said it all started with a typo.

On Tuesday morning, members of the S3 team were debugging the billing system. As part of that, the team needed to take a small number of servers offline. “Unfortunately, one of the inputs to the command was entered incorrectly and a larger set of servers was removed than intended,” Amazon said. “The servers that were inadvertently removed supported two other S3 subsystems.”

The subsystems were important. Amazon said that one of them “manages the metadata and location information of all S3 objects in the region,” and without it services that depend on it couldn’t perform basic data retrieval and storage tasks. And suddenly the cloud seemed very vulnerable.

It’s the first Friday of a new month which sometimes but not always brings the government employment report. Today is one of those sometimes days, and the February data won’t be out until next week.

Financial Review

When Others Are Greedy

Sinclair Noe — February 16, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 7 = 20,619
SPX – 2 = 2347
NAS – 4 = 5814
RUT – 5 = 1399
10 Y – .05 = 2.45%
OIL + .19 = 53.79
GOLD + 5.40 = 1239.60

Asian markets moved higher this morning but European exchanges were slightly lower. World stocks hit an all-time high this morning, as the MSCI’s All Country World index, which spans 46 countries, notched a record. The Dow Jones industrial average, S&P 500 and Nasdaq have all closed at record highs for five consecutive days, something investors haven’t seen since 1992. And today the Dow, pulled out another record high close but couldn’t drag the other indices higher.

Yesterday, Fed Chair Janet Yellen was delivering her Humphrey-Hawkins testimony before the House Finance Committee and she answered a question about the market’s melt-up. She said: “I think market participants likely are anticipating shifts in fiscal policy that will stimulate growth and perhaps raise earnings.”

Federal Reserve Vice Chairman Stanley Fischer confirmed Fed chief Janet Yellen’s message to the markets this week that the central bank sees signs of strengthening in the economy and “is a little more confident about where we’re going and how soon we’ll get to full employment with stable prices.”

Yellen delivered 2 days of testimony before Congress this week and made the case for continued interest rate hikes this year. Stronger than expected inflation data combined with comments from Fed Chair Janet Yellen to Congress helped push the Fed funds futures market-implied chance of a rate hike in March to 44%, up from 34% the day before.

The odds, per overnight index swaps pricing, have jumped to 52% for March. The dollar hasn’t had a very good week despite the prospect of tighter US policy.

Promises of massive and phenomenal tax reforms have certainly been a driving force in the recent rally; the reality is that we don’t yet know the details, and so the cart seems a bit ahead of the horse. According to a new Bank of America Merrill Lynch Global Fund Manager Survey just 23 percent of respondents, for instance, expect tax cuts to happen before Congress takes its August recess, and 30 percent believe they won’t get enacted until 2018.

Another gauge of emotion, the Investors Intelligence Advisors Sentiment survey, shows bullishness on the stock market at 62.7 percent, the highest reading in more than 12 years. Bearish sentiment, or a belief that the market is heading lower, dropped to 16.2 percent, the lowest since August 2015. Of course, this is a contrarian indicator. You don’t want to buy when everyone is bullish. Or as Warren Buffett famously said, “be greedy when others are fearful and be fearful when others are greedy.”

Normally, the Fed taking a hawkish stance would wipe out giddy optimism but it hasn’t slowed this market hopped up on Trumponomics. What is especially peculiar, is that Trump is calling the economy a disaster.

At a press conference today, to announce his new nominee for Labor Secretary (Alexander Acosta, a former Justice Department official and current dean of Florida International University) Trump claimed: “It’s a mess. At home and abroad. A mess. Jobs are pouring out of the country. You see what’s going on with all the companies leaving our country. Going to Mexico and other places. Low pay, low wages… I inherited a mess.”

When it comes to the U.S economy, though, that “mess” isn’t borne out by most measures. The stock market is at all-time highs. Though growth in the gross domestic product is slow by historical standards, the economy is in the tenth year of one of the longest sustained expansions in history.

And the U.S. job market, which is creating jobs faster than employers can fill them, appears to be stronger than it’s been in nearly a decade; 227,000 new jobs last month and the unemployment rate at 4.8%, which is close to full employment.

The Philadelphia Fed said its manufacturing index soared in February to a reading of 43.3 from 23.6 in January. That’s the highest level since early 1984. Manufacturing activity in the Philadelphia region has been improving since the middle of last year. The new orders index rose 12 points to 39, and the shipments index rose 8.1 points to 28.6.

Initial claims for state unemployment benefits rose 5,000 to a seasonally adjusted 239,000 for the week ended Feb. 11. Claims have been below 300,000, a threshold associated with a strong labor market, for 102 consecutive weeks.

Construction on new houses fell 2.6% in January, but another increase in permits points to builders breaking ground on more units in the months ahead. Housing starts took place at an annual rate of 1.25 million last month. The decline in new construction last month was centered entirely on the category of multi-dwelling units that are usually rented.

Construction on apartment, condos and buildings with five or more units shrank nearly 8%. Yet work on new single-family homes rose almost 2%. Permits to build new homes, climbed 4.6% in January to a 1.29 million pace, and are up 8.2% in the past year.

On Monday, February 20, all US banks and financial markets will be closed in observance of the Presidents Day, perhaps giving investors a chance to catch their collective breath and contemplate the madness of the markets this year.

Cisco sees softness in its core business. The company beat on the top and bottom lines but said revenue from its key “NGN Routing, Switching and Data Center product revenue decreased by 10%, 5% and 4%, respectively.” Shares fell by more than 1% in after-hours trade.

Waste Management said revenue for the latest quarter climbed, driven by increased volumes and yield in the company’s collection and disposal business, though earnings on a per-share basis missed Wall Street expectations. Waste Management confirmed guidance for the current fiscal year.

Snapchat has reportedly set the value of its IPO. The company has set a valuation of $16.2 billion to $18.5 billion for its initial public offering, below the lower end of its range.

America’s largest banks are to propose a complete overhaul of how financial institutions investigate and report potential criminal activity, arguing that rules imposed in the years after the Sept. 11, 2001 attacks are onerous and ineffective. To keep drug traffickers and terrorists from laundering money through the US financial system, federal law mandates that bank employees file a Suspicious Activity Report (SAR) with authorities if they suspect transactions could be part of a crime.

Oil prices are moving higher after OPEC sources said the group could extend its oil supply-reduction pact with non-members and might even apply deeper cuts if global crude inventories failed to drop to a targeted level. OPEC and other exporters agreed last year to cut output by 1.8 million barrels per day to reduce a price-sapping glut. The deal took effect on Jan. 1 and lasts six months. Most producers appear to be sticking to the deal so far but it is unclear how much impact the supply reductions are having on world oil inventories that are close to record highs.

US oil producers sent a record 7 million barrels of crude out into the world market last week. The 1 million barrels a day is nearly double the week-earlier level. The Energy Information Administration’s weekly inventory data also showed that US oil stockpiles swelled to a record 518.2 million barrels last week, and gasoline inventories also hit a record 259.1 million barrels, gaining 2.8 million barrels.

At 2.25 gigawatts, Arizona’s Navajo Generating Station is the biggest coal-burning power plant in the Western US. The plant, and the nearby Kayenta coal mine that feeds it, are located on the Navajo Indian Reservation, and the Navajo and Hopi peoples have had a conflicted relationship with coal since the plant opened in the 1970s. Almost all the 900-plus jobs at the mine and plant are held by Native Americans, and the tribes receive royalties to account for large portions of their budget.

Negotiations were underway to improve the tribes’ lease terms, which expire in 2019. But on Monday, the four utilities that own most of the plant voted to close it at the end of 2019. They decided that the plant’s coal-powered electricity just can’t compete with plants burning natural gas.

Lease negotiations included consideration of a plan to close one of the plant’s three turbines and replace the generation with renewable energy. But the economically vulnerable tribes will be hard-pressed to immediately replace the critical jobs and revenue associated with coal should the plant close three years from now. The flip-side, of course, is that closing the plant (as well as the mine) would eliminate a significant amount of pollution and water use.

Staff at the Environmental Protection Agency have been told that President Trump is preparing a handful of executive orders to reshape the agency, to be signed once a new administrator is confirmed.

Financial Review

Like a Bird on a Wire

Sinclair Noe — November 11, 2016

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

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DOW + 39 = 18,847
SPX – 3 = 2164
NAS + 28 = 5237
10 Y closed 2.12%
OIL – 1.21 = 44.15
GOLD – 31.00 = 1228.60

The Dow closed at a new all-time high. Milk and cookies for everyone. Or wine and Xanax – your choice. It was a wild ride. For the week, the Dow rose around 5.4 percent, marking its best weekly performance since December 2011. The S&P 500 gained 3.8 percent for the week. The Nasdaq Comp posted a 3.4 percent weekly gain.

While stock markets were open today for Veterans Day, bond markets were closed, after taking a beating over the past few sessions. The global bond sell-off continued; across the world, more than $1 trillion has been wiped off the value of bonds as President-Elect Trump’s policies are seen boosting inflation.

One bright spot in the bond market, TIPS, or Treasury Inflation Protected Securities, which are indexed to inflation, have enjoyed their largest eight-week inflow on record, attracting over $5 billion. Commodities and equities also proved big gainers.

Commodities funds attracted $1.5 billon inflows in the week to Wednesday, the largest in 14 weeks. Copper is eyeing its biggest weekly rally in 35 years and iron ore is heading for its biggest weekly gain on record, helped by a rosier outlook for Chinese demand and anticipation of infrastructure spending straight from the pseudo-Keynesian playbook.

Equities funds attracted $8.9 billion, the most in 17 weeks, but some $200 million was pulled from bond funds in the US. Healthcare stocks enjoyed their largest inflows since October 2015, attracting $700 million, but European equities continued to suffer outflows, with some $1.3 billion redeemed.

The financial sector has rallied 10% over the past 4 days. Just remember, early market strength after an election is not a guarantee of future long-term performance.

In addition to bonds and tech stocks, emerging markets are not faring so well in the election’s aftermath. That’s down to fears about how Trump will act on global trade. But it’s also about the prospect of higher U.S. interest rates – which is boosting the dollar and hitting far-flung currencies.

Fed Vice Chair Stanley Fischer said this morning that economic growth prospects appear strong enough for the Federal Reserve to proceed with a gradual increase in interest rates. The central bank’s second-in-command said the Fed was “reasonably close” to achieving its employment and inflation goals, and the case for tightening, thus, is “quite strong”.

Fischer did not mention the outcome of the presidential election in his remarks. Yesterday, Richmond Fed President Jeffrey Lacker said that if the next Congress passes a stimulus program, the Federal Reserve should respond with more interest-rate hikes.

The Bank of Korea kept policy on hold. The central bank held its key interest rate unchanged at 1.25%, as expected. The British pound is up – at $1.26, its highest level since the October 6 “flash crash,” but remains nearly 20% below its pre-Brexit level. Meanwhile, the dollar is off slightly this morning but still on course for its best week in a year, racking up another round of gains against the yuan and peso.

An organizational chart released by the Trump campaign detailing who will handle his transition into office is filled with Washington lobbyists, insiders, and GOP veterans. Vice President-elect Mike Pence will take over the Transition Team from Chris Christie, who will now serve as vice-chair. Other advisers will include: Ben Carson, Newt Gingrich, Rudy Giuliani, Reince Priebus, Stephen Bannon, Peter Thiel and Trump’s children Donald Jr., Eric and Ivanka.

Going through the chart, Bill Walton, chairman of the DC-based private equity firm Rappahannock Ventures, and David Malpass, an economist and former Reagan administration treasury official, will head Trump’s economic team. Dan DiMicco, the former CEO of the largest steel producer in the United States, Nucor, was listed as Trump’s trade representative on the transition team.

Former Securities and Exchange (SEC) Commissioner Paul Atkins will oversee “Independent Financial Agencies”. Atkins is now the CEO of Patomak Global Partners, a private DC firm that consults companies on how to navigate post-financial crisis Dodd-Frank financial regulatory overhaul, to which Atkins staunchly opposed.

Former congressman Mike Rogers is slated to lead the national-security transition. And former Ohio official and George W. Bush honorary campaign co-chair, Ken Blackwell, will oversee domestic issues, including health and human services, labor, and environmental protection.

The management and budget team is being jointly handled by former Attorney General Ed Meese and Kay Coles James, a former director of the Office of Personnel Management who served under George W. Bush. Trump’s Homeland Security team, for example, is being led by Cindy Hayden, a director at the US tobacco giant Altria. Jim Carter, an in-house lobbyist for the manufacturing company Emerson, has been tasked with overseeing tax reform policies.

Not exactly draining the swamp.

President-elect Donald Trump outlined some pieces of his health-care program. A document was posted on the presidential transition website, the first look at Trump’s plan since the election. It includes protecting “innocent human life from conception to natural death” and gives states a big role in regulating health insurance and in running their Medicaid health-insurance programs for the poor.

Whether the 15.7 million people who have gained access to Medicaid through the ACA expansion will keep it is not clear from Trump’s plan. Trump hinted at softening the coverage guarantee for those with pre-existing conditions under the ACA, saying high-risk pools – state insurance programs for individuals who are sick or otherwise unable to get coverage – would cover those with large medical expenses who have “not maintained continuous coverage.”

Maybe – and this is just a shot in the dark – rather than relying on private citizens’ employers to select individual insurance plans from third-party providers, the government could try buying one great big insurance plan that covers everybody when they get sick? Not sure if there’s a term for that.

Alibaba has set new records for its annual Singles’ Day event as sales reached $1 billion in the first five minutes and hit $17.7 billion, or about one-third more than last year’s total; and more than double Black Friday and Cyber Monday combined online sales in the US. The world’s biggest retail event features 6 million products from 30,000 brands sold by 40,000 merchants and is closely watched for clues on the health of China’s economy and its largest online retailer – Alibaba.

Disney said it expects modest earnings growth next year and an even more robust rise in 2018. The assuring message came after the media company reported weaker-than-expected third quarter earnings – hit by a drop in ad sales and subscribers at its struggling ESPN unit. New deals with Hulu and AT&T/DirecTV could also help Disney attract elusive millennial customers.

Allianz beat expectations in the third quarter, posting a 37% rise in net profit. Europe’s largest insurer saw improvements across all its businesses, including bond fund manager Pimco, which logged net inflows for the first time in three years. Quarterly operating profit also beat forecasts, rising 18% and helping Allianz reaffirm its full-year target.

J.C. Penney posted a decline in sales, citing softness in apparel, and lowered a key sales metric. The company’s same-store sales fell 0.8% in the quarter, down from 6.4% growth last year and well below estimates. For the quarter, Penney posted a loss of $67 million, or 22 cents a share. Revenue fell 1.4%.

Macy’s reported third-quarter sales and revenue that missed estimates. Macy’s also announced a series of real estate deals including the $250 million sale of the Union Square Men’s store in San Francisco – part of more than 100 planned store closures.

Nordstrom delivered an earnings beat , while Kors offered up a weak outlook. Nvidia soared on upbeat profits .

Saying it was too easy to spend their parents’ money, a judge in Seattle has set up a year-long process to reimburse customers whose children made Amazon in-app purchases without permission, but rejected an FTC request for a $26 million lump sum payout. The agency already settled similar cases against Apple and Google. All three companies now require a password for in-app purchases or an opt-in to enable purchases without a code.

Brazil has been plunged into a fresh bout of political uncertainty after lawyers for former president Dilma Rousseff presented evidence suggesting her successor, Michel Temer, accepted bribes from a construction company. If found guilty, Temer, a member of the Brazilian Democratic Movement Party, would also be removed from office.

Shari Redstone, vice chair of the board at CBS and Viacom now says: “I was never a great proponent  of the split of the two companies,” adding “Scale will matter to your advertisers, who more than ever have to reach the consumer on a number of platforms.” A decade ago, Sumner Redstone decided to divide the two into separate companies, and while CBS has thrived, Viacom has wrestled with falling ratings and declining ad sales. CBS and Viacom are now looking at the prospect of a re-merger.

The largest, brightest full moon in nearly seven decades – what is known as a “Super Moon” – will be on display in the coming days. The full moon will come nearer to Earth than at any time since 1948. On Monday, the moon will pass within 216,500 miles of Earth’s surface, about 22,000 miles closer than average. If skies are clear, the upcoming full moon will appear up to 14 percent bigger and 30 percent brighter than usual. The next time a full moon comes as close to Earth will be in 2034.

Today, of course is Veterans Day, marking the Armistice, on the 11^th hour of the 11^th day of the 11^th month of 1918 – the end of World War I, the war to end all wars. Veterans Day is intended to honor and thank all who served in the United States Armed Forces. I would like to give my thanks to all veterans. And I believe the best way to honor veterans is no more wars.

Financial Review

Decent August Jobs Report

Sinclair Noe — September 2, 2016

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

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DOW + 72 = 18,491
SPX + 9 = 2179
NAS + 22 = 5249
10 Y + .03 = 1.60%
OIL + 1.34 = 45.09
GOLD + 11.20 = 1325.80

The economy added 151,000 jobs last month. The unemployment rate was unchanged at 4.9%. Hiring was expected to taper off after strong gains in July and June in which more than a half-million new jobs were created. The results missed estimates of 180,000 new jobs.

Revisions subtracted a net 1,000 jobs from overall payrolls in the previous two months. The government said 275,000 new jobs were created in July instead of 255,000. But June’s gain was cut to 271,000 from 292,000.

The government’s underemployment rate, or U-6, held at 9.7 percent, as the number of people working part-time for economic reasons rose slightly. Some 6.05 million American employees were in part-time jobs but wanted full-time work, up from 5.94 million in the prior month.

The Labor Force Participation Rate was unchanged in August at 62.8%. This is the percentage of the working age population in the labor force.

Average hourly earnings rose 0.1 percent from a month earlier to $25.73, following a 0.3 percent increase in the prior month. The year-over-year increase was 2.4 percent, compared with 2.7 percent in the 12 months through July.

The average work week for all workers decreased by 6 minutes to 34.3 hours in July, the lowest since 2014 and the first drop in six months. If the jobs market were overheating, you would expect to see longer hours, not fewer.

When you combine the shorter workweek with the very small hourly wage gain, average weekly earnings actually fell in August, dropping 0.2 percent to $882.54.

We have now seen job growth for 71 consecutive months. Private employers have added 15.1 million jobs to their payrolls in the 78 months since February 2010, an average of 194,000 jobs a month. Total employment (private plus government) has averaged 191,000 a month over that period, as federal, state, and especially local government were net job losers.

That’s right, over the past 6 years, we have lost government jobs. In August, private employers added 126,000 jobs. Federal government employment increased by 1,000, state government employment was unchanged, and local government employment rose by 24,000.

Factories cut payrolls by 14,000, the most in three months. Mining and logging, which includes the oil patch, lost another 4,000 jobs. Employment at construction companies fell for the fourth time in the last five months; down 6,000 in August. Construction firms complain about a lack of skilled construction workers, but it may also portend a slowdown. If builders have orders, they tend to find the workers.

Employment slowed at private service providers, with payrolls in professional and business services adding 22,000 jobs, but that’s the smallest gain since a decrease in January. Retail jobs rose by 15,100. Leisure and Hospitality added 29,000. Education and health services added 39,000.

While equities advanced across the board, the S&P 500 Index remained squarely within the same 1.5 percent band it has now occupied for 37 straight days. That’s the tightest since 1964 for the gauge, with volatility hovering near a two-year low.

Things were no different in the currency and bond markets, where benchmark 10-year notes got stuck in the narrowest trading range in almost a decade in August. Yields on two-year notes, the coupon securities most sensitive to Fed policy, were little changed. The 10-year note dropped, pushing yields back above 1.6%; that selloff gave a boost to the banks, especially the regionals.

The dollar fell against the world’s major currencies; with a weaker dollar, gold was higher. And the gold miners (GDX) had a great day with a 1.9% pop.  GDX had dropped from $31.79 on August 12 to $25.17 yesterday, so maybe it was due for a bounce or maybe it’s just a dead cat bounce.

Oil rallied. In addition to a weaker dollar, oil halted four days of declines as Vladimir Putin said he would like Russia and OPEC to clinch a deal to freeze supply. The Russian president said he would likely give his backing to a plan to crimp production at the Group of 20 summit in China next week, ahead of OPEC talks in Algiers at the end of September. In the prior 4 sessions, oil lost just over 9%, so even with today’s gains, oil is down a little over 6% for the week.

So, the Jobs Report wasn’t great but not really bad. The economy only needs a little over 100,000 new jobs per month to maintain current levels. If we had seen a repeat of July’s report (275,000 new jobs), we would all be talking about how the job market was overheated. Instead, we have slow, steady growth.

The average growth over the past 3 months is still 232,000. In August, the year-over-year change was 2.45 million jobs; that is a very good, steady rate of growth, much better than expected at this point in the recovery.

Was it enough for the Federal Reserve to hike interest rates in September? The unemployment rate has been in a tight range between 4.7% and 5.1% for the past 12 months. No change last month. The economy is close to full employment but we aren’t seeing inflationary pressures as a result.

Fed rate hike odds are essentially unchanged. Fed funds futures imply a 30% chance of a September rate hike, down from 34% yesterday. But December is holding steady at 60%. We know that Fed Chair Janet Yellen said at Jackson Hole that 190,000 jobs would be a clear sign of a very strong labor market, and likely reason for a rate hike.

On Aug. 30, 2016, Fed Vice Chairman Stanley Fischer said the US is “very near full employment.” He added that an interest rate hike (or a series of them) would be made based on economic signs. FOMC members keep citing the current U.S. unemployment rate (U-3) of 4.9% as evidence that the US economy has recovered from the Great Recession. Fischer says the US is near full employment. Even though the U6 unemployment still seems to have some slack. As of August 2016, it was at 9.7%.

In December 2006, the U6 hit a low of approximately 7.9%. In October 2000, the U6 was at a much lower low of 6.8%. The U6 includes the U3 plus discouraged job seekers and those working less than full time because they have not been able to find full-time employment. It seems the data is not quite confirming the full employment argument – close, but not quite.

Richmond Federal Reserve Bank President Jeffrey Lacker said today, after the jobs report that the economy appears strong enough to warrant significantly higher interest rates. Lacker argued that a range of economic analysis suggests the Fed’s benchmark overnight interest rate is too low.

Meanwhile, the last time we saw the Fed hike interest rates in an election year was 2004, and that was part of an ongoing campaign of incremental, very widely anticipated quarter point moves. If the Fed hikes rates in September, it would be a surprise to the market, despite some recent, not-quite-convincing jawboning by policymakers. If the Fed wants to raise rates in September, they need to say it strong and loud – otherwise, we’ll wait for December, which is a long way away.

I read several headlines that called today’s report disappointing, or a “whiff”. Not at all. It just wasn’t as strong as June and July. August was still a good solid month of job growth. We’ve really only had one month this year that was really bad – that was in May, when we added just 24,000 jobs, which proved to be a blip.

The labor market still has problems.  More than 6 million Americans are working part-time because they can’t find full-time jobs, a number that has barely budged so far this year. Long-term unemployment remains a problem. Millions of Americans abandoned the labor force during the recession and are now returning at a trickle; the number of jobs increase, but the number of people coming off the sidelines and looking for jobs increased as well – that’s why the unemployment rate stayed steady at 4.9% instead of dropping.

The trend lines, however, are headed in the right direction – and one month of just decent job growth doesn’t change that.

We had some other economic data this morning:
The U.S. trade deficit slid almost 12% in July to $39.5 billion as a surge in soybean shipments pushed exports to a 10-month high. Exports rose 1.9% to $186.3 billion to mark the biggest advance in two and a half years. Soybean exports tripled to $5.2 billion, largely accounting for the increase. Imports, on the other hand, fell 0.8% in July to a seasonally adjusted $225.8 billion, even though the price of oil rose for the fifth straight month and hit the highest level per barrel since last September.

The Commerce Department says new orders for manufactured goods rebounded 1.9 percent in July after a downwardly revised 1.8 percent decrease in June. It was the biggest rise since October 2015 and followed two straight months of declines. Orders for non-defense capital goods excluding aircraft increased 1.5 percent in July. Manufacturing, which accounts for about 12 percent of the economy, remains constrained by the lingering effects of a strong dollar and weak global demand, which have crimped exports of factory goods.

Hurricane Hermine made landfall on Florida’s northwest coast early this morning, toppling trees and utility lines, cutting power to tens of thousands and leaving at least one person dead. The Category 1 hurricane moved ashore from the Gulf of Mexico near St. Marks, south of Tallahassee, with sustained winds of 80 miles per hour. It was downgraded to a tropical storm as it churned slowly toward the Carolinas.

Financial Review

Taxman Bites Apple

Sinclair Noe — August 30, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 48 = 18,454
SPX – 4 = 2176
NAS – 9 = 5222
10 Y + .01 = 1.57%
OIL – .70 = 46.28
GOLD – 12.70 = 1311.50

Since July 8, when the S&P rose 1.54%, that index hasn’t moved more than 0.9% in any given day, and most of those changes were slight gains, including 10 all-time highs. Since Brexit, the S&P 500 has now gone 43 straight sessions without a daily decline greater than 0.7%.

Compare that with the first 43 days of this year when it happened 15 times. For the month of August, the S&P 500 has managed to gain just 3 points, which means it is about as flat as it can be.

EU antitrust regulators have ordered Apple to pay up to €13-billion-euro ($14.5-billion dollars) in taxes to the Irish government after ruling that a special scheme to route profits through the country was illegal state aid. The EU Commission says Apple paid an effective corporate tax rate of less than five-one-thousandth of a percent (0.005%) on its European profits in 2014.

Apple has previously said it received no special treatment in Ireland. Apple’s tax arrangement with Ireland also meant the company avoided taxation on almost all profits from sales of its products in the EU single market, as the sales were recorded in Ireland rather than in the country where the transaction took place. Apple and Ireland said they would appeal the decision.

Ireland’s Finance Minister said he would fight the European Commission ruling that would force Apple to pay taxes to Ireland, even though €13-billion-euro in back taxes is more than twice the country’s entire 2015 corporate tax take and equivalent to about $3,000 for every man, woman and child in Ireland.

Apple is one of more than 700 U.S. companies that have units in Ireland, employing a combined 140,000 people. The government maintains that even if it were to take the cash, European rules mean it would have to use the money to pay down some of its €180 billion euros of national debt rather than fund spending.

CEO, Tim Cook wrote an open letter about the tax ruling and in it he said that Apple “in Ireland and in every country where we operate, follows the law and we pay all the taxes we owe.” And that is probably very true; no reason to doubt that Apple has hired top accountants and attorneys to figure out all the legal loopholes. And now the EU is closing one of the loopholes.

Tim Cook, that is to say Apple, has reacted with outrage, saying the decision would “upend the international tax system” and promising to appeal and overturn the decision. No doubt years of legal fees lie ahead for all involved. But the writing has been on the wall for Apple’s convoluted corporate structure in Ireland for years.

In 2013, a US Senate committee found that Apple pushed its foreign profits into a “stateless” company, one that paid no taxes anywhere, while using an intellectual property agreement to shift US profits to the subsidiary. In 2015, the EU released its own investigation, with more specificity: Apple had negotiated two special deals with Ireland that allowed it to allocate profits to this untaxed company.

The U.S. Treasury Department said it was disappointed with the European Commission seeking to force Apple to repay tax breaks given by Ireland and the case could undermine the “spirit of economic partnership between the U.S. and the EU.” In other words, the Treasury hopes to collect taxes on Apple’s overseas cash hoard someday and they don’t want to see that money going to Europe. Plus, any money Apple pays in taxes to the EU is deductible from Apple’s US tax bill.

Apple has its tax issues in Ireland but it will hope to put all that behind it next week as a new iPhone is expected to be announced. After all, as long as Apple is selling iPhones, $14 billion is not that much. What will an iPhone 7 look like? Pretty similar to an iPhone 6 but new features will likely include waterproofing, stereo sound, a touch-sensitive home button, a dual-lens camera, and due to its thinner chassis, the headphone jack will be removed. The starting point for storage on the new entry-level model is thought to be 32GB, up from 16GB.

New MacBooks, iPad features and a monitor may also be in the works from Apple – but at least some of those devices may not be seen until after the company’s Sept. 7 event. A thinner laptop, a faster iPad display to work with Apple Pencil, and 5K monitors are among the updates coming to Apple products. But the MacBook, which some tech bloggers had thought might come alongside the iPhone 7, is more likely to be released in October.

Voters are heading to the polls for Senate and House primaries in Arizona. Locations of polling places are assigned by address. The location that coincides with your registered address (on your voter information) is where you can cast your vote on election day. Arizona law allows any voter who is registered as independent to cast a vote in the primary election, but independent voters must choose a Republican or Democratic Party ballot at the polling place. The polls close at 7 PM.

The S&P CoreLogic Case-Shiller 20-city composite of existing home prices recorded a 0.8% gain in June and a 5.1% year-on-year advance; that’s down from a 5.3% pace the prior month. Home prices in three U.S. cities – Denver, Seattle and Portland, Oregon – showed the highest year-over-year gains. Housing prices in Phoenix were up 5.1% over the past 12 months.

The Conference Board’s consumer confidence index rose to 101.1 in August from a revised 96.7 in July. That’s the highest level since September 2015. Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.

Americans’ view the economy right now was the strongest since before the Great Recession. The present situation index, a measure of current conditions, climbed to 123 from 118.8 and hit the highest level since late 2007. What consumers expect six months down the road, however, was less optimistic. The future expectations index edged up to 86.4 from 82, but it was still well below the post-recession high.

Fed Vice Chairman Stanley Fischer says the US job market is nearly at full strength and the pace of interest rate increases by the Federal Reserve will depend on how well the economy is doing. The Fed has signaled since March it would lift rates twice this year, but investors have been skeptical. Fischer did not comment on the timing of the next Fed rate hike but said “we choose the pace on basis of data.”

The U.S. Labor Department’s monthly employment report on Friday is expected to show the economy added 180,000 jobs in August.  At the end of the day, it always comes down to the jobs number. Yellen can try to persuade us that the case for a rate hike is strengthening, and the other policymakers can chime in with their two cents. But they are all held hostage to the government’s jobs numbers on Friday.

Anything strong (250,000-300,000) and you won’t need anyone from the Fed telling us they are going to raise in September. The number will say it all: below 200,000, and it’s back to a December-only hike.

Trade talks between the European Union and the United States should be halted and a new set started, France’s trade minister said on Tuesday, adding his voice to calls from within Germany for an end to the negotiations. Three years of talks on a Transatlantic Trade and Investment Partnership (TTIP) have failed to resolve multiple differences, including over food and environmental safety.

Critics say the pact would hand too much power to big multinationals at the expense of consumers and workers. But despite a weekend comment by Germany’s Economy Minister that the talks had “de facto failed”, and today’s comments by the French Trade Minister, the European Commission says negotiations are making steady progress and there is an outline of a future agreement.

More than 76,000 people have signed a petition demanding former European Commission President Jose Manuel Barroso be stripped of his pension after taking a job at Goldman Sachs. Organizers plan to present it to current leaders of the EU institutions at the end of September. Critics claim the role is inappropriate given Goldman’s role in the U.S. subprime crisis and Greek debt talks. That’s one way to stop a revolving door.

The FDIC reported that U.S. banks earned $43.6 billion in the second quarter, up from $43 billion a year earlier. Around 60 percent of banks reported an increase in profit from a year earlier. However, the impact of low oil prices on energy companies led banks to continue to post bigger losses on commercial and industrial loans. Only 4.5 percent of banks were unprofitable, down sharply from 5.8 percent in the second quarter of 2015.

Countries including the U.K., Australia and Taiwan have issued travel advisories for tourists to Singapore after the city-state announced a further increase in Zika cases. Singapore’s Ministry of Health confirmed 15 more people with locally-transmitted Zika, bringing the total number affected to 56. Health officials think they will identify even more positive cases.

Stocks off Highs, Up from Lows in Mixed Close

Charles Schwab: On the Market

Posted: 8/26/2016 4:15 PM ET

Stocks off Highs, Up from Lows in Mixed Close

U.S. stocks erased early session gains and finished mixed on the heels of Fed Chair Janet Yellen's highly anticipated speech which was followed by comments from Vice Chair Stanley Fischer to CNBC, alluding to the possibility of two rate hikes before year end. Treasuries, gold and crude oil prices were lower and the U.S. dollar was higher. In economic news, 2Q GDP was revised slightly lower, as expected, while on the equity front, GameStop and Ulta Salon sank in the wake of some disappointing earnings reports.

The Dow Jones Industrial Average (DJIA) declined 53 points (0.3%) to 18,395, the S&P 500 Index lost 3 points (0.2%) to 2,169, and the Nasdaq Composite increased 7 points (0.1%) to 5,219. In moderate volume, 808 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.31 to $47.64 per barrel, wholesale gasoline added $0.01 to $1.43 per gallon and the Bloomberg gold spot price decreased $1.08 to $1,320.90 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% higher at 95.47. Markets were down for the week, as the DJIA ticked 0.9% lower, the S&P 500 Index declined 0.7%, and the Nasdaq decreased 0.4%.

GameStop Corp. (GME $29) reported 2Q earnings-per-share (EPS) ex-items of $0.27, one penny north of the FactSet estimate, as revenues declined 7.4% year-over-year (y/y) to $1.6 billion, below the projected $1.7 billion. 2Q same-store sales fell 10.6% y/y, versus the expected 5.9% decline. GME issued 3Q and full-year guidance that was roughly in line with forecasts. Shares finished solidly lower.

Ulta Salon, Cosmetics & Fragrance Inc. (ULTA $255) posted 2Q EPS of $1.43, above the projected $1.40, as revenues rose 21.9% y/y to $1.1 billion, roughly in line with expectations. Quarterly same-store sales rose 14.4% y/y, above the estimated 12.9% gain. ULTA issued softer-than-expected 3Q earnings guidance, while raising its full-year outlook. ULTA was under solid pressure.

Yellen's speaks, 2Q GDP revised slightly lower as expected

Federal Reserve Chairwoman Janet Yellen spoke at the Central Bank's annual policy symposium in Jackson Hole, Wyoming on the subject of the Fed's monetary policy toolkit. Yellen noted that the U.S. economy is now nearing the Central Bank's goals of maximum employment and price stability. Looking ahead, Yellen noted that the Federal Open Market Committee (FOMC) expects moderate GDP growth, additional strengthening in the labor market and inflation rising to 2.0% over the next few years. In light of this outlook, she believes the case for an increase in the fed funds rate "has strengthened in recent months." She did reiterate that the FOMC's decisions always depend on the degree to which incoming data continues to confirm its outlook, and that the FOMC continues to anticipate that gradual rate increases will be appropriate.

Stocks and Treasuries gained ground on the speech and the U.S. dollar remained lower. However, the markets reversed course as Fed Vice Chairman Stanley Fischer spoke on CNBC after the speech suggesting that a September rate hike may be on the table and next week's August nonfarm payroll report will probably weigh on the decision. Fischer added that Yellen's comments were consistent with the possibility of as many as two rate hikes this year

Yellen's comments are in line with Schwab's Chief Investment Strategist, Liz Ann Sonders' view in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings, that we continue to believe a rate hike is on the table for this year. However, the combination of Fed policy uncertainty and the contentious election season could mean the recent lull in volatility will not persist into the fall. Read more at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

The second look (of three) at 2Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.1%, revised slightly from the 1.2% expansion reported in the first report. This matched the Bloomberg forecast. 1Q GDP expanded by an unrevised 0.8% rate. Personal consumption came in at a 4.4% gain for 2Q, up from the preliminary estimate of a 4.2% increase, where it was expected to remain. Personal consumption grew by an unrevised 1.6% in 1Q.

On inflation, the GDP Price Index was revised to a 2.3% gain, versus forecasts of an unrevised 2.2% increase, while the core PCE Index, which excludes food and energy, was adjusted at a 1.8% rise, versus expectations of an unadjusted 1.7% increase.

The final August University of Michigan Consumer Sentiment Index (chart) was revised to 89.8 from the preliminary level of 90.4, and compared to expectations of a slight rise to 90.8. The index was down compared to July's level of 90.0. The expectations component of the report was revised lower but remained above July's level, while current conditions were adjusted higher but below the prior month's level. The 1-year inflation outlook held steady at 2.5% but was down from July's 2.7% rate.

Treasuries finished lower , with the yields on the 2-year and 10-year notes rising 5 basis points (bps) to 0.84% and 1.62%, respectively, while the yield on the 30-year bond was 2 bps higher at 2.29%.For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Follow Randy on Twitter: @randyafrederick.

Europe higher following Yellen's speech

European equities gained ground amid an initial positive reaction to Fed Chairwoman Janet Yellen's speech that mirrored recent comments from Central Bank officials that the U.S. economy is now nearing goals of maximum employment and price stability, and the case for a rate hike has strengthened in recent months. However, healthcare stocks remained hamstrung by festering concerns about a pricing crackdown following the presidential election in the U.S. France's 2Q GDP growth was up 1.4% y/y as expected and matching 1Q's growth, while 2Q U.K. GDP growth increased 2.2% to match forecasts and following the 2.0% y/y expansion seen in 1Q. The British pound dipped versus the U.S. dollar, following its recent rally that has been fueled by a string of upbeat data suggesting the economy is seeing a limited impact from the late-June vote in the U.K. to leave the European Union, known as a Brexit. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. The euro lost ground on the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed as today's speech by U.S. Fed Chair Yellen kept conviction in check, while some disappointing inflation data out of Japan weighed on sentiment. Japan reported that core consumer inflation for July declined more than expected y/y, exacerbating deflationary concerns and sending equities in the region lower, while the yen reversed to the upside. However, Chinese stocks bucked the trend, rebounding modestly from yesterday's slide that came courtesy of resurfacing liquidity concerns and as reports fostered uneasiness about a government crackdown aimed at cooling the real estate markets. The cautious mood ahead of Yellen's speech resulted in a decline for securities in South Korea and India. Finally, weakness in financials and oil & gas issues helped pull Australian stocks to the downside. Amid the choppiness in the global markets, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks decline after Yellen's speech

U.S. stocks retreated from recent record highs for the week, following Friday's highly-anticipated speech from Federal Reserve Chairwoman Janet Yellen which culminated a week of commentary from Fed officials that raised the prospects for a rate hike this year, but did support the financial sector. Healthcare issues led to the downside amid resurfaced concerns about a crackdown on drug pricing as the U.S. presidential election looms, while the energy sector stumbled as crude oil prices came under pressure amid some bearish oil inventory reports. The U.S. dollar ticked higher and Treasuries were mixed, with rates on the short-end of the curve moving higher, while yields on the mid-to-long end lost ground.

Mixed earnings and economic data likely kept conviction in check. A jump in new home sales was met with a larger-than-expected drop in existing home sales, while durable goods orders showed business spending may be starting to pick up, though a preliminary read on services sector activity from Markit surprisingly declined. Best Buy Co. Inc. (BBY $40) rallied after its upbeat earnings report, while HP Inc. (HPQ $15) offered a disappointing outlook. As noted in the Schwab Market Perspective: The Calm Before the…., a period of peace has reigned in the market over the past month, but the lull in volatility likely won’t last. However, we do believe the secular bull market has further to run. Read the whole perspective at www.schwab.com/marketinsight.

Labor report set to command attention

On the heels of today's comments from the Fed's Yellen and Fischer, next Friday's August nonfarm payroll report is poised to be a key focus for the global markets as a September rate hike remains a possibility (economic calendar). The report will also be preceded by key reads on personal income and spending, Manufacturing Purchasing Managers Indexes (PMIs) from ISM and Markit, the trade balance, Consumer Confidence, and August vehicle sales.

Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her article, What Does Strong Job Growth Mean for Bond Investors?, recent strong job growth has improved the odds the Fed will raise short-term interest rates in the coming months and this has potentially negative implications for the U.S. bond market, which has put in a strong performance so far this year. The risk of higher rates appears greater than the potential for lower rates. We suggest investors keep the average duration of their portfolios within the short- to intermediate-term bond range to help reduce volatility, and consider holding Treasury Inflation-Protected Securities. Read more at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Along with global manufacturing PMIs, international reports for next week worth noting include: Australia—building approvals and retail sales. China—industrial profits. India—2Q GDP. Japan—household spending, retail sales, and industrial production. Eurozone—consumer price inflation and unemployment rate. U.K.—mortgage approvals, consumer confidence and consumer credit.