Financial Review

A Quiet Friday in August

Sinclair Noe — August 25, 2017

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DOW + 30 = 21,813
SPX + 4 = 2443
NAS – 5 = 6265
RUT + 3 = 1377
10 Y – .02 = 2.17%
OIL + .43 = 47.86
GOLD + 5.00 = 1291.80
BITCOIN – 1.09% = 4360.42 USD
ETHEREUM – 0.90% = 328.87

For the week, the Dow rose 0.65 percent, the S&P 500 gained 0.72 percent and the Nasdaq climbed 0.79 percent. The weekly gains for equities snapped a two-week skid of declines for the Dow and S&P 500 and a four-week drop for the Nasdaq.

Hurricane Harvey projected to make landfall around Corpus Christi, Texas between 10 PM and midnight but it is now hitting the Texas coast with heavy wind and rain. The storm is more accurately stretched along a wide swath of the coast, with heavy rains as far east as New Orleans and inland beyond San Antonio.

Harvey is now a Category 3 storm, meaning the government now classifies it as a “major” hurricane with 120-mph winds and gusts over 150-mph. Harvey, the strongest storm to hit the U.S. since Wilma in 2005, is forecast to inundate Houston, Corpus Christi and Galveston, cities with more than 2.6 million people combined, with drenching rain and dangerous flooding. Texas Governor Greg Abbott declared a state of disaster for 30 counties. The storm may generate $1.9 billion of economic losses and $1.3 billion in insured losses.

The problem with this hurricane is they don’t see it trailing off in any direction so it’s just going to hover Harvey could deliver a one-two punch that could also spell trouble for the Houston Ship Channel. One forecast model shows the storm returning to the Gulf of Mexico before making a second landfall closer to Galveston, sending a storm surge into the channel, which carries more than 163 million tons of cargo per year.

The surge, coupled with the rains, could bring about water levels higher than ever recorded in the Houston metropolitan area. A storm surge of up to 12 feet may occur near the Padre Island National Seashore. Storm surges account for close to half of all hurricane deaths. It is going to be an issue for the ship channels.

Harvey may dump as much as 35 inches of rain on areas of Texas over the next week. Usually, you don’t get peak rainfall and peak surge at the same time. If the forecast holds for Houston, rainwater would be running down streams and rivers while ocean water is surging up to meet it. In other words, that unprecedented amount of rain will have nowhere to go.

A large metro area like Houston is also particularly vulnerable to flooding. Large swathes of the city are concrete and asphalt, which prevents rainwater from properly draining. It doesn’t help that Houston is naturally a low-lying city with clay soil that doesn’t drain well anyway. Sewage drainage will probably be a problem and clean water may also be affected. And not just humans are affected – all sorts of wildlife will be moving to higher ground.

The Federal Emergency Management Agency is sending staff and supplies to the region. Flooding will probably close roads and inundate power plants, while strong winds may disrupt utilities’ systems and knock out power to hundreds of thousands of homes and businesses. Anadarko Petroleum, Exxon Mobil and Royal Dutch Shell are among the energy explorers that have shut platforms in the Gulf of Mexico.

Midstream LP shut natural gas capacity in south-central Texas; and Enbridge evacuated non-essential workers from some platforms. BNSF was halting traffic from Galveston Island late Thursday and holding Galveston-bound trains until further notice. Cameron LNG begins evacuating workers ahead of Hurricane Harvey.

Gasoline futures hit a 4-month high in intraday trade. It is estimated the hurricane will push gas prices up by about 10-cents per gallon in the short-term. One of the worst things that can happen to a wind farm is too much wind. The storm could knock out between 2.1 and 3.6 gigawatts of power near the Texas coast.

The weather is fine in Jackson Hole, Wyoming. It’s a nice place to go fly fishing. This morning, Janet Yellen delivered what is probably her final speech to the Jackson Hole Economic Summit, an annual gathering of central bankers.

Yellen defended the government’s response to the 2008 financial-market meltdown while outlining some areas that regulators could review to improve efficiency in the financial system. Yellen focused on financial regulation and veered away from monetary policy. Yellen said reforms put in place after the 2007 to 2009 crisis have strengthened the financial system without impeding economic growth and any changes to these rules should remain modest.

That pretty much signals that she is not expecting to be re-nominated when her term expires in February.

European Central Bank president Mario Draghi also spoke at Jackson Hole. Draghi said he still is not seeing much inflation in the Eurozone and “a significant degree of monetary accommodation is still warranted.” Draghi said protectionist policies pose a “serious risk” for growth in the global economy.

Gary Cohn, who was president of Goldman Sachs before accepting a position in the Trump administration as head of the White House national economic council, is considered the front-runner to replace Yellen as the next Chair of the Federal Reserve.

Today Cohn said he had come under “enormous pressure” to resign after Trump equivocated in his denunciation of white supremacist groups, saying there had been “very fine people on both sides” at the demonstrations. The economic adviser said he had considered stand down but decided to stay on after discussions with the president. The New York Times reported he had gone as far as drafting a letter of resignation.

Treasury Secretary Steven Mnuchin said on Friday the nation’s debt ceiling will be raised in September and that after talks with congressional leaders from both parties everyone is “on the same page.” Mnuchin says he’s hopeful about getting a tax-code overhaul done by the end of this year after flatly stating he was “wrong” about finishing a deal by August.

Investors are fleeing U.S. stocks in a way they haven’t since 2004. According to a new Bank of America Merrill Lynch, for 10 straight weeks a total of $30 billion has left U.S. stocks, marking the longest streak of outflows since 2004.

Investors turned instead to emerging markets and European and Japanese stocks, which saw $36 billion in inflows over the last 10 weeks. The 10-week outflow from U.S. stocks comes despite the S&P 500’s nearly 1 percent gain this quarter and a record high on Aug. 8.

Some of the top sectors of the year have seen significant outflows, including tech, financials, and the consumer sectors. The only sector that has seen inflows – defense stocks. By investing style, investors withdrew $1.6 billion from U.S. growth stock funds and $1.1 billion from U.S. value stock funds

A South Korean court found Lee Jae-yong, heir to the Samsung empire and its de facto leader, guilty on charges of bribery and embezzlement, and other crimes. The court sentenced Lee to five years in prison. That’s less than the 12-year term prosecutors were hoping for. But it’s long enough to ensure that he will spend time behind bars.

Lee’s father, Lee Kun-hee, himself was once convicted for tax evasion, but he never served prison time because sentences of up to three years can be suspended. The ruling puts a cap on months of proceedings that tied the country’s single most important company to a corruption scandal revolving around former president Park Geun-hye. Park was impeached in March and is herself separately on trial.

The court found Lee guilty of providing $6.3 million in bribes to Park’s personal confidante, to secure approval for a merger between two Samsung subsidiary companies that gave Lee more power at the expense of other shareholders. Lee will appeal the conviction.

The conviction also marks a win for Koreans hoping to hold accountable the country’s chaebol—the country’s family-run conglomerates, which the public has increasingly resented for their corruption and grip on the economy. Newly-elected president Moon Jae-in made chaebol reform a key part of his campaign platform.

From exploding phones to execs charged with embezzlement, it has been an eventful year for Samsung, and none of those problems seem to matter. Samsung shares have gained 40% over the past year, a rise worth some $85 billion in market cap.

YouTube has expanded the internet-delivered YouTube TV subscription service into 14 new U.S. markets, which makes it available to half of all U.S. households. YouTube added the Phoenix market in July. According to Google, YouTube TV now offers the most markets with live local broadcast feeds from the four major broadcasters — ABC, CBS, Fox and NBC — than any over-the-top competitor.

Rivals in the space include AT&T’s DirecTV Now, Dish Network’s Sling TV, Hulu, Sony’s PlayStation Vue and FuboTV. However, the YouTube TV “skinny bundle” is missing big chunks of the cable dial. Unavailable on the service: networks from Turner, including CNN, TBS and TNT; Viacom; Discovery Communications; and Scripps Networks Interactive. HBO also isn’t available as an option, but Showtime is.

How much traction YouTube TV has gained to date isn’t fully clear; Google hasn’t released any subscriber numbers. But the service, and the other OTT contenders, are clearly appealing to a consumer segment that’s looking for a cheaper alternative to cable, satellite and telco TV — and traditional pay-TV customers are continuing to dwindle.

After weeks of relative slumber, gold traders were rudely awoken to a surge in volume and volatility. In a span of one minute, gold futures contracts equaling more than 2 million ounces traded. Prices spike, then dropped just as fast, and gold settled slightly higher for the session.

We don’t know who or why. But so much for a quiet Friday in late August.

Financial Review

Monday, Monday

Sinclair Noe — June 12, 2017

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DOW – 36 = 21,235
SPX – 2 = 2429
NAS – 32 = 6175
RUT – 2 = 1419
10 Y + .01 = 2.21%
OIL + .17 = 46.00
GOLD – .90 = 1266.50
BITCOIN + 0.39% = 2720.80
ETHEREUM + 16.83% = 398.58

The Dow Industrials fell from record highs, with an inside trading session that does not look like a reversal, not yet anyway. The Nasdaq Composite confirmed its sharp downturn on Friday. Really, it was just five mega-tech stocks that accounted for 75% of the Nasdaq’s drop.

Apple, Microsoft and Goggle parent Alphabet account for nearly 30 percent of the index’s weighting, and their outsize impact has driven the gauge lower even though the bulk of the stocks are doing fine. What has sparked the so-called tech wreck isn’t exactly clear, but Goldman Sachs issued a report last Friday entitled, “Is FANG Mispriced?”

More important is whether this is a short-term correction or the sign of something more ominous. One or two days down does not make a trend, but a trend can start with a couple of down days. At this point, most analysts see this as a pause after a very strong and fast rally in the mega-tech names.

The good news is that money is not leaving stocks, just rotating to different sectors. On a net basis, investors sent $1.9 billion to ETFs focused on U.S. equities Friday, five times the money sent to fixed income. While tech ETFs experienced withdrawals of about $510 million (and the Fang stocks lost $126 billion in market cap), financials had inflows of almost $1 billion and energy took in $120 million.

Tomorrow will kick off a busy week for economic data – we’ll get the latest producer price index, which is expected to be flat. Wednesday morning brings the consumer price index and retail sales data. Wednesday afternoon brings a statement from the Federal Reserve on monetary policy.

A federal funds rate increase is widely expected, so the more market-sensitive elements of the Fed’s meeting will relate to signals regarding future policy action — either the path for the rates going forward or plans regarding a reduction in the central bank’s $4.5 trillion balance sheet.

The British pound sterling continued falling today, marking its worst two-day decline since October. Last week’s election saw Prime minister Theresa May’s Tories falling short of a majority in Parliament. While the Tories are expected to cobble a slim coalition, May will now govern from a position of weakness.

Some of May’s most senior ministers are plotting to soften her approach to leaving the bloc, potentially keeping the country in the single-market and customs union. By contrast, hardline Brexit supporters are determined to force through the prime minister’s plans for a clean break.

Treasury Secretary Steven Mnuchin  had previously set an August deadline for the federal government to avoid a default. Mnuchin said he still prefers that Congress increase the government’s authority to borrow before lawmakers leave on a five-week break in August. However, he said he is “comfortable” that the Treasury Department can meet the government’s financial obligations through the start of September.

The 9th US Circuit Court of Appeals panel unanimously upheld an earlier decision by a federal judge in Hawaii to block the government from enforcing Trump’s executive order for a “travel ban” that would restrict refugees and people from six predominantly Muslim countries from entering the US. The Supreme Court asked two groups challenging the travel ban to file legal papers by Monday. Once it receives the briefs it sought, the court could act at any time.

Attorney General Jeff Sessions will testify publicly to a Senate panel tomorrow. It had been unclear whether Sessions would testify in an open or closed setting. Sessions is likely to face tough questioning from Senate Intelligence Committee members over his dealings with Russian officials during the campaign and whether he had a role in the firing of former FBI Director James Comey, who testified last week before the same panel.

Along with testifying before the Senate Intelligence Committee this week, Attorney General Jeff Sessions can expect a subpoena from lawyers for a former Maricopa county Sheriff Joe Arpaio. Arpaio is presently being prosecuted by the U.S. Justice Department for allegedly violating a federal judge’s order to cease immigration enforcement. Arpaio’s trial is scheduled to begin June 26.

Sessions could challenge the subpoena to testify. The defense attorneys hope to use Sessions to underscore the irony of Arpaio being prosecuted by the very entity that is using the threat of pulling federal funds to get cities to do essentially what their client is accused of doing.

The case will be before Judge Susan Bolton, the very one who upheld SB 1070, the Arizona state law that requires cops to act on a “reasonable suspicion” that someone they have detained is in the country illegally. As it now stands, the outcome will be decided solely by Bolton, not by a jury.

Puerto Rico voted overwhelmingly in favor of statehood on Sunday in a referendum that begins the steps toward sending representatives to Washington, DC. It was a landslide, with 97 percent voting for statehood, though turnout was only about 23 percent.

Puerto Rico previously voted in favor of becoming a state in 2012, but statehood opponents said the voter turnout was not high enough to accurately reflect will of the Puerto Rican people. Some fear that they will make the same case this time around.

The Supreme Court cut the time it will take for copycat versions of biologic drugs to get to market. In a unanimous ruling, the justices overturned a lower court’s decision that had prevented Swiss pharmaceutical company Novartis from selling its copycat version of Amgen’s Neupogen until six months after the US Food and Drug Administration approved it.

The decision has major implications for the pharmaceutical industry because it will dictate how long brand-name makers of biologic drugs can keep near-copies, called biosimilars, off the market. Even the six months at issue in the case can mean hundreds of millions of dollars in sales. Health insurers expect biosimilars to be cheaper than original brands, like generics, saving consumers billions of dollars each year.

In a separate case, the Supreme Court ruled in favor of Microsoft in its bid to fend off class action claims by Xbox 360 owners who said the videogame console gouges discs because of a design defect. In an 8-0 ruling, the court overturned a 2015 decision by the 9th US Circuit Court of Appeals that allowed console owners to appeal the dismissal of their class action lawsuit by a federal judge in Seattle in 2012.

Typically, parties cannot appeal a class certification ruling until the entire case has reached a conclusion. But the 9th Circuit allowed the console owners to voluntarily dismiss their lawsuit so they could immediately appeal the denial of a class certification. The court ruled such a move was not permitted because a voluntary dismissal of a lawsuit is not a final decision and thus cannot be appealed.

Jeffrey Immelt is stepping down as chairman and chief executive of General Electric. Amid mounting pressure from activist investor Trian Fund Management for operational changes, GE said Immelt will be replaced by John Flannery, a 30-year company veteran who oversaw a jump in profits at the health-care unit.

Of all companies that remain in the Dow Jones Industrial Average since Sept. 7, 2001, when Jeffrey Immelt took over as chief executive officer of GE. GE’s stock has been by far the worst performer, and one of only two that have declined. GE’s stock has plunged 29.6% since Immelt took control through Friday.

Meanwhile, GE won US antitrust approval to merge its oil and gas business with Baker Hughes to form a new publicly traded company. GE and Baker Hughes announced the deal in October, months after Halliburton’s effort to buy Baker Hughes collapsed under pressure from the Justice Department.

Under the agreement, GE will combine Baker Hughes with its oil and gas business, creating a company with $23 billion in annual revenue, the companies said. GE will pay existing Baker Hughes shareholders $7.4 billion for a special dividend.

Meanwhile, another CEO with a rocky tenure — Travis Kalanick of Uber — may be taking a leave of absence. Uber’s board of directors met Sunday to mull over how to reverse the ride-hail company’s slow-motion implosion. Board members voted to unanimously adopt all the recommendations from a recent investigation into Uber’s culture of pervasive sexism and harassment.

They also discussed the fate of two of the company’s top executives, CEO Travis Kalanick and senior vice president of business Emil Michael. Michael is out. We’ll learn Kalanick fate tomorrow, maybe.

Time for today’s edition of Retail Armageddon, featuring Gymboree. The children’s clothing retailer announced it was seeking Chapter 11 bankruptcy protection. Gymboree has been in discussions with lenders since the beginning of the year as it grapples with a heavy debt load, much of which stems from Bain Capital’s $1.8 billion leveraged buyout of the retailer in 2010.

In conjunction with the filing, the company said it secured commitments for up to $308 million in additional financing. Public filings show Gymboree has more than $1 billion in outstanding debt, of which about $872 million is due in less than a year.

The U.S. Air Force has temporarily canceled flying operations of Lockheed Martin’s F-35 jets at Luke Air Force base in Arizona. The move comes after a series of five incidents in which pilots experienced hypoxia-like symptoms – in other words, they weren’t getting enough oxygen. Since May 2, pilots of five F-35A Lightning II aircraft assigned to the air force base have reported physiological incidents while flying

Financial Review

Rule the World

Sinclair Noe — April 20, 2017

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

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DOW + 184 = 20,589
SPX + 18 = 2357
NAS + 57 = 5920
RUT + 13 = 1381
10 Y + .05 = 2.25%
OIL – .02 = 50.42
GOLD + 1.40 = 1282.70

Each day this week, the Dow has posted triple digit moves: 2 down, 2 up.  The Dow is still about 100 points below its 50-day moving average. The S&P 500 broke above its 50-day moving average intraday but closed just a fraction below the trendline; and that is why it is called resistance.

Still volume increased today, so we wait for confirmation tomorrow. If you are looking for leadership, the Nasdaq Composite closed at a record high. Bonds slipped today, pushing yields on the 10-year not back up to 2.25%, which still seems low, considering the Fed claims the economy is strong enough to support higher rates.

Since the last FOMC meeting, a key inflation indicator fell for the first time since January 2010, the March nonfarm payrolls report significantly missed Wall Street expectations. Today the Labor Department reported initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 244,000 for the week ended April 15.

Other data showed factory activity in the mid-Atlantic region slowed in April amid a pullback in new orders and shipments. The Atlanta Fed now expects the economy to show growth of just 0.5 percent for the first quarter.

On top of that, President Trump’s pro-growth agenda has hit a bit of a wall in Congress. Tax reform was supposed to follow closely on the heels of healthcare reform, but repeal and replace suffered a crash and burn. But today, repeal and replace is back on the table. GOP moderates and conservatives are nearing a deal on health care that in theory could get the Republican alternative to the Affordable Care Act out of the House and over to the Senate.

The changes also might move Republicans even further away from passage ― no one really knows. Leadership is expected to discuss the amendment on a conference call this Saturday with GOP members, but public opinion might also affect the landscape.

Republicans are trying to say their amendment will cover people with pre-existing conditions ― because, first, the legislation still claims those people can’t be denied coverage, and second, because there will be high-risk pools for those people if insurance costs dramatically go up for them. The reality, however, is that insurers would be able to effectively deny coverage by pricing sick people out of the market.

Those concerns may be significant enough that the deal does not win over moderates. The concessions also might not be enough for some conservatives, who have expressed issue with Republicans establishing an advance refundable tax credit to help pay for insurance. The amendment wouldn’t seem to address the big concerns moderates have expressed ― like raising the cap on how much insurers can charge seniors or cutting $880 billion from Medicaid.

With Republicans effectively going back on their repeated promises to guarantee coverage for people with pre-existing conditions, the amendment could lose several Republicans who already supported the legislation. In short, even though the Tuesday Group and the Freedom Caucus think they have a deal, Republicans writ large might have nothing.

Once social programs are passed into law, it is famously difficult to undo them. But the fact that the GOP has evolved into a cross-class coalition with an increasingly blue-collar flavor is clearly playing a role. If Republican lawmakers are going to replace Obamacare, they’re going to have to make sure that it covers almost as many people, because if it doesn’t, there’s going to be hell to pay from newly minted Republicans.

The GOP 2.0 version of the American Health Care Act has about as much appeal as the original AHCA, or maybe less. It’s still a big tax cut for the rich, a hit to pocketbooks of older and more rural voters, and less generous than what recipients had received under Obamacare. At least that is the best estimate now – there is no legislative text at this time.

We don’t yet know if version 2.0 has fixed some of the earlier problems and if the fix is enough to flip votes. And if it crashes and burns again, it won’t inspire much confidence in the administration’s tax reform plans.

Treasury Secretary Steven Mnuchin said the Trump administration is close to bringing forward “major tax reform.” Mnuchin, who this week backed off his earlier goal of passing tax reform by August, said the White House will unveil a plan “very soon.”

Time for a quick trip down memory lane. A tax reform plan was supposedly imminent when President Trump met with airline executives at the White House on Feb. 9. “We’re way ahead of schedule,” Trump said then. “We’re going to be announcing something, I would say, over the next two or three weeks that will be phenomenal in terms of tax.”

Nearly 10 weeks later, Trump told a crowd in Wisconsin on Tuesday a plan was “coming along very well” and would be out “very soon.” So, today Mnuchin got the memo and stated tax reform is close. Except, it probably isn’t. First, lawmakers will need to figure out if tax reform is going to increase the deficit; that means it needs to be scored by the Congressional Budget office.

On the sidelines of the International Monetary Fund and World Bank spring meetings in Washington today, Treasury Secretary Mnuchin said: “Some of the lowering in (tax) rates is going to be offset by less deductions and simpler taxes, but the majority of it will be made up by what we believe is fundamentally growth and dynamic scoring.”

Dynamic scoring is a little-known government forecasting method that skirts Senate fiscal rules by using economic modeling to predict changes in revenues resulting from economic growth spurred by new tax and economic policies.

In other words, tax cuts will spur such strong growth, in the range of 3% to 4%, that the government will take in more revenue, even at lower rates. If, however, economic growth does not zoom forward, the result would be a massive hit to the deficit and higher debt burdens.

Eliminating tax deductions and credits is easy to talk about but difficult to do because each one has a coalition in Congress or an interest group or industry fighting to keep it there. For individuals, the House GOP blueprint would eliminate nearly all personal deductions and credits and replace them with a significantly increased standard deduction and flatter, lower tax brackets. Instead of taking the standard deduction, people could choose to deduct mortgage interest and charitable contributions.

Reducing the tax benefits for making donations to charity would stir up religious groups, however. And eliminating or reducing the benefit of owning rather than renting a home by changing the mortgage interest deduction would be vigorously opposed by powerful lobbies for home builders and realtors.

Eliminating an existing deduction for state and local taxes, for example, would mean taxpayers in states with high state income or property taxes, such as California, New York and New Jersey, would get a much smaller benefit, if any, from an increased standard deduction and lower rates.

The House Ways and Means Committee may have a hearing next week on “border adjustment,” a change to corporate taxes that is a key piece of a “blueprint” unveiled in June by the House GOP because it is expected to raise $1 trillion to offset lost revenue from lowering corporate rates.

The border adjustment tax or BAT relies on a massive increase in the strength of the dollar to offset what is essentially a tariff. The BAT would levy a 20 percent tax on imported goods and would allegedly raise over a trillion dollars of revenue over the next decade. A better name might be the Consumer Tax.

If the dollar ever did show about a 25% increase needed to offset the tax, the result would make American exports ridiculously expensive – essentially shutting down exports. If the dollar does not show a massive increase, the cost of the BAT would be passed on to consumers. Additionally, a BAT would lead to fewer jobs and higher unemployment. Increased consumer costs and fewer exports would translate into more Americans out of work.

Beyond that, nobody really knows what tax reform is being proposed. Only after the plan is finalized can the debate begin. There is a chance tax reform could get quick approval. Keep in mind that Republicans could make use of the budget reconciliation process to pass a tax bill on a party-line vote if they’re so inclined. No, the problem is that while Republicans might agree on the virtues of tax-cutting in theory, they’re finding it awfully difficult to craft a tax overhaul they can agree on in practice.

Turns out that tax reform is complicated and good tax reform might be too much to expect, and the fear of this daunting challenge may require compromise, and the easiest form of compromise in Washington would be “corporate-only tax reform”, after all, corporate lobbyists would be more than happy to write the legislation for the legislators.

Beware if you hear the president and members of Congress claiming, in the days ahead, that corporate-only reform is the way to go because it’s “clean,” “simple” and “good for jobs.” Probably true. But corporate-only tax relief is also cronyism. It’s Wall Street over Main Street.

Meanwhile, Congress is on recess; they return to Washington next week. Congress faces a looming deadline by April 28: funding the federal government. If no new funding bill is passed by next Friday, parts of the federal government will shut down.

The White House and Congress are considering passage of a one-week extension on funding to hash out a more considered funding bill and possibly give the House time to take up the AHCA. This is the one thing Washington is good at – kick the can down the road.

Financial Review

Hippity Hoppity

Sinclair Noe — April 17, 2017

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

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DOW + 183 = 20,636
SPX + 20 = 2349
NAS + 51 = 5856
RUT + 15 = 1361
10 Y + .02 = 2.25%
OIL – .43 = 52.75
GOLD – 3.80 = 1285.00

The S&P 500 is coming off a three-day losing streak, having fallen more than 1% over that period. It has also dropped for two straight weeks, closing at its lowest level since February on Thursday. The Dow and the Nasdaq have also dropped over those periods.

Also, geopolitical hotspots did not boil over during the holiday weekend, even though South Korean news agencies are reporting that 2 more US aircraft carriers are headed for the Korean peninsula. The US and South Korea are discussing joint drills, which will include the three aircraft carriers and other ships. So, we were probably due for a bounce.

And today, the market turned its attention to earnings reporting season, just getting underway with an optimistic outlook. Profits of S&P 500 companies are estimated to have risen 10.4 percent in the latest quarter, the first double-digit percentage growth since the third quarter of 2014, according to Thomson Reuters.

The Atlanta Federal Reserve bank downgraded their outlook for U.S. economic growth for the first quarter. The Atlanta Fed said first-quarter gross domestic product was on track to grow 0.5 percent, which was lower than the 0.6 percent growth rate calculated on April 7. Meanwhile, a survey from CNBC and Moody’s analytics puts the consensus forecast at 0.9%.

Now, keep in mind this is first quarter GDP, and we are already in the second quarter, and we are likely to see a familiar pattern emerge, where a weak first quarter is followed by a second quarter revival, and an even stronger third quarter. What’s expected to underpin second-quarter growth is higher household spending.

Consumers cut back early in the year, partly to recover from holiday spending but also because tax refunds were sent out unusually late. Millions of Americans will have more money to spend this month and next. Also, the US economy is simply on much more solid ground than any time since the Great Recession ended in the middle of 2009.

Home-builders are not feeling the animal spirits. The National Association of Home Builders/Wells Fargo housing market index fell 3 points to 68, on a scale where any reading over 50 is considered good. The March reading was an 11-year high. The measure of current sales conditions also fell 3 points, to 74, though it’s been over 70 for five consecutive months.

Tomorrow, the government will release the latest housing starts data, which should show a modest decline in March. Single-family housing starts have more than doubled from the 2009 lows but are well below non-recessionary levels.

Also, this morning, the Empire State manufacturing survey fell to a reading of 5.2 in April from a two-year high of 16.4 in March. The survey still shows improving conditions, since the index was above zero. But several key components to the survey, including new orders and shipments, also declined.

On Friday, the Commerce Department said retail sales fell 0.2 percent in March following a 0.3 percent decrease in February, which was the first and biggest decline in nearly a year.

Meanwhile, the Labor Department said its Consumer Price Index declined 0.3 percent last month. This was the first decline in 13 months and biggest decrease since January 2015 amid falling prices for gasoline and mobile phone services, which offset rising rents and food costs.

So, with the economy continuing its sluggish growth in the first quarter, where is earnings growth coming from? The answer might surprise you – Europe. The Euro area has made an important contribution to global growth with GDP projected to expand 2.25% in the first quarter and 2.5% this quarter.

First quarter earnings per share growth in the Eurozone is forecast to grow at almost double the rate of earnings growth in the US. Higher nominal GDP outside the U.S. is benefiting European firms and US export-oriented names.

For S&P 500 companies that generate more than 50% of sales inside the US, the earnings growth rate is 6.0%. For companies that generate less than 50% of sales inside the US, the earnings growth rate is 15.7%.

So, we are starting to see a bounce back in Europe. Also, emerging-market stocks and bonds have attracted large inflows from investors. Since the beginning of the year, the main exchange-traded fund for emerging markets, iShares MSCI Emerging Markets, is up 11 percent, with funds that track markets like Mexico, Turkey, India and Argentina rising even more.

And China said its economy, buoyed by heavy investment spending, had grown 6.9 percent, a better figure than economists had projected. Other economies considered to be emerging markets — Mexico, South Korea and Brazil — are also overcoming deterrents, like volatile currencies, political upheaval and worries of a trade crackdown.

According to an index of hard and soft economic data points compiled by the Institute of International Finance, growth in emerging economies was up 6.8 percent through the first quarter this year — the model’s highest reading since 2011.

Non-US equities are multi-decade cheap versus the S&P 500. It’s likely, then, that the next long-term trend will favor non-US markets. Stock and bond market gains in emerging markets can be fleeting, vulnerable to political turmoil and investors with short-term investment horizons. But for now, the mood is bullish.

This afternoon, Treasury Secretary Steven Mnuchin said the administration’s timetable for tax reform is set to slip. The Financial Times reports, Mnuchin said the target to get tax reforms through Congress and on President Donald Trump’s desk before August was “highly aggressive to not realistic at this point”.

Ahead of meetings with finance ministers and central bankers in Washington this week, Mnuchin also rejected fears that the Trump administration may be embarking on a new round of currency wars over the strength of the dollar following the president’s public fretting last week.

He stressed that the US did not intervene in currency markets. He agreed with the president’s repeated comments in recent months that the dollar’s strength in the short term was hurting US exports and the economy.

Budget Director Mick Mulvaney told CNBC.com the administration plans to cut taxes without regard to the budget deficit. Mulvaney also noted House Republicans want to phase out Medicare in favor of vouchers, a position Mulvaney voted for six times when he was in the House —- though he said Trump may or may not go along.

Whatever is happening or is going to happen on the fiscal front, look for opposition from both sides of the aisle. President Trump has promised a raft of presumably Wall Street-friendly initiatives, including tax cuts, an increase in infrastructure spending and deregulation. Those pledges have lifted markets to records, but since March 1, when equity benchmarks last touched a fresh round of all-time highs, momentum has faded.

Meanwhile, the Federal Reserve is lurking in the background. There’s a 47% chance the Fed raises its key interest rate in June, according to World Interest Rate Probability data provided by Bloomberg. That’s down from a 66.5% probability one week ago. The decline in CPI inflation may slow the Fed’s assault on higher rates, but we’ll need to see more data before we can confirm rate hikes are off the table.

Congress remains on vacation as another week begins in Washington, and when lawmakers return they’ll have only days to head off a government shutdown. Senators are due to return Monday, April 24, with House members scheduled to come back a day later. Federal government operations are funded through April 28, and without a new spending bill, a partial shutdown kicks in for the first time since 2013. The key here is “partial.”

United Continental this morning reported first-quarter earnings that topped forecasts. The company earned $0.41 in adjusted earnings per share (0.38 expected) and operating revenue of $8.42 billion ($8.38 billion forecast.) Of course, that was all before last week’s incident where a doctor was dragged from a plane to make way for United employees to fly. The earnings call will be tomorrow.

After the closing bell, Netflix reported a miss on both domestic and international subscriber growth in its first quarter earnings. The bright spot: Netflix turned in a rosier forecast for Q2 than Wall Street was expecting, both domestically and internationally. Earnings beat expectations, and revenue was in line with analysts’ estimates. Shares dropped in after-hours trade.

Netflix said in the fall that it plans to spend $6 billion on content this year, above last year’s predicted spending from companies like Amazon and CBS. Netflix also said in January it plans to produce 1,000 hours of premium original content this year — even as tech giants like Apple try their hand at original shows.

As of last year, Netflix was by far the most-watched streaming service in America, at 52.6 million American households – nearly double the number streaming Amazon.

HCA Holdings warned its first-quarter results would come up short of analyst expectations. HCA pre-announced first-quarter revenues of $10.6 billion, which is one percent below the $10.78 billion top-line consensus estimate. The hospital operator, which specializes in trauma and surgical centers, said emergency room admissions rose 1.1 percent in the latest quarter, down from the 1.6 percent gain in the same quarter a year ago, and below analysts’ expectations.

Boeing plans to lay off hundreds of engineers in Washington state and other locations – and may eliminate more jobs later this year. The latest workforce reduction, which should take effect June 23, follows a separate exodus of 1,500 mechanics and 305 engineers and technical workers who agreed to leave voluntarily earlier this year. Both union and non-union workers will be affected.

Financial Review

Boxcars

Sinclair Noe — February 27, 2017

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

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DOW + 15 = 20,837
SPX + 2 = 2369
NAS + 16 = 5861
RUT + 13 = 1407
10 Y + .05 = 2.37%
OIL + .06 = 54.05
GOLD – 5.00 = 1252.90

Another up day, another record close for the Dow and the S&P; this was the 12^th record close in a row for the Dow. For the month of February, the Dow is up about 970 points. The S&P up 91 points and the Nasdaq up about 250.

The White House will propose boosting defense spending and slashing funding for the Environmental Protection Agency in a set of marching orders to agencies as it prepares its budget for the coming fiscal year.

Tomorrow, Trump will address a joint session of Congress and he is expected to propose boosting defense spending by $54 billion in his first budget plan and offset that by an equal amount cut from the rest of the government’s discretionary budget. Most federal agencies other than those involved in security will see their budgets reduced to make room for 10 percent higher spending on defense.

Discretionary spending makes up about 30 percent of the $4 trillion budget. President Trump’s proposal for the 2018 budget year won’t make significant changes to Social Security or Medicare, per Treasury Secretary Steven Mnuchin. Trump campaigned on a promise of 4% economic growth, but Mnuchin walked back that pledge to 3%.

And this is an important point, because that forecast for 3% underpins Trump’s tax reforms – the idea being that Trump can deliver tax cuts without an explosion in deficit spending by growing the economy. And we can get to 3% growth because of tax cuts and deregulation.

The problem is, in interview after interview, Trump and his surrogates have demonstrated that they have no idea how to get there. Take for example Commerce Secretary Wilbur Ross’, confirmation hearing. He told Senators that a combination of tax reform, a more self-sufficient energy policy, and increasing exports would do the trick.

GDP growth is a function of how many workers enter the workforce, and how productive those are. It has nothing to do with energy consumption or how much we export unless that manages to bring more workers. And right now, the workforce is shrinking due to demographics of the boomer population transitioning to retirement.

Also, the unemployment rate is 4.8%, meaning that most people who were looking for jobs have jobs. And the productivity part of the equation – well, all we need something twice as big as the internet boom of the 90’s.

Trump called his plan a “public safety budget” focused on increasing law enforcement and keeping out terrorists. He also promised that “we’re going to start spending on infrastructure, big,” without giving details. Infrastructure-linked stocks, such as construction materials and steel producers, were among the best performing industries in the S&P 500 index today. Congress ultimately controls the government purse strings, and the White House budget is a baseline on negotiations to set a federal budget for the upcoming fiscal year. You can bet Wall Street will be look for details that it can sink its teeth into.

Trump reiterated his pledge to repeal and replace the Obamacare law in remarks at a black-tie dinner for the National Governors Association on Sunday. The president will offer details on how he would like to overhaul the Affordable Care Act on Tuesday. The administration has said the repeal and replace of Obamacare is its priority ahead of a tax overhaul. He also seemed to express surprise at the complexity of the reform process. “I have to tell you, it’s an unbelievably complex subject,” Trump said. “Nobody knew that health care could be so complicated.”

Trump is expected to sign a new refugee and immigration executive order on Wednesday, one day after addressing lawmakers at a joint session of Congress. Meanwhile, the president’s pick for secretary of the Navy, Philip Bilden,  has pulled out from consideration, citing concerns about privacy and separating himself from his business interests. Billionaire investor Wilbur Ross is headed toward confirmation as Commerce secretary. The Senate is set to vote on his nomination tonight.

Mexico’s top trade negotiator doubled down on threats to break off talks to rework NAFTA, saying his country will walk away if the U.S. insists on slapping duties or quotas on any products from south of the border. Mexican Economy Minister Ildefonso Guajardo said: “The moment that they say, ‘We’re going to put a 20 percent tariff on cars,’ I get up from the table. Bye-bye.”

Orders for durable goods rebounded in January, a sign companies remained upbeat at the start of the year. Bookings for goods meant to last at least three years rose 1.8 percent after a 0.8 percent decrease in December. Bookings for non-military capital goods excluding aircraft — a proxy for future business investment — fell 0.4 percent.

Pending home sales fell by 2.8% in January, per the National Association of Realtors. Buyer demand for housing is as strong as it’s been since the recession, the NAR said. However, “the significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay,”

Warren Buffett struck an upbeat tone on American business and what he called a “miraculous US economy” in part because of a “tide of talented and ambitious immigrants.” In his annual letter to Berkshire shareholders, the Oracle of Omaha urged a long-term view of the markets, saying a collection of conservatively financed companies are “virtually certain” to be worth more in the future.

He also defended share buybacks and spent a sizable section of the letter attacking investment fees. He estimated that investors wasted more than $100 billion on high-fee Wall Street money managers over the past 10 years.

He declared an early victory in his decade-long bet that a basket of hedge funds would fail to keep pace with an S&P 500 Index fund. He has a bet with a hedge fund, with the proceeds going to charity. He gave an update: A $1 million investment in the bundle of hedge funds would have generated a $220,000 gain in the nine years through 2016, compared with the index fund’s $854,000 increase.

That means it’s a near certainty Buffett will win when the bet ends on Dec. 31. Buffett estimated that about 60 percent of the gains that the hedge funds produced during that period were eaten up by management fees, which he called a “misbegotten reward.”

Buffett wrote, “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”

March may be the best month to work at Warren Buffett‘s Berkshire Hathaway, especially for college basketball fans. Buffett said his company will give $1 million a year for life to any employee who guesses which teams will play in the NCAA men’s basketball tournament’s round of 16, or “Sweet 16.”

Also, this weekend, Jeffrey Immelt, the CEO of General Electric wrote America “will be less of a leader in trade” in the coming years. And “We’re in an era when some very basic assumptions about the global economy are being tested,” he said in his annual letter to shareholders. “There is deep skepticism toward the ideas that powered economic expansion for a generation.” That said, globalization is not coming to an end, according to Immelt.

However, “It is the end of the ‘global elite,’ those who see the world only from financial centers or a website. Most ‘Global Institutions’ are 70 years old and must be modernized to address contemporary global challenges.”

The pound dipped below $1.24 in early trading after reports that U.K. Prime Minister Theresa May’s team is preparing for the possibility that Scotland calls a second independence referendum. Scotland held an independence referendum in 2014, with 55% of Scots voting to remain a part of the UK. But First Minister Nicola Sturgeon argues that Britain’s planned departure from the EU — which most Scots voted against — has significantly altered the terms of the national relationship.

A mega-merger between two European stock exchanges is in peril. Plans to combine the London Stock Exchange with Deutsche Boerse, which runs the main German stock market, have been in the works for more than a year. But late Sunday, the London exchange warned that the deal has run into trouble with European regulators.

Europe’s biggest tech showcase, Mobile World Congress, kicked off in Barcelona today with global smartphone makers launching devices. But the notable absence was a flagship smartphone from Samsung, which has its own event scheduled for late March to debut the S8.

Sony has announced a $1,587 projector that turns any surface into a touchscreen, and the first ever smartphone with a 4K high dynamic range screen.

Alphabet’s Google unit will implement its digital assistant to all smartphones running the latest version of the Android operating system, not just phones made by Google.

A series of bills in at least four U.S. states, Georgia, Maryland, Illinois, and Tennessee, could prevent Uber or Google from operating self-driving cars. The measures would only allow a network of self-driving cars to operate on public roads if the cars were owned by an automaker.

Walmart is running a new price-comparison test in at least 1,200 U.S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with grocery chains. Walmart launched the price test across 11 Midwest and Southeastern states, focusing on price competition in the grocery business that accounts for 56 percent of the company’s revenue. Wal-Mart’s tests are aimed at finding the right price point across a range of products that will attract more shoppers, and then adjusting prices as needed.

Favorite “La La Land” was mistakenly awarded the best picture Oscar, only to have it taken away from the cast and crew and handed to indie upstart “Moonlight” in an unprecedented Oscars mix up. And the loser is … PricewaterhouseCoopers.

The global accounting firm has apologized for the embarrassing envelope mix-up that resulted in mistake. Meanwhile, 2 streaming services and one television network went home with Oscar statuettes on Sunday night. The wins for Amazon, Netflix and ESPN showcase the evolving and expanding shape of the movie business.

Financial Review

Count Your Pants and Shirts

Sinclair Noe — February 23, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW + 34 = 20,810
SPX + 0.99 = 2362
NAS – 25 = 5835
RUT – 9 = 1394
10 Y – .03 = 2.39%
OIL + .77 = 54.36
GOLD + 12.10 = 1250.30

The Dow Industrial Average hit another record high close, its 10^th record in a row, its longest run of record closes since 1987. Not counting record closes, the last time the Dow logged gains for 10 straight sessions was March 2013. The S&P 500 finished up a fraction of a point and just short of Tuesday’s closing record of 2,365. The benchmark index set an intraday record of 2,368.00 before retreating.

Treasury Secretary Steven Mnuchin said today that he has asked his staff to explore having the U.S. government issue debt maturities as long as 50 years or 100 years. In an interview on CNBC, Mnuchin said he was not ready to make a “formal announcement” of a 50-year or a 100-year bond.

Mnuchin repeated it was the Trump administration’s goal to have Congress complete work on a tax-reform package by August. Trump has promised a “phenomenal” tax plan by early March to cut business taxes. Paying for that “phenomenal” tax plan could require an equally phenomenal rate of economic growth that experts, including the non-partisan Congressional Budget Office, say may not be possible.

Mnuchin said the administration is aiming for a 3% or higher annual growth rate, but said it make take a couple of years, probably 2018, before we see an “engine of growth” from tax reform and regulatory relief.

Mnuchin says the Treasury has no plans now to label China a currency manipulator. Later in the day, Trump called China a “grand champion” in currency manipulation.  Mnuchin also agreed with the sentiment that the stock market is a report card for how the Trump administration is doing. “Absolutely,” he said, “It’s a mark-to-market business.”

And in the first month, the administration gets the grade of a solid A. Of course, it still has a long way to go to match the 17.4% annual gains sported by the Clinton Administration. And Mnuchin should be wise enough to realize the market is fickle.

Axios reported that President Trump‘s infrastructure plans may be pushed back until 2018. Axios, citing Republican sources, said that putting off any consideration of these plans would give lawmakers on Capitol Hill more breathing room to deal with a legislative calendar that already includes a Supreme Court nomination, tax reform and repealing Obamacare.

Several construction stocks did not fare well today. Shares of Fluor, Eagle Materials, Quanta Services and Vulcan Materials all dropped at least 1.5 percent. U.S. Steel’s stock dropped more than 7 percent.

The Justice Department has rescinded a memo issued by the Obama administration that phased out the use of private contractors to run federal prisons.

The president met today with company executives to discuss how to create jobs, which is nothing unusual, except that five of those companies are laying off thousands of workers as they shift production abroad. Those companies include General Electric, Caterpillar, 3M, United Technologies and Dana. The big idea from the execs was to cut the business tax rate.

The number of Americans filing for unemployment benefits rose slightly more than expected last week, but the four-week average of claims fell to its lowest level since 1973. Initial claims for state unemployment benefits increased 6,000 to a seasonally adjusted 244,000 for the week ended Feb. 18. The four-week moving average of claims, which smooths out week-to-week volatility, fell 4,000 to 241,000 last week.

The American Petroleum Institute reported an 884,000-barrel decline in U.S. crude supplies last week, a 893,000-barrel decline in gasoline stocks and a 4.2 million barrel decrease in distillate inventories.

Official inventory data from the U.S. Energy Information Administration shows a build of 600,000 barrels, that was less than expected. Last week, EIA’s report put crude stockpiles at a record high of 518.1 million barrels. This week’s figures were for a total inventory size of 518.7 million barrels, still above seasonal limits.

Oil producers, in and outside of OPEC, have largely kept their promise to reduce collective output by 1.8 million barrels a day starting in January to tackle a global supply glut. However, a steady increase in US crude production and inventories is stoking concerns that global supply remains bloated despite these cuts.

The United States is expected to become a net exporter of natural gas on an average annual basis by 2018, per a recently released Annual Energy Outlook update from the U.S. Energy Information Administration.

The transition to net exporter is driven by declining pipeline imports, growing pipeline exports, and increasing exports of liquefied natural gas (LNG). The United States is also projected to become a net exporter of total energy in the 2020s, in large part because of increasing natural gas exports.

Low energy prices during 2016 forced Exxon Mobil to lower its estimate of its proved oil and gas reserves. The company had to shave off nearly 15%, or 3.3 billion barrels of oil equivalent, of untapped crude. It comes a day after ConocoPhillips de-booked more than a billion barrels of its oil sands bitumen reserves, citing weak global energy prices.

Wind plant manufacturing is the fastest growing job sector in the U.S. economy — and this employment has been concentrated in the “Rust-Belt” states, pivotal in swinging the presidential election. Similarly, domestic solar companies are growing 12 times faster than the overall job creation rate in the U.S. economy.

In total, renewable energy sector employment in the United States grew 6 percent in 2016 to 769,000 jobs, while employment in gas, coal and oil exploration and extraction combined fell 18 percent, to 375,000 jobs.

European budget carrier Norwegian Air Shuttle said it would begin flying single-aisle planes nonstop from the U.S. to Europe starting in June. The initial flights will connect Edinburgh, Scotland to Stewart International Airport in New York, Green Airport in Providence, Rhode Island, and Bradley International Airport near Hartford, Connecticut.  The airline is promising fares as low as $65.

McDonald’s diners will soon be able to quench their thirst for as little as a dollar. Starting in April, soft drinks of any size will cost a buck, while McCafe specialty drinks will sell for $2. McDonald’s has been looking for ways to boost profits and sales, making its popular breakfast items available all day, and recently rolling out a smaller and jumbo-sized version of its iconic Big Mac.

Jack In The Box missed estimates by 7 cents with adjusted quarterly profit of $1.18 per share, and the restaurant chain’s revenue fell short of forecasts as well.

The Model 3 electric sedan remains on schedule and will reach production of about 5,000 units per week by the end of the year. Tesla reported a wider-than-expected loss of 69 cents per share, compared with the consensus estimate for a 43-cent loss. CEO Elon Musk also announced he will likely seek more capital from investors.

Carlos Ghosn, longtime CEO of Nissan who saved the automaker from near-collapse, will leave his current post to oversee Nissan’s alliances with Renault and Mitsubishi Motors.

Square lost 4 cents per share for its latest quarter, smaller than the 9 cents forecast by analysts, while the mobile payments company’s revenue came in slightly above estimates. Square saw a better than 34 percent jump in payment volume compared with a year earlier.

Nvidia shares closed down 9.3% after a round of bearish analyst comments prompted investors to take profits from the high-flying chip maker, which has more than tripled over the past 12 months. Instinet downgraded the stock to reduce from buy, while BMO Capital Markets cut its price target to $85 from $100.

Shares of HP Inc. rallied 8.6% after quarterly results topped Wall Street estimates.

Also, shares of First Solar led S&P 500 gainers, rising 11%.

Shares of L Brands sank 16% after the Victoria’s Secret parent late Wednesday issued weaker-than-forecast guidance for 2017. Might be feeling the pain from slowing mall traffic.

Hormel Foods shares lost 5.4% after the food company cut its earnings forecast for the year following a sharp decline in profit from its Jennie-O turkey brand.

Kohl’s Corp. shares, which had traded higher earlier after earnings beating forecasts, closed down 2.1%.

The Powerball lottery jackpot reached $435 million last night. A winning ticket was sold in Indiana. For the rest of us – back to work.