Geopolitics Continue to Traffic Stocks

Charles Schwab: On the Market

Posted: 4/11/2017 4:15 PM ET

Geopolitics Continue to Traffic Stocks

With little in the way of news on both the equity and economic fronts, uncertainty surrounding the geopolitical landscape appeared to drive U.S. equities lower in another volatile session. Treasury yields continued to move lower and the U.S. dollar lost ground, while crude oil prices showed some signs of resiliency, getting a slight lift on headlines regarding a possible discussion of an expansion of OPEC production cuts, and gold jumped.

The Dow Jones Industrial Average (DJIA) fell 7 points to 20,658, the S&P 500 Index lost 7 points (0.3%) to 2,357, and the Nasdaq Composite declined 25 points (0.4%) to 5,881. In moderate volume, 781 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.32 to $53.40 per barrel and wholesale gasoline was unchanged at $1.76 per gallon. Elsewhere, the Bloomberg gold spot price jumped $18.14 higher to $1,272.82 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 100.73.

Loews Corp. (L $47) announced an agreement to acquire Consolidated Container Co. from Bain Capital Private Equity for about $1.2 billion. L traded lower.

Shares of Hub Group Inc. (HUBG $41) were sharply lower after the full-service transportation company preannounced that it expects 1Q and full-year earnings-per-share (EPS) to come in well below the FactSet estimates. The company said it is experiencing a soft pricing environment due primarily to excess truck capacity and extraordinarily aggressive intermodal pricing.

Qualcomm Inc. (QCOM $55) announced a countersuit against Dow member Apple Inc. (AAPL $142) alleging the iPhone maker breached contractual pledges, mischaracterized their agreements and misrepresented facts. The countersuit comes after AAPL launched a lawsuit in January against QCOM regarding how it charges royalties for using its mobile phone technology. Apple has not commented. Shares of both companies were lower.

Small business optimism edges lower, job openings rise

The National Federation of Independent Business (NFIB) Small Business Optimism Index for March dipped to 104.7 from February's 105.3 level, matching the Bloomberg estimate.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, rose to a level of 5.74 million jobs available to be filled in February, from January's 5.63 million level, and above forecasts of 5.65 million. The hiring rate dipped to 3.6% from January's 3.7% rate, as did the separation rate to 3.5% from 3.6%.

Treasuries finished higher, as the yield on the 2-year note declined 3 basis points (bps) to 1.24%, while the yields on the 10-year note and the 30-year bond fell 5 bps to 2.31% and 2.94%, respectively.

Bond yields have moved lower as of late, amid Fed and political uncertainty both here and abroad, as well as continued signs of steady economic growth and flared-up geopolitical tensions. Financials have retreated in the wake of the slide in yields, contributing to the recent soft patch in the stock markets after a strong post-election rally. As such, Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, One of These Things … Market's Moves Not All About Trump, much of the pick-up in economic growth, as well as the earnings turn, pre-dated the election and shouldn't be fully credited to President Trump. Liz Ann concludes that growth has accelerated globally; while nominal growth in the United States is under-appreciated and the recent consolidation in stocks is likely about sentiment having gotten a tad too frothy. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

For a look at the moves in the bond markets, see our video's by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' discussion, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Financials are set to unofficially kick off 1Q earnings season later this week. Per data compiled by FactSet, the financials sector is expected to report the highest year-over-year (y/y) earnings growth of all eleven sectors at 14.3%, leading to the projected 8.9% growth for the S&P 500, a rate that would be the highest since 4Q 2013. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers analysis of the sector in his latest Schwab Sector Views: Financials—Opportunity or End of the Run?, at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

Tomorrow's economic calendar will offer investors a look at the Import Price Index, forecasted to have fallen 0.2% m/m during March following the 0.2% increase the month prior, as well as MBA Mortgage Applications.

Europe and Asia mixed on data and geopolitical concerns

European equities finished mixed, with the global markets remaining uneasy amid heightened geopolitical tensions toward Syria and North Korea, while G-7 foreign ministers met for a second day. Technology and financials weighed on the markets, along with a modest pullback in basic materials, while oil & gas issues overcame early losses despite intra-day weakness in crude oil prices after a recent rally. German investor confidence improved more than estimated for April, while eurozone industrial production unexpectedly declined and U.K. inflation statistics were mixed. The euro and British pound finished higher versus the U.S. dollar, while bond yields in the region traded mixed. Political uncertainty in the region continued to garner attention as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Randy Frederick in the videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, check out our article, Brexit Begins: What's Next for the U.K., at www.schwab.com/insights, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational.

Stocks in Asia finished mixed amid continued geopolitical concerns that have been exacerbated by tensions toward North Korea and last week's U.S. missile strikes in Syria, along with resurfacing concerns about ramped up regulations of the financial markets within China. For a look at the global landscape, see Schwab's Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching. Japanese equities declined, with the yen gaining ground to weigh on the markets, while mainland Chinese shares advanced, but those traded in Hong Kong, as well as South Korea declined. Strength in oil & gas and financial stocks supported Australia's markets, which overshadowed a dip in the nation's business confidence for March, and India's bourse snapped a string of losses that have trimmed the nation's record run that has given emerging markets a boost in 2017. Schwab's Michelle Gibley, CFA, offers her commentary on the region in her article, Emerging Markets: Why They Deserve a Place in Your Portfolio, while Schwab's Kathy Jones addresses the question, Emerging Market Bonds: Can the Hot Start In 2017 Continue?. Read all these commentaries at www.schwab.com/oninternational and www.schwab.com/marketinsight.

Tomorrow, the international economic calendar will offer the unemployment rate from South Korea, CPI and industrial production from India, consumer prices and lending statistics from Japan, consumer confidence from Australia, CPI and PPI from China, employment data from the U.K., and CPI from Spain.

Stocks Finish Flat Following Jobs Report and Syria Strike

Charles Schwab: On the Market

Posted: 4/7/2017 4:15 PM ET

Stocks Finish Flat Following Jobs Report and Syria Strike

U.S. stocks finished Friday's trading session near the unchanged mark after battling back from early pressure following a softer-than-expected March Labor Report and overnight missile strikes by the U.S. in Syria. Treasury yields and gold advanced, while the U.S. dollar and crude oil prices also gained ground, but experienced bouts of volatility. In very light equity news, PriceSmart announced 2Q results that fell shy of the Street's expectations.

The Dow Jones Industrial Average (DJIA) moved 7 points to the downside to 20,656, the S&P 500 Index shed 2 points (0.1%) to 2,356, and the Nasdaq Composite ticked 1 point lower to 5,878. In moderate volume, 752 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.54 to $52.24 per barrel and wholesale gasoline was $0.02 higher at $1.75 per gallon. Elsewhere, the Bloomberg gold spot price increased $3.04 to $1,254.74 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 101.15. Markets were mostly lower for the week, as the DJIA was flat, the S&P 500 Index declined 0.3%, and the Nasdaq Composite shed 0.6%.

PriceSmart Inc. (PSMT $87) reported fiscal 2Q earnings-per-share (EPS) of $0.90, versus the FactSet estimate of $0.92, as revenues rose 2.0% year-over-year (y/y) to $793 million, compared to the expected $794 million. Shares traded solidly lower.

March nonfarm payroll job growth misses severely

Nonfarm payrolls (chart) rose by 98,000 jobs month-over-month (m/m) in March, compared to the Bloomberg forecast of a 180,000 increase. The rise of 235,000 seen in February was revised to a gain of 219,000 jobs. The total downward revision to the job gains in February and January was 38,000. Excluding government hiring and firing, private sector payrolls increased by 89,000, versus the forecasted gain of 170,000, after increasing by 221,000 in February, revised from the 227,000 rise that was initially reported. Professional and business services continued to show solid growth to lead the way, while retail sector employment fell and job growth in construction slowed from February's sharp increase. Weather may have had an impact as March saw a heavy snow storm in the Northeast, while February's unseasonably warm weather likely pulled some gains forward in the construction sector.

The unemployment rate fell to 4.5%—the lowest since May 2007—from 4.7%, where it was forecasted to remain, while average hourly earnings rose 0.2% m/m, matching projections and following February's upwardly revised 0.3% increase. Compared to last year, earnings were 2.7% higher, matching estimates and following the 2.8% gain in the previous month. Finally, average weekly hours remained at February's downwardly revised 34.3 rate, versus estimates of 34.4.

The data appeared to catch economists off guard, given the employment data leading up to the report, notably Wednesday's blowout figures from ADP. However, the report is likely keeping concerns about a faster-than-expected pace of Fed rate hikes in check. The March figures likely did little to calm concerns about the wide spread between "soft" and "hard" data, as discussed by Schwab’s Chief Investment Strategist Liz Ann Sonders in her article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data. But as Liz Ann points out, after a "typical" weak first quarter, economic growth should accelerate and based on history, soft data is likely to retreat, while hard data is likely to accelerate. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $15.2 billion during February, just topping the $15.0 billion forecast of economists polled by Bloomberg, while January's figure was adjusted higher to an increase of $10.9 billion from the originally reported $8.8 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $12.3 billion, while revolving debt, which includes credit cards, increased by $2.9 billion.

Wholesale inventories (chart) were unadjusted at a 0.4% m/m gain for February, matching expectations, and following January's 0.2% decline. Sales rose 0.6% m/m, after January's upwardly revised 0.3% gain. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at January's 1.28 months level.

Treasuries were lower despite some early strength, with the yield on the 2-year note ticking 5 basis points (bp) higher to 1.29%, the yield on the 10-year note gaining 4 bps to 2.38% and the 30-year bond rate increasing 3 bps to 3.01%. The bond and currency markets were choppy following the employment report and amid a flare-up in geopolitical concerns in the wake of last night's U.S. missile strikes in Syria, and showed little reaction to President Trump's favorable comments on his meeting with China.

Amid this backdrop, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop. Also check out our videos by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' discussion, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones. Finally, for our recent commentary on the political front, see Schwab’s Chief Investment Strategist Liz Ann Sonders' and Randy Frederick's video, Is Tax Reform Still On the Table? at www.schwab.com/insights.

Europe nudges higher, Asia mixed

European equities ticked higher, showing some late-day resiliency in the face of a jump in geopolitical uncertainty after the U.S. conducted missile strikes in Syria in response to a chemical attack on civilians earlier this week. The strikes fostered a relatively limited reaction for the markets, though crude oil prices briefly spiking and pared gains but extended a recent rally. The markets appeared to shrug off the much softer-than-expected U.S. labor report, as well as scrutiny on the second day of talks between the U.S. and China. Political uncertainty in the region remained as discussed by Schwab's Jeffrey Kleintop, CFA, and Randy Frederick in the videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Also, check out our article, Brexit Begins: What's Next for the U.K., at www.schwab.com/insights, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. In economic news, French industrial and manufacturing production missed expectations, while German exports unexpectedly rose and the nation's industrial production surprisingly jumped. U.K. manufacturing and industrial production both unexpectedly declined. The euro and British pound were lower versus the U.S. dollar and bond yields in the region moved to the downside.

Stocks in Asia finished mixed as the global markets reacted to a flare-up in geopolitical concerns after the U.S. launched missile strikes in Syria, while also eyeing the two-day summit between the U.S. and China. Crude oil prices spiked briefly following the U.S. military action but later pared gains amid a relatively limited reaction. Headlines regarding the start of the U.S. and China meeting lacked details but some reports suggested the talks were off to a good start. As such, see Schwab's Jeffrey Kleintop's, CFA, article, Five Reasons to Stay Invested Despite Heightened Uncertainty at www.schwab.com/oninternational. Japanese equities overcame early downside pressure as the yen pared some of its gains. Mainland Chinese stocks rose and shares in Hong Kong finished flat, with the rise in crude oil prices helping the latter recover. Oil & gas issues saw some strength to help nudge Australian securities higher. South Korean equities dipped and Indian listings continued to trim gains from a recent rally to record highs in the wake of the heightened geopolitical concerns and yesterday's raising of a non-benchmark interest rate by the Reserve Bank of India.

Stocks dip as bond rates continue slide

U.S. stocks dipped on the week as domestic and European political uncertainty lingered and the markets eyed the highly-anticipated first meeting between President Trump and his Chinese counterpart Xi. Financials led to the downside and utilities outperformed as Treasury yields resumed a slide amid a flare-up in geopolitical concerns, resurfaced uncertainty regarding tax reform, and as the minutes from the Fed's March meeting suggested the Central Bank may act sooner than expected on shrinking its bloated balance sheet. Conviction was also corralled by the growing concern about the widening divergence between "soft" and "hard" data as March auto sales figures solidly missed expectations to precede Friday's much softer-than-forecasted Labor Report, though ISM and Markit surveys of manufacturing and services sector activity both showed continued growth, with the former sector remaining firmly in expansion territory. The U.S. dollar ticked higher and gold jumped, while crude oil prices shrugged off a bearish oil inventory report to extend a recent rally and bolster the energy sector.

Next week's economic calendar will likely foster a delayed reaction as key data points, retail sales and the Consumer Price Index (CPI), will fall on Good Friday when the U.S. markets will be closed. Leading up to Friday, the docket will deliver the NFIB Small Business Optimism Index, JOLTS Job Openings, the Producer Price Index (PPI) and the preliminary University of Michigan Consumer Sentiment Index. Finally, 1Q earnings season will begin and will likely garner attention amid elevated expectations of earnings growth.

As noted in the latest Schwab Market Perspective: Working off the Froth, the recent pullback in stocks and failure of healthcare reform appears to have helped take some of the froth out of the market and correct some overly optimistic sentiment conditions. We believe this will prove to be healthy for the continuation of the bull market, with an improving economy and a still business-friendly administration supporting further gains. But potential political-induced volatility isn't limited to the United States, as the official Brexit process started. A UK recession doesn't appear to be in the cards at this point, but risks have risen; while U.S. recession risk remains quite low. Read more at www.schwab.com/marketinsight.

Reports on next week's international front that deserve a mention include: Australia—consumer confidence and employment change. China—lending statistics, CPI and PPI, and trade balance. India—CPI, trade balance and industrial production. Japan—machine orders and trade balance. Eurozone—investor confidence, industrial production, along with German CPI and investor sentiment. U.K.—inflation statistics and employment change.

Financial Review

Nobody Knows Normalization

Sinclair Noe — February 12, 2016

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DOW + 313 = 15,973
SPX + 35 = 1864
NAS + 70 = 4337
10 Y + .10 = 1.75%
OIL + 2.77 = 28.98
GOLD – 9.40 = 1238.00

The Nikkei Stock Average finished down 11% for the week, its biggest weekly percentage drop since October 2008. For the day, the index ended off 4.8% at 14,952, the lowest since October 2014. The Nikkei is down 21% year-to-date.

Japanese Prime Minister Shinzo Abe held a meeting with his top financial diplomat today, as well as the BOJ’s governor, following a report that the “architect of Abenomics” called for a Group of 20-wide response to the recent market rout. Friday’s high-level gathering came as the country’s stock markets plunged again and the yen hit highs not seen since October 2014. Speculation is also rampant that Tokyo could conduct yen-selling intervention.

The Hang Seng China Enterprises Index of mainland Chinese companies trading in Hong Kong fell 2% Friday and was off 6.8% for the week. Trading was halted on the Kosdaq, the smaller cap, tech focused exchange in South Korea as the index dropped by more than 8%.

Here in the US, we’re not quite in bear territory for the major indices: The Nasdaq dropped 18% from last summer’s high; the S&P 500 dropped 15% from last year’s high.

And then we bounced today, not enough for weekly gains, but a bounce off the lows, as expected. For the week the Dow lost 1.4%, the S&P lost just under 1% after hitting a two-year low yesterday, and the Nasdaq lost just over a half a percent for the week. I’m just glad the markets will be closed Monday.

So, the very, very bad start to the New Year in the markets has carried over into February, and everybody is looking for a market bottom. And maybe yesterday marked a low; we can never really know until after the fact, but one day does not confirm a trend reversal. Add Bank of America to the list. The firm’s research team is the latest on Wall Street to lower expectations for the U.S. stock market in 2016, after one of the worst starts to a year on record wiped out more than $2 trillion in value.

The bank now expects the Standard & Poor’s 500 Index to end the year at 2,000. While the bank’s new target implies a 7.7 percent advance from the current level, it’s 9 percent lower than the prior target of 2,200. It would also mean a small annual loss. Of course, nobody knows where stocks will finish the year. You don’t know, Bank of America doesn’t know, I certainly don’t know, and the central bankers of the world have no clue.

So far, all attempts by central bankers to respond to the situation have not been working out. The People’s Bank of China has been selling dollars and substituting derivatives to prop up its balance sheet; a strategy that seems likely to result in devaluation of the Chinese currency.  Japan is fumbling around for answers and the yen has been getting stronger.

Europe has joined Japan with negative interest rates and it isn’t stimulating the economy, it is just leading banks, businesses and individuals to hoard cash. And Eurobanks are looking especially vulnerable right now. Deutsche Bank’s problems came into focus this week. The yield on Deutsche Bank’s 6% Contingent Convertible bonds, or CoCos, rose to more than 13% from 7.5% at the start of the year. The bank’s shares were down 40% in the same period.

When the debt of Germany’s biggest bank is trading like junk, it should catch your attention. As a side note, it would be high irony if Germany had to go begging to the EU to save its banking system. But Deutsche Bank is not the only Eurobank with problems.

Janet Yellen tried to normalize interest rates and instead the yield curve flattened. Fed Chair Janet Yellen wrapped up her testimony before Congress yesterday, stressing that the central bank was not on a “preset” path to return policy to “normal” and “wouldn’t take negative rates off the table.”

Yellen told lawmakers this week she was studying ways to “be prepared” in the event the current slide in world stock markets, concern about financial sector stress, and slowing economic growth all translate into a recession or another financial crisis. The growing consensus is that the Fed can’t raise rates again and a majority of money managers are calling for cuts.

What are the central banks going to do when another wave of bad news breaks over the markets? And will whatever they do work? The idea of the central bank “put” seems to be losing its punch, or even worse, backfiring. While the recent market volatility might just be an overblown response to the December rate hike by the Fed, you also have to question how one tiny little rate increase could cause this much damage, and if the real problem goes much deeper?

Retail sales rose 0.2% in January, as consumers boosted purchases of new cars as well as groceries and shopped more online. Sales in December were sharply revised higher to show a 0.2% gain instead of a 0.1% decline. Sales at gas stations dropped 3.1% in January.

Core sales – excluding autos, gas, building materials and food – rose an even stronger 0.6%. In an early sign of lackluster spending, Retail Metrics, a private research firm, said sales at stores open at least a year fell 0.9 percent in January from a year earlier. Meanwhile, business inventories climbed a seasonally adjusted 0.1% in December. To put it simply, sales are not strong enough to clear the shelves.

The University of Michigan’s preliminary February reading on consumer sentiment dropped to 90.7 from 92.0 in January. The expectations component fell from 82.7 to 81.0 during the month. The gauge of current conditions was down less, falling from 106.4 to 105.8. Consumer views of their financial situations improved, but largely because they expect lower inflation. In fact, respondents anticipated the lowest inflation rate on record in the January survey.

Sure enough. The Labor Department said import prices dropped 1.1% last month after decreasing 1.1% in December. Import prices have decreased in 17 of the last 19 months, reflecting the strong dollar and plunging oil prices.

A new report from the New York Federal Reserve shows older Americans have been ramping up their debt while younger Americans have not. In real terms, debt in the hands of Americans between 50 and 80 years of age has increased by 59% since 2003. At the same time, the aggregate debt of those age 39 and younger has dropped by 12%.

This is mainly a result of the housing market. Home-secured debt, per capita, has surged 47% for those age 65, for an increase of $11,191, while it’s dropped 28% to $8,195 for those aged 30. The same trend played out for auto loans as well; on a per-capita basis, auto debt is up 29% for those 65 years old, but it’s down 6% for those 30 years old. Overall, balances owed by households grew $288 billion in 2015, slightly less than the $306 billion increase seen in 2014.

Major world powers have agreed to a cessation of hostilities in Syria set to begin in a week and to provide humanitarian assistance to besieged areas, but failed to secure a complete ceasefire or an end to Russian bombing. The U.S., Russia and more than a dozen other nations also reaffirmed their commitment to a political transition when conditions on the ground improved, following a marathon meeting in Munich aimed at resurrecting peace talks.

Meanwhile, Saudi Arabia says it is willing to commit ground troops to fight ISIS in Syria; exactly how or when they might deploy, and what they intend to do if they deploy, and the extent of US involvement in any Saudi deployment – those are still open questions.

Oil prices were on a 6-day slide from February 4 until this morning; prices went from a high of 33.60 to a low of 26.05; or a 22% bear market in 6 days. Needless to say, there were some big bets on the short side, and when news of a hint of OPEC production cuts hit the wires, the shorts cashed in, which caused prices to pop, which squeezed the remaining short positions.

A big move up in oil prices today (10.5% and 12.3% intraday) but for the week, oil was down 4.7%. Most of the volatility in oil right now is due to speculators. At the same time, stocks have been moving in lockstep with oil; that correlation is not based on fundamentals; stocks and oil will disconnect eventually, just not today.

Christine Lagarde is set to win a second term as managing director of the International Monetary Fund, after a nominee deadline passed with no new candidates to challenge her. In a statement released Thursday, Treasury Secretary Jacob Lew said the U.S. supports her for a second term.

A full 76% of S&P 500 companies have reported fourth quarter earnings through early Friday. And the picture is not pretty. FactSet data show expectations for first-quarter per-share earnings have fallen to a decline of 6.3%, far wider than the decline of 5.5% they were showing as recently as Monday.  Back in September, that forecast was for growth of 4.8%.

By the end of December, it had fallen to growth of just 0.8%. The energy sector is looking worst, but all 10 S&P 500 sectors are facing lower expected earnings-growth rates for the first quarter than at the end of September

In case you missed it, Burger King announced this week that it will add hot dogs to its fast food menu. Proof positive that there is still some common sense in this world.

Financial Review

Times Change

Sinclair Noe — September 30, 2015

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DOW + 235 = 16,284
SPX + 35 = 1920
NAS + 102 = 4620
10 YR YLD + .01 = 2.06%
OIL – .14 = 45.09
GOLD – 12.40 = 1116.30
SILV – .13 = 14.62

This is the last trading day of the third quarter. China’s main stock market posted its worst quarter since 2008 and its smaller Shenzhen index, posted its worst quarter in at least two decades. Markets in Singapore and Indonesia are set to post their worst quarters since the financial crisis. The MSCI Asia ex-Japan Index fell 19.1% from the beginning of the quarter. The Nikkei closed out its worst quarter since 2010 and the ASX its worst since 2011.

European stocks moved higher today, but not enough to recover from the worst quarter in 4 years. The Stoxx Europe 600 index is down about 9.5% for the quarter. Germany’s DAX index down 12% for the quarter. France’s CAC index posted a quarterly loss of 7.3%, and the UK’s FTSE 100 down 7.7%. The Eurozone is back in deflation. Consumer prices slipped 0.1% year-over-year in September.

The major U.S. averages had a rough third quarter. Concerns about spillover from slowdown in China and the timing of a Federal Reserve rate hike sent markets into correction territory, or more than 10 percent below their 52-week highs, in late August. The major U.S. averages recently fell back into correction mode and were close to retesting the August lows Tuesday.

The Russell 2000 held below its Aug. 24 low Tuesday. For the quarter, the Dow fell 7.6 percent, the S&P lost 6.9 percent and Nasdaq fell 7.4 percent. For September, the Dow fell 1.5 percent while the S&P dropped 2.6 percent and Nasdaq fell 3.3 percent. The Nasdaq biotech index lost 19.8% for the quarter.

West Texas Intermediate and Brent crude oil were down 24% for the quarter, for their sharpest decline since the end of 2014. The LMEX Metals Index is set for its longest streak of monthly declines since January 2009, down 11% for the quarter. Based on the most-active contracts, gold prices lost 1.5% for the month and 4.8% for the quarter. Year to date, gold is down 5.8%.Rice, cocoa, and cotton are the only commodities to post gains year-to-date.

Everything else is down. The worst performers are coffee down 28.8%, and lumber down 34.6%. Brazil and Columbia have flooded the coffee markets to boost exports to customers buying with U.S. dollars, in an effort to help offset losses from weakness in their local currencies. The selloff in lumber tells us something about the construction market, not just domestically but more so in China.

The MSCI Emerging Markets Index is down 19% for the quarter; investors pulled $40 billion out of developing economies in the third quarter, the biggest outflows since the fourth quarter of 2008. About $11 trillion has been erased from global shares in the third quarter.

The head of the International Monetary Fund says there is reason to be concerned about the global economy. In a speech today, IMF Director Christine Lagarde said that her organization sees troubling signs in the world’s finances, and that it is unclear if the current situation is cyclical or if it represents a fundamental downturn. “The simple answer is that there is no simple answer. Certainly, we are at a difficult and complex juncture,” Lagarde said, explaining she is worried about recent global affairs and international economics are similarly distressing.

Interfax reports Russian warplanes have started air strikes against ISIS targets in Syria; this marks Russia’s first use of force in the Middle East since the 1980s. In a speech at the United Nations on Monday, Putin called for a mandate for a broad coalition to fight ISIS that would include Syrian government forces and Iran. The U.S. and a coalition of countries is also carrying out limited airstrikes in Syria against ISIS, but they also say a future Syria must not have Assad at its helm because of his brutal actions against his own people.

Russian strikes will be in support of operations by the Syrian army and won’t target opposition forces other than those of ISIS. At least that’s one story; the other story is that the Russians bombed the Free Syrian Army, the anti-Assad rebel group that is backed by the West. Speaking at the U.N. on Wednesday, Secretary of State John Kerry said the U.S. would have “grave concerns” if Russia targeted other groups. If Putin really wants to jump into Syria with both feet, I suppose the best thing is that nobody tells him he’s jumping into quicksand.

The government will be open tomorrow. The Senate and the House just passed a short-term spending bill that will extend federal funding until December 11 and avoid a government shutdown by tonight’s midnight deadline. Following the votes, Republican leaders plan to start talks with President Obama about a two-year budget, although it’s unclear whether any successor to outgoing House Speaker John Boehner would be interested in such a deal.

Payroll processor ADP says the private sector added 200,000 new jobs in September. The Labor Department will issue its report on Friday; estimates are calling for 190,000 to 200,000 new jobs in the government report. ADP reports about half of the new jobs were created by large companies with 1,000 employees or more. Small and midsize firms were less aggressive in hiring. Only the energy and manufacturing sector reported job losses.

The Securities and Exchange Commission charged twenty-two municipal underwriting firms with selling municipal bonds using materially false statements or omitting required disclosures to investors. They will pay penalties based on the number and size of the fraudulent offerings identified, with a maximum penalty imposed on PNC Capital Markets of $500,000. Mesirow Financial, and Edward Jones also failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers. The firms did not admit or deny the findings, but agreed to cease and desist from such violations in the future.

Tesla last night launched its long-awaited Model X sports-utility vehicle, which features two electric motors, a range of around 250 miles and seating for seven people, as well as “falcon wing” rear doors that can open differently depending on conditions. Tesla CEO, Elon Musk, said around 25,000 people had ordered the SUV, but they’ll have to wait 8-12 months to receive their cars. The basic theme here is: they can sell them as fast as they make them.

Considering that the founder of Tesla Motors is also into rocket ships, and solar arrays, and cargo carrying pneumatic tubes, and planetary colonization, the car offers some unusual features, including Bioweapon Defense Mode. Elon Musk says it should be useful “if there’s ever and apocalyptic scenario of some kind.” We don’t know how well this might work in the event of thermonuclear war; it is, after all just a slightly more aggressive version of an air filtration system, but it might come in handy if there’s a dead skunk in the middle of the road.

There are some other Easter eggs built into the Model X computer programs. There is “Ludicrous Mode”, a button you can push if you want to go from 0-60 in 3.5 seconds, and then if you keep pushing the button you can see a clip from the movie Space Balls. Or, if you want to know more about the people that built your car, on the computer screen press the Tesla logo and then press the lower right corner of the screen and up pops a photo of the development team. And for audiophiles, a premium sound system where you can turn the volume to eleven.

Meanwhile, the only software Volkswagen can come up with is to cheat on emissions, and General Motors is still trying to make the ignition switch work.

The times are changing, and it’s not just computerized electric cars. The biggest coal companies in the U.S. are in trouble. Twenty-six percent of U.S. coal companies have gone out of business in the last three years, and the value of the companies that have managed to survive has dropped 76% in five years, according to a report from the energy finance research group Carbon Tracker.

As of 2001, just 17.1% of U.S. electricity came from natural gas generation. By 2014, gas’ share had increased to 27.4%. The entire U.S. coal industry made a big, expensive, debt-laden bet that China’s thirst for coal, particularly the kind used to make steel, would never slow down, and they were wrong. And now, New York City’s five pension funds, worth a collective $160 billion, announce they will divest their investments in coal.

In America’s long, dangerous history of mining, not once has a coal mine owner been charged criminally for a worker’s death. Coal miner fatalities, in some ways, have been considered a business expense. All of that changed with the indictment of Donald Blankenship. The former CEO of Massey Energy will stand trial starting tomorrow at a federal court in Charleston, W.Va. He faces up to 31 years in prison for allegedly conspiring to violate safety laws and lying to regulators about safety practices at the Upper Big Branch mine in Montcoal, W.Va., where a 2010 explosion killed 29 workers, the nation’s deadliest mining accident in 40 years.

Blankenship is facing criminal charges when other mining executives have not, in large part, because federal prosecutors say he was intimately involved in Upper Big Branch’s output to an extraordinary degree. He demanded reports every half hour on its production—they were sent to his home by fax on nights and weekends. Blankenship’s trial won’t do anything to resolve the disasters the coal industry has left. His conviction might bring closure to the families of the dead miners (if that’s possible). But in the long term, it might end up being a mere footnote in the tortured history of the Appalachian coalfields.

Financial Review

Canoe Trips on Mars

Sinclair Noe — September 28, 2015

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

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DOW – 312 = 16,001
SPX – 49 = 1881
NAS – 142 = 4543
10 YR YLD – .07 = 2.09%
OIL – .03 = 44.40
GOLD – 14.20 = 1133.10
SILV – .53 = 14.70

Well, this was just ugly. All three major indices traded in correction territory today or more than 10 percent below their 52-week highs. For the Nasdaq Composite, the 50 day moving average crossed the 200 day moving average, forming a pattern that goes by the catchy name “death cross”. The Nasdaq Biotechnology ETF closed down 6.3%, following a 5% drop on Friday.

Shares in mining and trading company Glencore fell almost 30 percent and closed at a record low, wiping out more than $5 billion in market valuation. The fall followed publication of a note by analysts at investment bank Investec which raised doubts about Glencore’s valuation if spot metal prices do not improve. The note pointed to high debt levels and a need for deeper restructuring. The analysts wrote: “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate.” Glencore, a Swiss based company, has said it will suspend dividends, sell assets and raise cash with a $2.5 billion share placement, among other measures, to cut its $30 billion debt pile and protect its credit rating.

The 15-month commodities free-fall is starting to resemble a full-blown crisis. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.

Alcoa the world’s largest aluminum producer, says it will split into two separate publicly-listed companies, with the separation expected to be completed in the second half of 2016. The company says the split will create an “upstream company”, focused on bauxite, alumina and aluminum, and a “value-add company”, focused on innovation in “high performance multi-material products and solutions in attractive growth markets”.

Royal Dutch Shell has abandoned its Arctic search for oil after failing to find enough crude. Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion to shut down exploration in the region. The unsuccessful campaign is Shell’s second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and ran aground. Environmental groups and shareholders have also pressured Shell to drop Arctic drilling.

The IMF warns world GDP at 3.3% this year isn’t realistic anymore, and a forecast of 3.8% for next year is not either. IMF Director Christine Lagarde pointed to slowing growth in emerging economies, in particular China. Lagarde says “There is no reason (for the Federal Reserve) to rush” to tighten policy, noting both the Japanese central bank and the ECB in recent years both hiked and then were forced to quickly retreat.

The Federal Reserve will probably raise interest rates later this year and tighten policy gradually thereafter, so says William Dudley, New York Fed President, echoing statements from Fed Chair Janet Yellen last week. Dudley, who cautioned in late August that the uncertain global outlook made the case for a rate increase in September less compelling, said his expectation on the timing of liftoff was “not calendar guidance. It depends on the data.” San Francisco Fed President John Williams, also speaking today, made a similar argument.

As world growth falters, the US consumer rolls along. Most of the change over the past quarter related to China. The Chinese currency was devalued, and many Chinese economic indicators continued to slow. China has showed lower growth rates and missed growth forecasts for several years. The news this morning shows Chinese industrial profits fell 8.8% in August year-over-year. It’s not new news. Still, the devaluation brought some already well-known weaknesses to the forefront. And as we have long been expecting, a slowing China generally has helped the U.S. economy as the small decrease in exports has been more than offset by lower commodity prices, which puts more money in consumer pockets.

Purchases of new cars and trucks and strong back-to-school sales drove consumer spending higher in August, a sign the economy continues to expand at a moderate pace. In August, consumer spending rose a seasonally adjusted 0.4% to match the revised gain in July. Personal incomes rose 0.3% last month. Incomes have also risen steadily since the early spring, largely reflecting strong job creation that’s tugged the unemployment rate down to a post-recession low of 5.1%. Since spending grew faster than income, the amount of money individuals save fell a tick to 4.6% from 4.7%. Inflation as gauged by the PCE price index, was unchanged in August. The PCE index is up just 0.3% in the past 12 months.

This week’s big economic report comes on Friday, when the Labor Department publishes the September employment report. The consensus estimate calls for 190,000 new jobs in September. The unemployment rate is likely to remain at 5.1%.

A gauge of pending home sales fell 1.4% in August to the lowest level in five months. The index from the National Association of Realtors declined to a seasonally adjusted 109.4 in August from 110.9 in the prior month. Pending sales have leveled off since mid-summer, with buyers being bounded by rising prices and few available and affordable properties within their budget.

The federal government is funded only through Wednesday but House Speaker John Boehner says there won’t be a government shutdown. Speaking on CBS’ “Face the Nation,” Boehner confirmed plans to pass a short-term funding bill. Boehner, who announced Friday he is resigning from Congress at the end of October, also said he will set up a committee to investigate Planned Parenthood.

President Obama addressed the United Nations General Assembly this morning, saying the US is was willing to cooperate with Russia, as well as Iran, to try to end the Syrian civil war but the two big powers clashed over whether to work with Syrian President Bashar al-Assad, whom Obama called a tyrant. Russian President Vladimir Putin, in contrast, told the gathering of world leaders that there was no alternative to cooperating with Assad’s military in an effort to defeat ISIS. Later, Obama and Putin met privately.

In opening the General Assembly, Secretary General Ban Ki-moon struck a sober theme, asserting that: “Inequality is growing, trust is fading, and impatience with leadership can be seen and felt far and wide.” Mr. Ban called explicitly for an “end to bombings” in Yemen, and named the five countries that, as he said, “hold the key” to peace in Syria: Russia, the United States, Saudi Arabia, Iran, and Turkey.

Pro-independence parties won a majority 72 seats (out of 135) in Catalonia’s regional parliament, but took down only 48% of the vote. Blocked by the national government from holding a referendum on independence, the separatists attempted to turn these elections into just that. While they won a majority of seats, the failure to gain more than 50% of the vote means had this been a referendum, it would have been a loss.

Apple said it sold more than 13 million iPhone 6s and 6s Pluses during their first weekend on the market. The company beat its previous record of 10 million in sales for the previous generation of iPhones in its first weekend in 2014. This year’s results benefited from the inclusion of the Chinese market, where regulatory problems delayed the gadget’s debut last year.

Whole Foods Market said it would cut about 1,500 jobs, or about 1.6 percent of its workforce, over the next eight weeks. The cuts are aimed at reducing costs as the company invests in technology upgrades. Whole Foods said in May that it would launch a new chain of smaller, more value-focused shops next year.

Scientists say there is water on Mars. In a paper published in the journal Nature Geoscience, scientists report definitive signs of liquid water on the surface of present-day Mars, a finding that will fuel speculation that life, if it ever arose there, could persist to now, or possibly in the future. In the research, Dr. Alfred McEwen, a professor of planetary geology at the University of Arizona and the principal investigator of images from a high-resolution camera on NASA’s Mars Reconnaissance Orbiter, along with other scientists discovered in photographs from the Mars Reconnaissance Orbiter dark streaks descending along slopes of craters, canyons and mountains. The streaks lengthened during summer, faded as temperatures cooled, then reappeared the next year.

The researchers were able to identify the telltale sign of a hydrated salt at four locations. In addition, the signs of the salt disappeared when the streaks faded. In other words, small rivers of liquid water; briny water, but water nonetheless. The salts lower the freezing temperature, and the water remains liquid. The average temperature of Mars is about minus 70 degrees Fahrenheit, but summer days near the Equator can reach an almost balmy 70.

Many mysteries remain. For one, scientists do not know where the water is coming from. One theory is that the salts act like a sponge to soak up moisture from the environment. The other possibility is underground aquifers, frozen solid during winter, melting during summer and seeping to the surface.

To Hike Or Not To Hike-Is That Really The Question To Ask?

Financial Review

To Hike or Not To Hike

Sinclair Noe — September 11, 2015

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

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DOW + 102 = 16,433
SPX + 8 = 1961
NAS + 26 = 4822
10 YR YLD – .04 = 2.18%
OIL – 1.12 = 44.80
GOLD – 3.70 – 1108.20
SILV – .13 = 14.68

The S&P 500 index was up 2.1% for the week, the best weekly gains since July.  The Dow was up 2.1% for the week, and the Nasdaq gained 3%.

The Senate has blocked an anti-Iran deal resolution. Senate Democrats successfully fended off an effort by the Republican-led Congress to dismantle the Iran deal with a disapproval resolution. While the Senate killing the resolution should mean that Congress’s bid to undo the deal is over, the House is fighting on with several bills aimed at expressing their disapproval. There’s even talk of filing lawsuits against the president.

Russia is calling for Washington to restart direct military-to-military cooperation to avert “unintended incidents” near Syria, at a time when U.S. officials say Moscow is building up forces to protect President Bashar al-Assad’s government. The U.S. is leading a campaign of air strikes against ISIS fighters in Syrian air space, and a greater Russian presence would raise the prospect of the Cold War superpower foes encountering each other on the battlefield. Both Moscow and Washington say their enemy is ISIS, but Russia supports the government of Assad, while the U.S. says his presence makes the situation worse.

The White House has announced that the U.S. is preparing to accept 10,000 Syrian refugees for the 2016 fiscal year. The Syrian Civil War is now in its fifth year and more than 4 million people have become refugees. Syria’s neighbors currently host the majority of the country’s refugees. As conditions deteriorated, many refugees made the dangerous trip to Europe. European Union governments are likely to agree in principle to shelter 160,000 refugees from crisis zones. To date, the U.S. has resettled less than 1,500 Syrian refugees out of 18,000 referred by the United Nations.

A week before the Federal Reserve’s most critical policy decision in years, Wall Street opinion makers can’t agree on anything. Not only is there no consensus about whether the Fed will end its seven-year-old policy of zero interest rates, but views on the fallout from such a move are wildly disparate.  We’ll all find out more on Wednesday, when the FOMC issues its statement. As divided as the market is on that decision, it’s the aftermath that stirs the real split. Many say the economy is too weak for a rate hike, and fear the markets could tank. Others say the rate hike is warranted, even necessary, and would signal the economy is strong.

The real question is what will happen when interest rates rise? First up, a rate hike would strengthen the dollar, particularly if the hike is part of a long-term cycle. A stronger dollar would likely result in money flowing into the US. A stronger dollar means assets priced in dollars would go down in price; so we might anticipate weakness in commodities such as oil, industrial metals, and precious metals – pretty much all commodities except agriculture. In this way, a rate rise would be deflationary.

A stronger dollar would put even more pressure on emerging market currencies, which have already experienced pressure; there is still plenty of dollar denominated debt in emerging markets. Countries with current account deficits could expect to feel the pressure, led probably by Brazil.

For real estate, there is no question that lower interest rates spurred real estate purchasing activity. So, it stands to reason that an increase in rates will have the opposite effect, by reducing demand due to higher costs of money. Some say that a slight rise will cause a short-term increased demand for purchasing real estate; people think that rates will continue to rise, potentially keeping them out of the market in the future, and so they act. The longer-term effect is to tap the brakes on real estate.

For stocks on Wall Street, the impact of higher rates is tougher to call. Historically, there is no direct correlation between the start of a rate-rising cycle and a drop in stock prices. The reasoning is that rates are hiked when the economy is strong and the economy is humming along, perhaps humming along a bit too fast. Historically, Wall Street reacts negatively to surprise moves by the Fed (think 1987) but the Fed has been warning they will hike rates and they will do so slowly and incrementally – no surprises, just some guessing about the exact date. Most investors aren’t confident that the economy is strong right now; earnings growth has been flat, stocks have suffered a correction, and there is still slack in the labor market.

Ultimately, the stock market will respond to the fixed income and credit markets, and this is pretty straightforward; higher target rates set by the Fed will send bond yields higher, which means bond prices must go down.

With yields already low, the proportionate falls in prices need to be that much greater and the biggest price drops will come for the assets with the greatest duration. The twist here is that long duration assets are widely perceived as less risky, because they carry a lower risk of default; for example: corporate bonds, or municipal bonds. Junk bonds carry greater credit risk, and are considered less sensitive to a rise in interest rates.

The biggest risk is that markets get panicked. People who think they have a low risk asset suddenly realize they are exposed, and they hit the sell button, which can lead to a herd or mob mentality. If prices go too far south too fast, credit markets can freeze, and when that happens, everything freezes. The gears grind to a halt and the markets crash. There really is no reason to expect a crash. The economy can withstand a little quarter point rate increase. We don’t know what the Fed will announce on Wednesday, but we should not be surprised by a hike.

Of course, if you don’t like volatility, you could just stop playing the game for a while. Investors pulled another $19 billion from equity funds over the past week. The exodus from emerging markets also continued, with losses extending into their ninth week. Emerging equity funds shed $4.5 billion, while U.S. equities saw outflows of $15.9 billion and European stocks lost $800 million. Japanese funds were the only category to post inflows. The data also that global equity funds had shed $46 billion over the past four weeks. Year-to-date outflows from emerging stocks total $58 billion.

Consumer sentiment declined in September to the lowest level in year as Americans anticipated a weaker economy in face of a global slowdown and turbulent financial markets. The University of Michigan’s preliminary index dropped to 85.7 from 91.9 in August, the largest one-month decline since the end of 2012. Households were less upbeat about future growth in employment and wages than a few months earlier as 73 percent of respondents reported hearing news of negative economic developments.

Wholesale prices were flat in August, held down by a sharp decline in gasoline prices. The producer price index was unchanged last month on a seasonally adjusted basis. Excluding the volatile categories of food, energy and trade margins, core producer prices edged up 0.1%. Over the past year overall producer prices have fallen an unadjusted 0.8%, unchanged from July. The core rate has risen 0.7% in the same span.

How low can oil go? Goldman Sachs has cut its 2016 forecast to $45 a barrel from $57—and it’s leaving open the possibility that prices could go much lower than that. Goldman says the global surplus of oil is even bigger than previously thought and that could drive prices as low as $20 a barrel. Goldman said in a report e-mailed this morning that it is cutting its Brent and WTI crude forecasts through 2016, in part because a failure to reduce production fast enough may require prices near the $20 level to clear the oversupply.

The Goldman report stands in contrast to a report yesterday from the International Energy Agency, estimating that crude stockpiles will diminish in the second half of next year as supply outside OPEC declines by the most since 1992, with drops in U.S. shale production accounting for 80 percent of the decline. The IEA thinks lower supply will support prices. Twenty bucks isn’t Goldman’s most likely scenario but it’s a nice dramatic number that generates lots of tweets, as were the forecasts by Goldman and others in the not-so-distant past that oil would hit $150-$200 a barrel.

Copper prices dropped today, ending the metal’s longest rally since June. Copper prices have fallen 15 percent this year amid concerns that slower growth in emerging markets will reduce demand. Tighter U.S. monetary policy could further damp consumption as foreign currencies weaken and make the metal more expensive for overseas buyers. Copper for delivery in three months sank 0.5 percent to settle at $2.43 per pound. Prices climbed in the previous four sessions, rising 5.4 percent on concern that supplies would tighten as miners including Glencore took steps to cut production.

Nate Silver from FiveThirtyEight has run the numbers on the 2015 NFL Football season. He figures the season will come down to the Patriots and the Seahawks, and Seattle will win the Super Bowl, even though the Patriots will have win more games – 11.3 to be precise. Silver predicts the Cards will win 8.2 games – not enough to win the division, but more than San Francisco.

Arizona state troopers took two people into custody today who they believe might be connected to a string of 11 recent highway shootings. One detainee was described as a “person of interest.” So far, eight vehicles have been hit by bullets while police haven’t specified what hit the other three. This doesn’t mean the cops have caught the shooter or shooters, just that they have someone in custody. Be careful out there.

Timing is………..Everything

Financial Review with Sinclair Noe — September 10, 2014

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

 

DOW + 54 = 17, 068
SPX + 7 = 1995
NAS + 34 = 4586
10 YR YLD + .03 = 2.53%
OIL – 1.13 = 91.67
GOLD – 6.80 = 1250.00
SILV – .12 = 19.04

Later today, at 6PM local time or 9PM eastern, President Obama will address the nation and lay out his strategy to degrade and destroy the Islamic State insurgency operating in Iraq and Syria. This will likely involve significant escalation of the US military role in the area, but we aren’t sure about the intervention in Syria; probably a combination of airstrikes, and support for more moderate Syrian forces willing to carry out attacks on both ISIS and Assad; along with regional allies providing on the ground support.

The president has pledged there will not be boots on the ground. He said: “This is not the equivalent of the Iraq war. What this is similar to is the kinds of counter-terrorism campaigns that we’ve been engaging in consistently over the last five, six, seven years.” Which sounds like a distinction without a difference.

Earlier today an administration spokesman said: “The president will discuss how we are building a coalition of allies and partners in the region and in the broader international community to support our efforts, and will talk about how we work with the Congress as a partner in these efforts.”

That doesn’t mean Congress would actually vote on going to war. For weeks, the administration, and particularly the Pentagon, has urged Congress to approve $500 million in funding to train and arm Syrian rebels to fight ISIS. The legislation has been stuck on Capitol Hill since Obama first sought it in May, but it could provide both Obama and Congress with an opportunity to tacitly enlist congressional support for a war without a formal vote ahead of the November midterm elections, something many politicians this week indicated they wish to avoid.

As one geopolitical hotspot heats up, another looks to be cooling. Ukraine’s president said today Russia had removed the bulk of its forces from his country, raising hopes a ceasefire might hold. Ukraine’s military recorded at least six violations of the ceasefire overnight but said there were no casualties. And Russia conducted military tests of a nuclear capable intercontinental missile.

Ukrainian President Poroshenko said he would propose a bill next week offering “special status” to parts of the Donetsk and Luhansk regions of eastern Ukraine now controlled by rebels, but he was adamant in rejecting the separatists’ demands for full independence for their regions and the kind of “federalization” favored by Russia.

Meanwhile Russia faces the threat of further sanctions; the kind that could actually strike at the heart of the Russian economy, its oil industry. Proposed new sanctions would cut off Russia’s access to the technology to drill its richest oil fields. Bloomberg reports the sanctions would bar companies like ExxonMobil, Shell, and BP from using their resources—such as advanced drills and experts—to work in the Russian Arctic and an enormous Siberian oilfield. Neither the US nor Europe have decided whether to proceed, but a European decision could come at any time. If Europe goes ahead with the new penalties, the US would match them.

On Wall Street there seemed to be no worries about war. Apple bounced back. This remains an Apple-dominated market, especially in a week where we don’t have a lot of economic data. After a couple of down days, the S&P bounced back. The S&P 500 hasn’t posted a four-day string of losses in all of 2014. Crude oil futures fell to a 16-month low; there’s plenty of supply and demand has been constrained.

Today is Internet Slowdown Day. You may or may not have noticed certain websites with the dreaded spinning wheel of death loading symbol. Several websites have banded together to protest proposed changes to net neutrality rules, which would allow Internet service providers to charge high traffic websites more or essentially force them to create a “slow lane” for customers. The loading icons lead users to the “Battle for the Net” website where they can sign a letter to Congress, the Federal Communications Commission and the White House. The hope is that the campaign will inspire millions of people to submit comments to the FCC on net neutrality before the public comment period ends on Sept. 15.

Commerce Department reports wholesale inventories rose just 0.1% in July, and inventories excluding autos was flat. This is an interesting economic indicator because it gives us a hint at future economic activity; you have to have wholesale inventory before you make the retail sale. Inventories added 1.4 percentage points to GDP growth in the second quarter. The slow pace of inventory accumulation, however led several financial firms to lower their estimates for third quarter GDP, down to the 2.5% to 2.8% range. Of course, inventories ebb and flow; so, if inventories are light in the third quarter that might force some businesses to restock for the fourth quarter. Still, for all the stories about the economy being poised for big growth in the second half, most of the data points to a slow, steady slog.

Relapse is the rule of the recovery, and it’s a global relapse. The US, Japan, and Europe continue to see GDP growth falter. In the US we had a first quarter contraction; part of the blame was weather, but that was just part of the problem. Europe’s fragile economy has similarly failed to recover strongly enough to ward off periodic growth setbacks. As a result, annual growth in the 18-country eurozone slipped to just 0.4% in the first half of 2014. Earlier this week, Japan reported a 6.8% contraction in second quarter GDP.

The Bank of Japan has pushed a short-term interest rate below zero to try and stimulate the economy and fend off deflation. The BOJ bought three-month bills for more than their redemption value this week, essentially paying to lend money to the market. Giving away money, as the BOJ will be doing if it holds the paper to maturity, is basically subsidizing Japanese banks. Lenders that buy debt from the government stand to make an easy profit if the government pays above par for the paper.

The European Central Bank recently decided to go negative on reserve deposits held by banks, trying to push money back into circulation. Meanwhile, the Federal Reserve FOMC meets next week, and you have to wonder how they’ll respond to the negative rates from the ECB and the BOJ. It is pretty certain the Fed will continue to taper, and stop buying bonds in October; but the next question is when they will start raising targets on interest rates. For several months the Fed has been sticking with the somewhat vague guidance that it will be a “considerable time” before we see rate increases.

Next, consider the performance of the S&P 500; after the crash in 2008, the S&P bottomed in 2009, and then went on to double. For the past 34 months the S&P 500 has not seen a correction of 10%, the third longest correction free stretch in the past 25 years. A chart of the past five years is the very picture of a relentless uptrend. Some people have been lulled into believing that this is typical market behavior; it is not. If you are looking for a reason for the bull market, look no further than the Federal Reserve; they have thrown a lot of money at Wall Street. But now they are promising to stop the flow of easy money, and eventually raise rates. This is not a guarantee that the equity party is over, but just a reminder the party won’t last forever.

The stock market is near an all-time, but economic activity is not. Corporate earnings have been good but revenue has been weak; this reflects the distortions of stock buybacks, but even more, it shows a lack of demand. Weak demand does not bode well for earnings growth. Meanwhile, the global economy wobbles, with the EU and Japan propped up by negative interest rates; China seems doomed to repeat the mistakes that hobbled Japan’s economy for a decade, and emerging markets still suffer from the last beat down. The US looks good by comparison but that’s just the prettiest horse in the glue factory argument. So, you probably think the market is ready for a pullback at the very least, and maybe even a good old fashion crash. But, as always, timing is….. everything.

This is not the time to go short. Picking tops is more a matter of luck than science. There may be many indicators of a top, but it’s smart to listen to the market because you can’t dictate to the market. So, rather than going short, now seems like a good time to lock in some gains and take out some insurance, or hedge some bets.

There are several hedging techniques, including inverse ETFs and shorts. The problem is that the past five years have not been a good time to be short, and we don’t know if the bull market will end tomorrow, or next month, or next year. Shorts and inverse ETFs are great only after the uptrend ends and you see a clear indication of a reversal. Markets can sometimes defy gravity; markets can remain irrational longer than you can remain solvent.

Other popular hedges include options, which can be very effective, but you have to pay a premium for the option. Options are a form of insurance, but they are like term insurance, you pay the premium every month, and if the market doesn’t die, you have to pay again next month. If you stop paying, you lose your coverage.

Locking in gains just makes common sense. You are not in the market for the long haul, you are in the market to make money. The way you make money in the market is to buy low and sell high, and not lose money. It’s really not complicated. One of the easiest things you can do is use stops. If the price falls, you get stopped out, and you collect your profits. Another way is to harvest gains; the idea is that if you have doubled your original investment, sell part of it. Now you’re playing with the house’s money.

Tuesday, August 26, 2014 - A Few Old Sayings

Financial Review with Sinclair Noe

DOW + 29 = 17,106
SPX + 2 = 2000.02 (record)
NAS + 13 = 4570
10 YR YLD + .01 = 2.40%
OIL + .55 = 93.90
GOLD - .70 = 1280.90
SILV - .08 = 19.38

The S&P 500 notched its 30th record of the year and closed above 2000 for the first time ever. The Dow also rose but fell short of its record closing high after setting an all-time intraday high earlier in the session.

There are a few old sayings about the market that seem to fit. The first is, “the trend is you friend”; we have seen a few minor pullbacks since the bottom in 2009, but since the start of 2013 there has been a strong and steady uptrend. “A trend in place is more likely to continue than it is to reverse, until it reverses” and today marked a continuation of the trend, not a reversal.

Why is the market going up? Who knows? There are plenty of problems around the world. The US economy looks sluggish, but “stocks climb a wall of worry to march into bullish territory”; that’s a phrase that’s been thrown around for more than 60 years, but was made popular by Joe Granville in the 1980s.  Another financial proverb claims “Worry is interest paid on trouble before it falls due.” And the opposite of the “wall of worry” is “Bear markets slide down a slope of hope.”

And then there is the very, very old saying “buy low, sell high.” Any idiot off the street could repeat this phrase to you as if they had the secret recipe for investing success. Honestly, it’s good advice, because the overwhelming top indicator for investors and traders is price. You can’t spend volume or moving averages or stochastics or relative strength, and eventually, inevitably the trend will change.

If you want to look at a chart of an uptrend, just look at the S&P 500. If you want to see a chart of a downtrend look at the past four months’ worth of charts for wheat and corn and soybeans. As we near the end of summer, farmers are preparing for record crops in the Midwest. Wheat crops are forecast at a record 273 million bushels, up from 235 million last year; this year’s  soybean harvest is also expected to be a record, and corn will be a near record. But there is a problem. In many areas, such as the Dakotas, where agriculture has been a mainstay, the energy boom has taken over, and most of that oil travels by rail, and that means grain shipments have been held up, right as we head to harvest.

Reports the railroads filed with the federal government show that for the week that ended Aug. 22, the Burlington Northern Santa Fe Railway, North Dakota’s largest railroad, had a backlog of 1,336 rail cars waiting to ship grain and other products. Another railroad, Canadian Pacific, had a backlog of nearly 1,000 cars. Agriculture Department officials estimate that Canadian Pacific would not be able to fulfill nearly 30,000 requests from farmers and others for rail cars before October.

We have a couple of reports on home prices. The Federal Housing Finance Agency’s home price index shows house prices rose just 0.8% in the second quarter of 2014. This is the twelfth consecutive quarterly price increase for the FHFA index, but it also shows a slowdown. The FHFA index is based on home sales prices from conforming mortgages through Fannie Mae and Freddie Mac. Home prices are up 5.2% from the second quarter a year ago. Arizona ranked 5^th in annual appreciation.

In another indicator of a housing slowdown, the S&P/Case-Shiller National Home Price Index gained just 6.2% in the 12 months ending June 2014, while the 10-City and 20-City Composites gained 8.1%. That’s a dramatic shift from the double-digit, year-over-year price increases that had become the norm in the second half of 2013 and the first part of this year. All three indices saw their rates slow significantly from last month. To be clear, home prices are not dropping, simply rising at a slower rate.

The 20-city composite rose 1% in June. Phoenix posted a 0.6% gain for June, and a 6.9% gain from June of last year. Nationally, prices are still 17% below their peak. In Phoenix, the peak was measured to June 2006; from that point prices dropped 56%, and although prices have recovered, we are still 35% below peak prices.  

The takeaway from the housing reports is that price gains are slowing, and home supply has increased with higher prices and more people renting; consumers are slowly losing their ability to finance large purchases as home price appreciation continues to outpace wages. Absent a big increase in wages, you might expect home prices to remain flat or even decrease a bit in coming months.

Orders for durable goods jumped 22.6% in July; that is a record move, but much of the increase is because Boeing saw a jump in signed contracts for the 777X; it will take years before those planes are flying. Along with Boeing, automakers also turned in a strong performance. Demand for cars and small trucks climbed by 10.2%. Orders excluding the transportation sector, however, fell 0.8% with widespread weakness. Orders for primary metals, machinery, computers and defense goods all declined. Another key measurement of business investment, a category known core capital goods, dropped 0.5% in July. Orders for durable goods are volatile, and can jump around from month to month. While business investment has fallen in three of the past four months, it’s increased by an annual pace of 9% so far this year.

The Conference Board’s consumer confidence index jumped to 92.4 in August, the highest level since October 2007, from a revised 90.3 in July. Confidence has now increased for four straight months, and consumers remain quite positive about the short-term outlooks for the economy and labor market, even as the future expectations index declined from 91.9 to 90.9.

It’s official, minus the approval of regulators; Burger King will buy Tim Hortons for $11.4 billion and move the corporate headquarters to Canada, except they will keep corporate offices in Miami; and even though the deal would make sense without the tax dodging; it is a tax inversion deal. Warren Buffett’s Berkshire Hathaway is providing $3 billion in financing for the acquisition. Berkshire will earn 9% annual interest by taking a preferred equity stake.

The Department of Veterans Affairs says investigators have found no conclusive proof that delays in care caused any deaths at a VA hospital in Phoenix. That may be technically accurate, or not, but a troubled health care system in which veterans waited months for appointments while employees falsified records to cover up the delays, certainly did not serve those veterans with the care they deserved. The inspector general's final report has not yet been issued.

The VA is preparing a whole host of fixes for its healthcare system. Congress approved $17 billion to expand health care resources at the VA. Across the entire VA system, $400 million must be spent on staff overtime or private doctors to ensure veterans are treated quickly. As of Aug. 6, the VA had allocated $128 million in private care costs for 83,000 veterans; 8,248 VA schedulers across the country have been trained in appropriate ways of scheduling patients, including 764 Phoenix workers; an internal investigation board will be created to identify managers at the Phoenix hospital responsible for wrongdoing and what disciplinary actions should be taken; nearly $17 million has been spent in Phoenix to send veterans to private doctors for speedier care.

Also, mental health resources have been expanded in Phoenix by filling all but three of 13 psychiatric vacancies and six of seven psychologist positions and adding four social workers. The hospital's primary care staff has been expanded by 53 doctors, nurses and other caregivers. Twenty-seven temporary examination rooms have been opened, and two new outpatient clinics are planned with an additional 30,000 square feet of space.

President Obama went to Charlotte North Carolina today to address the national convention of the American Legion; and he announced steps to expand veterans’ access to mental health care and an initiative with financial companies to lower home loan costs for military families.

The US has begun surveillance flights over Syria to gather intelligence that might lead to airstrikes against ISIS militants in Syria. Military action inside Syria has not been approved yet. Pentagon officials have been drafting potential options for the president, including airstrikes.

Here’s a thought, before we send any more troops back into Iraq, or approve any airstrikes in Syria, we should make sure the VA has figured out a way to provide the best medical care to veterans. No excuses.

Ukraine has captured 10 Russian soldiers, though it did not state how they were caught. Weapons and fighters are able to cross the porous border freely, but until now there has never been confirmation that serving Russian soldiers were active inside Ukraine, despite repeated claims from Kiev. Russian President Vladimir Putin and Ukrainian President Petro Poroshenko held one-one-one talks today in Minsk, aimed at defusing the situation, which is positive, but the Russian POWs undoubtedly makes talks a bit awkward.

After 50 days of fighting, Egypt has brokered a ceasefire between Gaza and Israel. Palestinian and Egyptian officials said the deal called for an indefinite halt to hostilities, the immediate opening of Gaza's blockaded crossings with Israel and Egypt and a widening of the territory's fishing zone in the Mediterranean.

The United Nations has produced a new study on climate change; it includes a summarization of hundreds of scientific papers and is considered to present the best scientific and economic analysis on global warming, and is designed to provide policymakers with a scientific foundation for dealing with global warming. Bloomberg says it has received a leaked copy of the report which highlights the dangers from rising temperatures including damage to crop production, rising sea levels, melting glaciers and more pervasive heatwaves. The report mentions the word “risk” more than 350 times; “vulnerable” or “vulnerability” are written 61 times; and “irreversible” comes up 48 times.

The study, called the “Synthesis Report”, says global warming already is impacting “all continents and across the oceans,” and further pollution from heat-trapping gases will raise the likelihood of “severe, pervasive and irreversible impacts for people and ecosystems”. And the longer we wait to address the problems the more it will cost.