Financial Review

Not Known for Patience

Sinclair Noe — June 9, 2017

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DOW + 89 = 21,271
SPX – 2 = 2431
NAS – 113 = 6207
RUT + 6 = 1421
10 Y + .01 = 2.20%
OIL + .26 = 45.90
GOLD – 11.20 = 1267.40
BITCOIN + 0.39% = 2837.72
ETHEREUM + 0.65% = 278.78

The Dow Industrials, S&P 500 and the Nasdaq Composite all hit intraday record highs – only the Dow managed to hang on for a record high close.

Tech stocks have been on a roll recently. Not today. Some of the biggest names tumbled. Alphabet dropped about 3.5%. Apple down almost 4% – its biggest one day loss in more than a year. Microsoft lost 2.2%. Facebook down 3.3%.

The strangest trade was Amazon. Over a period of about 5 seconds, the stock price went from $960 to $930. Back up to $953, down to $927, then traded just over $959. Looks like a fat-finger, flash crash. Amazon finished the day down 3.1%.

Goldman issued a report saying the big 5 mega-tech stocks have added $600 billion in market cap since the start of the year. In Goldman’s view, the sector has gotten ridiculously crowded. Bank of America issued a report saying the tech sector is the “most overweight it has ever been.”

We all know that trees don’t grow to the stars and stocks don’t trade in a straight line. It is a rotation today and it is out of tech into some of the other sectors. We’ll look for confirmation on Monday. The VIX, the volatility index, started the session in single digit territory, finished just above 10 – still very, very complacent.

Next week brings another Federal Reserve FOMC policy meeting. They are expected to raise rates another 25 basis points. Today, a group of economists published a letter urging the Fed to consider a monumental change in policy: raising its target for inflation above the current 2 percent. The Bank of England, the Bank of Japan and the Swiss National Bank also meet next week.

The Federal Reserve has been communicating that it will raise interest rates, and so that is what they will almost certainly do; anything less would shock the markets, and this Fed does not like surprises. Absent a shocker, we’ll watch the Fed for signs of a softer, or more dovish stance on future rate hikes and lower projections for inflation and economic growth.

In the follow-up to Super Thursday, President Trump denied accusations by former FBI director James Comey that he tried to block an investigation into a former national security adviser, adding that he was willing to give his version of events under oath. Asked by a reporter if he had told Comey to drop a FBI probe into former top aide Michael Flynn, Trump said, “I didn’t say that.”

Last month Trump tweeted that there might be tapes of the conversations. Time will tell. Meanwhile, oxygen continues to leak out of Washington DC at a rapid rate. And this means problems for the legislative agenda. It’s still unclear whether Republicans will ever be able to pass a replacement for Obamacare.

But whatever happens on the legislative front, there are big problems developing in the insurance markets as we speak: companies pulling out, leaving some parts of the country undeserved, or asking for large increases in premiums. The problem is the uncertainty, especially the failure to make clear whether crucial subsidies will be maintained.

In North Carolina, for example, Blue Cross Blue Shield has filed for a 23 percent rise in premiums, but declared that it would have asked for only 9 percent if it were sure that cost-sharing subsidies would continue.

On the international front, Trump blasted Qatar of being a “funder of terror at a very high level” and demanding that it cut off that money flow to rejoin the circle of responsible nations. Meanwhile, Secretary of State Rex Tillerson called for calm in the standoff urging an end to a blockade.

Qatar is in talks with Iran and Turkey to secure food and water supplies amid concerns of possible shortages two days after its biggest suppliers, the United Arab Emirates and Saudi Arabia, cut trade and diplomatic ties with the import-dependent country.

And remember, there is a US air base in Qatar, one of the biggest in the region with over 8,000 US military.

But, you say, stocks are up, so how bad can it be? And it’s true that while Wall Street has lost some of its initial enthusiasm for Trumponomics — the dollar is back down to pre-election levels — investors and businesses don’t seem to be pricing in the turmoil.

The good news is that the global economy keeps expanding as corporate profits rise and the recovery continues. Even as the Federal Reserve normalizes rates, the economy has the potential to grow for several more years before its next cyclical stumble. How this all plays out, I do not know. You do not know. The pundits do not know. But time is running out for the bold legislative moves Trump promised: healthcare reform, tax reform, infrastructure investment, and deregulation.

The economic agenda might still move forward but right now it isn’t. And one thing I think I know is that Wall Street is not known for its patience. Wall Street has been rolling along on a buy the dip mentality, but what happens when we get a day where liquidity doesn’t fill the void, and we don’t buy the dip?

The other big Super Thursday news was the election in the UK. Theresa May’s Conservative party did not win a majority. Between now and Tuesday, someone will have to create a coalition; either May and the Tories, or Jeremy Corbin and the Labor party. Likely, May will prevail, in a very weakened state.

Even if she holds power, the battles are just beginning. Foes include Tory dissidents who want her out now, a born-again Labor opposition that will confront her at every turn, anti-European hardliners who will demand she hew to the toughest possible line and the 27 European Union leaders who will seek to make Brexit as painful as possible.

This is largely a British problem, not a global problem. The pound dropped today – the biggest drop in 8 months, beyond that, market reaction was muted. The British economy has been sluggish, the worst performer among the G7. This election setback won’t help. And again, markets are not known for patience.

As an aside, note that Labor did worse in the seat results than predicted, but better in popular vote, getting 40.1% versus the Tory 42.3%. But in general, the pollsters have as much egg on their faces as the Tories do.

Brazilian President Michel Temer, who pushed back strongly against attempts to bring him down over corruption allegations, appeared set to win a victory in a court with the power to strip him of his office. The Supreme Electoral Tribunal (TSE), considering charges that Temer’s election in 2014 should be annulled because of the role of corruption money, was deeply split.

After deliberating since Tuesday, the lead judge on the case, voted to sack the scandal-plagued president. He laid out a damning portrait of systemic undeclared donations and bribes from big Brazilian corporations that he said had fatally undermined the election result in Latin America’s biggest country.

But when the other six judges on the panel began voting in turn, it became clear that the outcome may go the other way. The next three to vote after Benjamin decided in favor of Temer and the session was expected to continue late. Brazilian analysts were unanimous in predicting at least a narrow acquittal

Financial Review

Drifting

Sinclair Noe — June 5, 2017

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DOW – 22 = 21,184
SPX – 2 = 2436
NAS – 10 = 6295
RUT – 8 = 1396
10 Y + .02 = 2.18%
OIL – .27 = 47.39
GOLD + .80 = 1280.30
BITCOIN + 4.68% = 2864.70
ETHEREUM +.91% = 247.50

The markets were drifting today. After hitting record highs Friday on a very weak May Jobs Report, there just wasn’t any good news to push the markets higher. There was a bit of negative or sideways news.

On the economic data side, the Institute for Supply Management reported that their non-manufacturing index slipped to 56.9% in May, down slightly from April but still in positive territory.

The government said productivity was unchanged in the first three months of 2017 instead of declining at a 0.6% annual rate. The biggest change: The increase in output, or how many goods and services companies produce, was raised to 1.7% from 1%. The number of hours employees worked, meanwhile, was revised to a slightly higher 1.7% gain instead of 1.6%.

The updated figures show that labor costs rose more slowly than initially reported, a sign companies continue to keep costs down despite a steadily expanding economy and growing shortages of skilled labor.

Hourly compensation — pay and benefits — rose a revised 2.2% in the first quarter, but after adjusting for inflation workers lost ground. Real compensation fell 0.9%.

The upward revision in the first quarter doesn’t change the underlying weakness in productivity, the key to a higher standard of living.

Factory orders dipped 0.2% in April. For the year to date, orders are 4.4% higher than in the same period a year ago. Excluding transportation, which can be volatile, orders rose 0.1% during the month, and are 5.5% higher compared to the same period in 2016.

Activity is ticking up, but so are inventories. Stockpiles rose a seasonally adjusted 0.1% during the month and are 2.5% higher than a year ago.

Markets shrugged off the news of a series of attacks which killed several people and injured dozens in the heart of London on Saturday. The UK has a parliamentary election scheduled for Thursday, pitting the Conservative Incumbent Prime Minister Theresa May against Labor leader Jeremy Corbyn.

With the London attack dominating attention, a reduction in the number of police officers in England and Wales by almost 20,000 during May’s six years as interior minister from 2010 to 2016 shot to the top of the election agenda. Whatever the outcome of the election, the UK still must deal with Brexit.

The UK has slipped to become least attractive developed market for sovereign wealth funds one year after the 2016 Brexit referendum, according to a survey by asset manager Invesco. A survey of 97 sovereign wealth funds, pension funds and central banks with a combined $12 trillion in assets rated the UK 5.5 out of 10 for investor attractiveness, down from 7.5 in 2016.

Germany was the most attractive market in Europe, with a score of 7.8, while Italy and France followed with 6.1. The US was the most attractive place in the world to invest, earning a rating of 8 out 10.

Also on Thursday, former FBI Director James Comey is scheduled to testify before the Senate Intelligence Committee as part of the committee’s Russia-related investigation.

Saudi Arabia, Bahrain, Egypt and the United Arab Emirates have cut diplomatic relations with Qatar, having accused Qatar of supporting terrorism and destabilizing the region. The US’ biggest concentration of military personnel in the Middle East are located at an Air Force base near the Qatari capital of Doha, and is home to some 11,000 US military personnel.

The rift could cause problems for OPEC’s plans to cut oil production. With production capacity of about 600,000 barrels per day (bpd), Qatar’s crude output ranks as one of the smallest among the Organization of the Petroleum Exporting Countries, but tension within the cartel could weaken the supply deal aimed at supporting prices.

President Trump outlined a plan to privatize the US air traffic control system. The FAA spends nearly $10 billion a year on air traffic control funded largely through passenger user fees, and has spent more than $7.5 billion on next-generation air traffic control reforms in recent years.

The Aircraft Owners and Pilots Association said it will not support a plan that imposes fees on small plane owners. The major airlines generally favor the idea but Delta is opposed, saying that privatization would not save money, and would drive up ticket costs and could create a national security risk.

The proposal would require congressional approval. The president will hold a rally in Ohio on Wednesday to make a case for his $1 trillion infrastructure proposal.

The Supreme Court ruled 9-0 today that the SEC’s recovery remedy known as “disgorgement” is subject to a five-year statute of limitations. The justices sided with New Mexico-based investment adviser Charles Kokesh, who previously was ordered by a judge to pay $2.4 million in penalties plus $34.9 million in disgorgement of illegal profits after the SEC sued him.

Kokesh was sued by the SEC in 2009 for misappropriating investors’ money. His penalties covered conduct within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that time frame. The ruling represented a major victory for Wall Street firms, whose Securities Industry and Financial Markets Association trade group had urged the justices to curb the SEC’s powers.

The Supreme Court agreed to hear a major case on privacy rights in the digital age that will determine whether police officers need warrants to access past cellphone location information kept by wireless carriers, or whether that information is protected by Fourth Amendment rights to be free from unreasonable search and seizure.

The legal fight has raised questions about how much companies protect the privacy rights of their customers. The major wireless carriers receive tens of thousands of requests a year from law enforcement for what is known as “cell site location information”

The justices agreed to hear an appeal brought by a man who was arrested in 2011 as part of an investigation into a string of armed robberies in the Detroit area over the preceding months. Police helped establish that the suspect was near the scene of the crimes by securing cell site location information from his cellphone carrier.

The Supreme Court has twice in recent years ruled on major cases concerning how criminal law applies to new technology, on each occasion ruling against law enforcement. In 2012, the court held that a warrant is required to place a GPS tracking device on a vehicle. Two years later, the court said police need a warrant to search a cellphone that is seized during an arrest.

While the S&P 500 is up 9 percent this year, three of its 11 sectors — energy, telecommunications services and financials — are down by an average of 7.7 percent. The common factor in these 3 sectors is that they were all up big in the fourth quarter, perhaps too much, too fast; and now they have fallen back to earth.

Where has the big money been flowing in this market? It’s been a great year for big tech stocks, and a meager one for the small caps; the Nasdaq 100 index is up 20 percent this year, while the Russell 2000 has risen by less than 3 percent.

Markets worldwide are being propped up by a secret weapon of sorts: robust cash holdings that are at their highest in almost three decades. While stocks globally have benefited from rebounding earnings growth, bonds have also rallied amid declining inflation expectations and uncertainty around the pace of Federal Reserve interest-rate hikes.

Underpinning gains in both asset classes is $5 trillion of capital that is sitting on the sidelines and serving as a reservoir for buying on weakness. This excess cash acts as a backstop for financial assets, both bonds and equities, because any correction is quickly reversed by investors deploying their excess cash to buy the dip.

Goldman Sachs has issued a report looking at where hedge funds are investing and noted that technology is the favorite sector by far of professional investors. Hedge funds and large-cap mutual funds disagree about the prospects of the financial sector, which has been a shining spot of the Trump trade since the presidential election.

Hedge funds particularly love the “FAANG” stocks: Facebook, Apple, Amazon, Netflix and Google parent Alphabet. Last week, Amazon topped $1,000 per share. Today, Alphabet topped $1,000 per share. So, really, it has been easy to see where the big money has been flowing.

Today, Apple dropped about 1%, even as they presented their annual developers’ conference.

Apple unveiled a Siri-powered smart speaker, the HomePod. It runs $349, which is far more expensive than competing products. Apple is a bit late to the party. Amazon launched its Echo, priced at $179. Six months ago, Google introduced the Google Home speaker priced at $109.

They all use voice commands to play music, tell you the weather, read news, and answer questions. Apple ran through all the big improvements it's made to the software that runs on iPhones, iPads, and Macs. And they announced various tweaks to watches, computers, etc., etc., blah, blah.

Sorry, but these Apple conferences just don’t carry to “wow” factor they used to. It really looked like Apple was behind the curve when it comes to AI, and other big things that might get investors excited.

Separately, Foxconn’s CEO said that Apple and Amazon will join in Foxconn’s bid for Toshiba’s chip business. Representatives for Apple and Amazon declined to comment. The Japanese government has said it will block any deal that would risk the transfer of Toshiba’s key chip technology out of the country.

Financial Review

The Mark Inside

Sinclair Noe — January 27, 2017

Podcast: Play in new window | Download (Duration: 12:08 — 5.6MB)

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DOW – 7 = 20,093
SPX – 1 = 2294
NAS + 5 = 5660
RUT – 5 = 1370
10 Y – .02 = 2.48%
OIL – .64 = 53.14
GOLD + 2.90 = 1192.20

Major market indices traded in a tight range today. The Nasdaq pulled out another record high close. Meanwhile the VIX, the volatility index closed at 10.52, a multi-year low, indicating a certain complacency among investors, not in all sectors for sure, but with regards to overall market risk.

Gross domestic product, the value of all goods and services produced, rose at a 1.9 percent annualized rate in the fourth quarter, following the prior quarter’s 3.5 percent rate of growth.

For the full year, the U.S. grew just 1.6%, down from a 2.6% clip in 2015; still, even if growth was a bit sluggish, it marks 7 straight years of growth. A wider trade deficit — a negative for GDP — was by far the biggest anchor in the fourth quarter. The economy would have topped 3% growth if the trade gap has basically been unchanged.

Consumers increased spending by a solid 2.5%, with strong purchases of big-ticket items such as new cars or computers. Businesses also ratcheted up overall spending, including the first increase in equipment purchases in five quarters.

Home builders boosted investment in new housing by just over 10%, marking the first advance in three quarters. Companies also stocked up more: the value of inventories jumped by $48.7 billion after barely any change in the spring and fall. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.

Today’s GDP report shows that there is still plenty of room for economic growth, and President Trump’s proposals for tax cuts and infrastructure spending could certainly bolster the economy in the short-term. But in economics, things tend to cut both ways. Expansionary fiscal policy would likely lead to a stronger dollar, which would harm US manufacturing.

We could also see a higher federal deficit. And then remember the Federal Reserve is standing by to make sure we maintain price stability; and even though the Fed is not expected to hike rates at their FOMC policy meeting next week, they anticipate 3 hikes this year, which would be much more likely in the face of fiscal accommodation.

Orders for long-lasting goods made in the U.S. fell in December for the second month in a row, largely because of a cutback in demand from the Pentagon. New orders for durable goods dropped 0.4% last month. Bookings for defense-related equipment, including jets and other major hardware, accounted for the unexpected decline. Orders were also weak for primary metals, fabricated parts and computers. One strong area: orders for new cars rose 2%.

Mexican President Enrique Pena Nieto scrapped a planned trip to meet with President Trump, who has repeatedly demanded that Mexico pay for a wall on the U.S. border. And then today, it was announced that Pena and Trump talked on the phone for about one hour but nothing new on a wall or how to pay for it.

White House spokesman Sean Spicer, in a not so internal monologue, told reporters Trump was considering a 20% tax on Mexican imports to pay for the wall’s construction; that was later corrected to be just one of a “buffet of options” on the table. Just a reminder, the US has a $68 billion trade deficit with Mexico and is our third largest trading partner.

Mexican billionaire Carlos Slim, who once opposed a Donald Trump presidency and later said it would be “very good for Mexico,” held a press conference today in Mexico City. Slim offered his services to help Pena negotiate with Trump and called on Mexicans from all political parties to unite behind President Pena in his discussions with Trump.

Slim says Trump’s plans to bring manufacturing jobs to the US would only result in higher prices for consumers. Slim is Mexico’s wealthiest man and one of the world’s richest people, with an empire that encompasses telecoms, mining, banking and construction.

Theresa May last night offered to help President Trump to prevent the West from being “eclipsed” by China as she urged him not to shirk his “obligation” to lead the world. The U.K. Prime Minister also hopes he can be an economic ally – after Britain’s divorce from Europe, she’ll need a trade deal with the US.

The pair met face-to-face today, making her the first foreign leader to step into Trump’s Oval Office, and then they held a very brief joint press conference. May said Trump had committed 100% to NATO. May said the UK was opposed to lifting sanctions on Russia. Trump said he believes in torture. They both said they thought they could have a friendly relationship.

The US is Britain’s biggest export destination after the EU, accounting for over 15% of the country’s exports. Last week, May confirmed that Britain would leave the EU’s single market and customs union, allowing it to sign trade agreements of its own after the process of exit is complete.

The process includes the “Brexit bill,” which Parliament must approve to empower the prime minister to start the two-year negotiation period for Britain to leave the 28-nation bloc. The EU is hanging tough on not starting any sort of Brexit talks until Britain pulls the Article 50 trigger. The EU treaty stipulates that departure happens in 24 months irrespective of whether an exodus includes neat and clean trade bills.

Pretty much everyone agrees that a Brexit by default rather than a negotiated Brexit would be worse for the UK. And while there is a mechanism for extension, it requires unanimous approval of the 27 remaining states. The UK is so widely disliked in the EU that no one expects an extension to be granted.

So, the importance of a UK-US trade deal becomes even more important, even though it can’t technically be negotiated just yet. At the very least, it means Prime Minister May is negotiating from a position of weakness.

Trump has scheduled a phone conversation with Russian President Vladimir Putin and German Chancellor Angela Merkel on Saturday – not a three-way call. Trump’s PR team has been laying the groundwork for possibly removing sanctions against Russia, imposed after Russia invaded Ukraine and annexed Crimea.  Today, Arizona Senator John McCain said easing sanctions was a “reckless course.”

Alphabet’s revenue beat analysts’ estimates, but its profits per share missed expectations due to the company paying a much larger tax rate than anticipated. Alphabet, along with Microsoft and Intel, which also reported results yesterday, continue to show that cloud services remain the biggest growth area in tech. Microsoft shares hit an all-time high in trading today, and market cap topped $500 billion for the first time in 17 years. Apple, Amazon, and Facebook report earnings next week.

Starbucks slashed its 2017 revenue forecast. Starbucks’ first-quarter results were mostly in line with estimates but said it saw 2017 revenue growth of 8% to 10%, down from its previous estimate of a double-digit rise.

Chevron missed profit and revenue estimates for the fourth quarter. CEO John Watson said the earnings reflect the low oil and gas prices during the past year. The company cut capital and operating costs by $14 billion in 2016.

In Europe, UBS Group kicked off a run of bank earnings releases this morning saying all its money-management units saw net redemptions in the last quarter. UBS investors pulled out $15.2 billion in the fourth quarter and margins at its wealth management business declined for a third straight quarter, even as rising stock markets and higher interest rates in the U.S. lifted earnings.

Sears tumbled more than 9% to under $8 per share on Thursday, sending the company’s stock to its lowest price since its merger with Kmart back in 2004. The decline piled on to a 7% drop in Sears’ shares a day earlier, when Fitch Ratings called attention to the chain’s “significant” cash burn. The company also ended up at the top of a Bloomberg Intelligence list of retailers with the highest risk of bankruptcy.

Iranian supertankers are sailing to Europe for the first time since sanctions were eased last year as one of the world’s biggest crude shippers moves to step up deliveries. While European refiners have been taking small cargoes of Iranian oil, these are the first vessels operated by the National Iranian Tanker Company rather than independent shippers. Each of the very large crude carriers can carry more than 2 million barrels.

Lunar New Year celebrations are underway. Markets in China and across much of Asia will be shuttered over the next week in celebration of the Lunar New Year.

Record Runs Level Off

Charles Schwab: On the Market

Posted: 1/27/2017 4:15 PM ET

Record Runs Level Off

The bull runs into record territory for the U.S. equity markets of late cooled a bit in today’s action, with stocks closing mixed after being range-bound for most of the day, as declines in Treasury yields and crude oil prices pressured financials and energy stocks, respectively. Domestic economic data did little to catalyze the markets, while a heavy dose of earnings reports hit the Street with mixed results. Meanwhile, the U.S. dollar and gold rose.

The Dow Jones Industrial Average (DJIA) declined 7 points to 20,094, the S&P 500 Index ticked 2 points (0.1%) lower to 2,295, while the Nasdaq Composite inched 6 points (0.1%) higher to 5,661. In moderate volume, 751 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.61 to $53.17 per barrel and wholesale gasoline lost $0.02 to $1.55 per gallon. Elsewhere, the Bloomberg gold spot price rose $2.50 to $1,191.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 100.57. Markets were solidly higher for the week, as the DJIA increased 1.3%, the S&P 500 Index gained 1.0% and the Nasdaq Composite jumped 1.9%.

After the closing bell yesterday, Google parent, Alphabet Inc. (GOOGL $845) reported 4Q earnings-per-share (EPS) ex-items of $9.36, below the $9.64 FactSet estimate, as revenues excluding traffic acquisition costs (TAC) rose 22.8% year-over-year (y/y) to $21.2 billion, versus the expected $20.6 billion. Shares traded to the downside.

Dow member Microsoft Corp. (MSFT $66) reported 2Q EPS ex-items of $0.83, above the $0.79 FactSet estimate, while revenues increased 2.2% y/y to $26.1 billion versus the consensus forecast of $25.3 billion. Shares of MSFT gained ground.

Dow component Intel Corp. (INTC $38) announced 4Q EPS of $0.79 ex-items, above the $0.75 FactSet estimate, with revenues rising 10.1% y/y to $16.4 billion, topping estimates of $15.8 billion. INTC finished higher.

Dow constituent Chevron Corp (CVX $114) came under pressure after it reported 4Q EPS ex-items of $0.22, well short of the $0.64 FactSet estimate, while revenues rose 7.6% y/y to $30.1 billion, missing the consensus estimate of $36.9 billion. The company's Chairman and CEO noted that the 2016 earnings reflect the low oil and gas prices experienced during the year.

AbbVie Inc. (ABBV $60) reported 4Q EPS results of $1.20 ex-items, in line with the FactSet estimate, while revenues rose 6.2% y/y to $6.8 billion, just shy of the $6.9 billion consensus estimate. ABBV issued full-year 2017 EPS guidance of $5.44 to $5.54, which excludes $0.89 per share of intangible asset amortization expense and other specified items. Shares of ABBV fell.

Honeywell International Inc. (HON $118) reported 4Q EPS of $1.74, matching the FactSet estimate, with revenues flat y/y at $10.0 billion. The company reaffirmed its 2017 EPS guidance of $6.85 to $7.10, while the CEO concluded that the company delivered outstanding returns in 2016 and has set the stage for a successful 2017. Shares of HON were mildly higher.

Starbucks Corp. (SBUX $56) reported 1Q EPS of $0.52, in line with the FactSet estimate, with consolidated net revenues increasing 6.7% y/y to a record $5.7 billion, though short of expectations calling for $5.9 billion. SBUX reaffirmed its 2017 full-year EPS guidance, lowered its expectations for consolidated revenue growth and issued 2Q guidance that fell below consensus. Shares of SBUX were solidly lower.

Headline GDP and durable goods orders fall short of forecasts, consumer sentiment beats estimate

The first look (of three) at 4Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 1.9%, from the unrevised 3.5% expansion in 3Q, and below the 2.2% growth forecasted by Bloomberg. Personal consumption matched forecasts, rising 2.5%, following the unadjusted 3.0% increase recorded in 3Q.

On inflation, the GDP Price Index came in at a 2.1% rise, in line with expectations and above the unrevised 1.4% gain seen in 3Q, while the core PCE Index, which excludes food and energy, increased 1.3%, as expected and following the unrevised 1.7% advance in 3Q.

December preliminary durable goods orders (chart) declined 0.4% month-over-month (m/m), compared to estimates of a 2.5% rise and November's downwardly revised 4.8% drop. Ex-transportation, orders grew 0.5% m/m, matching forecasts and versus November's favorably revised 1.0% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, rose 0.8%, versus projections of a 0.2% increase, and following the upwardly revised 1.5% increase in the month prior.

The final January University of Michigan Consumer Sentiment Index (chart) was revised to 98.5—the highest since January 2004—from the preliminary level of 98.1, where the Bloomberg estimate called for it to remain. The index was up compared to December's level of 98.2. The expectations component improved m/m, rising to a two-year high, while the current conditions component eased slightly. The 1-year inflation outlook increased to 2.6% from December's 2.2% rate, and the 5-10 year inflation projection rose to 2.6% from 2.3%.

Treasuries finished higher, as the yield on the 2-year note was 1 basis point (bp) lower at 1.22%, the yield on the 10-year note lost 2 bps to 2.48%, and the 30-year bond rate decreased 3 bps to 3.06%.

The U.S. dollar and Treasury yields remained in focus, with the latter gaining some momentum as of late following the plethora of policy actions of President Donald Trump in his first week of office, which has been accompanied by continued relatively favorable economic data. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick offer their latest video, How Could the Items on the Republican Agenda Impact Investors?, at www.schwab.com/insights, where you can also find Michael's article, New Congress Plans Ambitious Agenda. Follow Schwab on Twitter: @schwabresearch.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and the greenback in her articles, Anatomy of a Bond Bear Market: What to Look For When Yields Rise and Will the U.S. Dollar Bull Market Continue in 2017?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones. For additional commentary on bond investing against this backdrop, listen to Schwab's Director of Income Planning, Rob Williams', CFP, podcast, Managing Your Fixed Income Holdings When Rates Rise, at www.schwab.com/insights.

Europe lower as PM May meets President Trump, Asia mostly higher in subdued action

European equities finished mostly lower with banking stocks among the worst performers of the day. Investors may have lent some of their focus to Washington where U.K. Prime Minister Theresa May will meet with U.S. President Donald Trump as the new U.S. leader commences the implementation of his vision of a more assertive style for trade relationships. Separately, some investors have taken note that the U.K. economy has recently been growing faster than expected with soaring levels of consumer borrowing, leaving some to believe that a possible interest-rate hike from the Bank of England could transpire by year-end. In economic news in the region, Germany reported a larger-than-expected m/m and y/y increase in the price for imported goods and a consumer confidence read in France was in line with expectations, while Italian consumer confidence came in below forecasts and hourly wage data was flat. With the global markets entering 2017 in volatile fashion, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers Five Reasons to Stay Invested Despite Heightened Uncertainty, at www.schwab.com/oninternational. The euro dipped versus the greenback and bond yields in the region were mixed.

Stocks in Asia finished mostly higher in lighter-than-usual volume as markets in mainland China and South Korea were closed for holidays with the former observing its week-long Lunar New Year which will keep markets shuttered next week through February 2. China did report that its industrial profits for December increased 2.3% y/y after rising 14.5% y/y in January. Stocks in Hong Kong were little changed in an abbreviated, half-day session, though the nation’s Hang Seng Index was able to register its biggest monthly gain in the past ten. Japanese equities advanced, with energy issues leading gains as the price of crude oil, though lower for the day, is headed for a second weekly increase and as the evolving global economic landscape may be boosting investors' willingness to take on risk. Meanwhile, the yen weakened versus the U.S. dollar as the Bank of Japan increased purchases of its bonds due in five-to-ten years after the benchmark yield approached 0.1% this week. Indian listings gained ground aiding the country's benchmark S&P BSE Sensex 30 Index to post its best weekly advance in the past eight months as overseas investors increased purchases of local shares. Finally, Australia's markets were higher, finding some support from strength in financials.

The international markets have been eyeing a number of executive orders from U.S. President Trump and appear somewhat optimistic regarding his plans to boost infrastructure spending and reduce regulations and taxes, while shrugging off his actions to change global trade relations. For more on Trump's trade policies, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know.

Stocks gain ground in first-week of new administration

With waves of corporate earnings reports flooding the Street, U.S. stocks managed to advance for the trading week despite some disappointing housing data in the form of new and existing home sales, which was joined by Friday's cooler-than-expected read on 4Q GDP, while a solid consumer sentiment report along with upbeat reads on regional and national manufacturing activity were seemingly able to build some investor confidence. The advance for stocks transpired amid the backdrop of the first full-week in office for President Donald Trump. The new administration took the reins at the White House and wasted no time in turning out executive actions that could potentially change current dealings in trade agreements, energy issues and health care. In his most recent Schwab Sector Views: Upgrading Health Care and Downgrading Real Estate, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, doesn't shy away from controversy, discussing various issues that have resulted in the health care sector being the worst-performing group over the past 12 months. But we think this is about to change. Read why at www.schwab.com/marketinsight and be sure to follow Schwab on Twitter: @schwabresearch.

Heavy dose of data next week

Next week, investors will have slew of data to digest, with the 4Q earnings season robust, as well as a domestic economic calendar that is chock full of key reports, including employment data in the form of the Employment Cost Index, non-farm productivity and labor costs, weekly initial jobless claims, the ADP Employment Change Report and Friday’s highly anticipated labor report. As well, manufacturing data is on the docket, with items slated for release to comprise both services and manufacturing reports from the Institute for Supply Management (ISM) and Markit, the Chicago Purchasing Managers’ Index and the Dallas Fed Manufacturing Index. Housing data will also be in focus, with pending home sales gracing the calendar, as well as the S&P CoreLogic/Case-Shiller Home Price Index and weekly MBA Mortgage Applications, while rounding out the heavy docket will be personal income & spending, factory orders, and construction spending. Not to be outdone, and likely the headlining event of the week, will be Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC).

As noted in the latest Schwab Market Perspective: A New World, now that it’s President Trump instead of candidate or President-elect Trump, we’ll see how quickly some of the much talked about plans come to fruition. Issuing executive orders to roll back previous executive orders is relatively easy in a lot of cases; but getting tax reform and new health care legislation written and passed will prove to be more difficult. Investor and corporate confidence may have gotten a bit ahead of the pace at which many of the administration’s policy priorities can get enacted, and the balance between those which are growth-friendly and those which could retard growth and confidence. Read more at www.schwab.com/marketinsight.

International reports due out next week that deserve a mention include: the Markit Manufacturing and Services PMIs from across the globe; as well as from Australia—business confidence and the Reserve Bank of Australia’s monetary policy meeting. Japan—retail sales and the Bank of Japan’s monetary policy meeting. Eurozone—CPI, and German unemployment and CPI. U.K.—construction spending and the Bank of England’s monetary policy meeting. Markets in China, South Korea and Hong Kong will be closed in observance of the Lunar New Year holidays.

Financial Review

3Q Earnings and Political Uncertainty

Sinclair Noe — October 10, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 88 = 18,329
SPX + 9 = 2163
NAS + 36 = 5328
OIL + 1.39 = 51.20
GOLD

Today is Columbus Day. Even though stock markets were open today, bond markets were closed, the majority of banks and credit unions were closed, and most federal and local government offices are closed for the holiday. (In case you were wondering why the mail wasn’t delivered.)

Oil prices rose to their highest in a year after Russia said it was ready to join a proposed deal to cap oil production. The Organization of the Petroleum Exporting Countries (OPEC), of which Russia is not a member, aims to agree an output cut by the time it meets in late November. Russian President Vladimir Putin said an output freeze or even a production cut were likely the only right decisions to maintain energy sector stability.

Analysts at ABN Amro took a more cautious view on an OPEC deal, saying previous hints by the group on output cuts have always failed to be followed up by action. Iraq, OPEC’s second biggest producer, had already poured cold water on expectations, saying over the weekend that it wants to raise output further in 2017.

Further complicating OPEC output caps is that inventory levels in the US have reached record highs since the oil-price collapse in 2014. This surplus supply is a major factor keeping oil prices low. Current inventories are 45 million barrels higher than 2015 levels, which were more than 100 million barrels higher than the average from 2010 through 2014. Until the present surplus is reduced by almost 150 million barrels down to the 2010-2014 average, there is little technical possibility of a sustained oil-price recovery.

The Federal Reserve’s September meeting was contentious. The Fed extended its stimulus campaign, but three officials voted to raise rates, the largest bloc of dissenting votes in several years. On Wednesday, the central bank will release an account of the meeting that may reveal more about the lines of conflict. Fed chair Janet Yellen said at a news conference after the meeting that the majority of officials saw no reason to rush ahead with a rate increase. The dissenters say the Fed is playing a dangerous game by dragging its feet. On Friday, Yellen will have another chance to explain her own views when she addresses a conference in Boston.

The publication of Alcoa Q3 results tomorrow after the closing bell, will mark the beginning of Q3 earning season for major US companies. According to FactSet consensus estimates, profits are likely to decline by 2.1% y/y, the sixth consecutive quarterly decline. Earnings should drop despite the expected 2.6% increase of sales. On June 30, analysts estimated a 0.3% increase of profits in Q3.

The decline in corporate profits should be mainly driven by the energy sector, whose earnings are expected to tumble by 67% y/y. Industrial and real estate should also record falling earnings, at -7.8% and -6.3% respectively. On the opposite side, utilities should post the highest earning growth rate (+5.3%), followed by consumer discretionary at +5%. According to FactSet consensus, corporate profits should return to a positive growth rate in Q4, with a 5.6% y/y increase.

During earnings reporting season, companies publish what passes for the results of the prior quarter and they also have the chance to explain their successes or failures. We tend to hear plenty of excuses such as a “strong dollar” or “Brexit” or the old standby “bad weather”.

The excuse for poor third quarter results is likely to be uncertainty related to the presidential election.  People aren’t buying enough potato chips – political uncertainty. Companies aren’t buying new computers – political uncertainty. Consumers aren’t buying new cars – political uncertainty. Recent measures of consumer confidence have exceeded or neared post-financial-crisis highs, and consumer spending remains one of the bright spots of the US economy. So, when you hear the excuse of “political uncertainty” you can be fairly certain that is not the answer.

The British pound resumed its decline as investors waited for clues about the cause of last week’s flash crash and on whether Britain is truly headed for a hard Brexit. U.K. Prime Minister Theresa May will meet with foreign leaders this week in a bid to build understanding for her negotiating position ahead of this month’s EU summit. Meanwhile, officials are still trying to figure out what triggered last week’s flash crash in the pound. Sterling remains the world’s worst-performing major currency this year.

British-born Oliver Hart and Finland’s Bengt Holmstrom won the Nobel Economics Prize today for work that addresses a host of questions from how best to reward executives to whether schools and prisons should be privately owned. Their findings on contract theory have implications in such areas as corporate governance, bankruptcy legislation and political constitutions. Hart is an economics professor at Harvard University while Holmstrom is a professor of economics and management at the Massachusetts Institute of Technology.

Hart’s research work has included a damning assessment of America’s private prisons. He showed that the pressure to cut costs was too great, leading to an unacceptable drop in quality. At the core is the issue of “incomplete contracts” – the fact that contracts are not detailed enough to cover every small point.

Holmström is known for pioneering research into executive pay. His work on employment contracts has considered a range of professions from teaching to management and whether they should be paid fixed salaries or work on the basis of performance-related pay.

A group of nuns and other religiously-affiliated investors have lost faith in Wells Fargo and filed a shareholder resolution calling on the bank to report on the root causes of a fake accounts scandal that led to a $190 million settlement struck with regulators last month. The faith-based investors say they also want the report to cover improved controls after revelations bank employees opened as many as 2 million checking, savings and credit card accounts without the customers’ permission in order to meet sales quotas. The resolution is one among a series filed recently at Wells Fargo. Other resolutions call on Wells Fargo to study a breakup and to split the roles of chairman and chief executive officer.

Deutsche Bank CEO John Cryan was in Washington over the weekend for the International Monetary Fund and World Bank’s autumn meetings. Reportedly while there he met with Justice Department officials but was not able to negotiate down the $14 billion fine they have demanded. Deutsche Bank is expected to issue new shares, sell assets, or both, once it knows the scale of the fine, to ensure that its capital ratio remains within regulatory limits.

Mylan has agreed to pay the U.S. government $465 million in a swift settlement over how it charged Medicaid for its allergy shot EpiPen. The U.S. Centers for Medicare and Medicaid Services, or CMS, said in a letter this week that Mylan had misclassified EpiPen as a generic drug, while the government has said it was a brand-name product and that Mylan should have given states and the U.S. bigger rebates. The agreement with the Justice Department and other agencies resolves all potential rebate liability claims by federal and state governments. There was no admission of wrongdoing by Mylan or its employees.

Negotiators from Unifor and Fiat Chrysler will not be with their families today celebrating Canadian Thanksgiving. The union has set a strike deadline of midnight for its 9,750 members employed by the automaker, and is looking for a contract similar to the one it signed last month with General Motors Canada. Among other things, that deal traded pension benefits for shortening the time it takes newly hired employees to reach full wage rates.

Chicago’s public schools and its teachers’ union make the final push to avert a looming strike on Tuesday. Pensions are among a key sticking point. The district would like to phase out the 7 percent of annual salary that it contributes each year to teachers’ pensions. Unions want to keep the pension contributions and ink a new, three-year contract that would give teachers 2 percent raises in the second and third years. The state, the city and the school district have all had their credit ratings cut to junk, or just above it. The impasse and the threat of the strike would affect nearly 400,000 students.

Samsung has reportedly stopped production of its Note 7. The temporary production halt comes after five reports of fires in replacement phones, suggesting replacement Galaxy Note 7 devices remained plagued by the same faulty battery problem that occurred in the original device. Samsung’s decision came after major mobile carriers in the U.S., including AT&T and T-Mobile, said they would stop issuing Note 7s over safety concerns.

After five years of litigation, the U.S. Supreme Court will hear arguments on Tuesday in the patent dispute between the world’s two top smartphone manufacturers over the amount Samsung should pay Apple for copying the iPhone’s distinctive look. The justices’ ruling, due by the end of June, could have a long-term impact for designers and product manufacturers going forward because the Supreme Court, if it agrees with Samsung, could limit the penalties for swiping a patented design.

A jury found that Samsung had violated an Apple design patent by mimicking the iPhone’s round corners and grid of icons. The question for the justices is whether that means Samsung must turn over all its profits from the infringing phones or just those attributable to the disputed features. The court has not heard a design patent case in over a century.

Financial Review

Theresa May is Britain’s new prime minister, replacing David Cameron

Sinclair Noe — July 13, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 24 = 18,372
SPX + 0.29 = 2152
NAS – 17 = 5005
10 Y – .03 = 1.47%
OIL – 1.37 = 45.43
GOLD + 9.60 = 1343.30

The cost of imported goods increased 0.2% in June, led again by the higher cost of fuel. Import prices have risen four straight months following five straight declines, largely because of the price of oil has climbed from multiyear lows. Excluding fuel, the cost of imports fell 0.3% in June. Over the past year, import prices are still 4.8% lower, reflecting a big drop in the oil prices in 2015.

That’s helped to keep overall U.S. inflation on the low side. Import prices minus fuel are down 1.8% in the past 12 months. U.S. export prices climbed 0.8% in June. Export prices are 3.5% lower in the past 12 months.

Corporations are paying less to the Treasury this fiscal year, and the government’s budget deficit is ballooning because of it. In its latest monthly budget report, the Treasury Department said the deficit through June was $401 billion, up 27% from the same period a year ago. In the month of June, the government managed to post a budget surplus of $6 billion, but that was down from a surplus of $50 billion in June of 2015.

While individual income tax collection has risen so far this fiscal year, it’s a far different story with corporate taxes: revenues are down 11%. The government’s budget year runs from October through September.  The nonpartisan Congressional Budget Office blamed the tax extenders, legislation that gives breaks for both businesses and individuals, for helping to blow up the federal debt in the long term; another possible culprit is that the decrease in corporate taxes may partly reflect lower taxable profits earned so far this calendar year.

The Federal Reserve published its Beige Book today, two weeks before the next FOMC policy meeting. The anecdotal assessment finds the economy chugging along through the end of June with little indication of inflation now or in the near future. Despite a strong rebound in U.S. job growth in June; pressure to raise wages at the end of the second quarter was centered on skilled workers and difficult-to-fill positions. Fed districts also reported some signs of softening in consumer spending but most retained an optimistic outlook, the report said. Manufacturing activity remained mixed while growth in the services sector was seen as “slight to modest.”

Oil industry hopes that markets are about return to balance, ending a global glut that pulled down prices by over 70 percent between 2014 and early 2016, might be abruptly dashed. Despite recent disruptions and output cuts, there is mounting evidence that plentiful supplies and brimming inventories will delay a much-quoted re-balancing of oil markets. Not just are supplies improving, now demand may be waning.

With the United States and Europe stagnating, Asia has been the main pillar of oil demand growth. But that too is now stuttering, with tanker flows into the region down for four straight months. So much oil is now stored that the world is running out of space, forcing traders to charter supertankers in which to keep unsold fuel. There is so much oil in storage that it could take well into 2018 for the glut to clear.

The latest American Petroleum Institute (API) showed crude oil supplies rose to their highest point in ten weeks. Meanwhile, the International Energy Agency said oil production from the Middle East has climbed to a record while U.S. output slumps. Middle Eastern output exceeded 31 million barrels a day for a third month in June amid near-record supply from Saudi Arabia, while U.S. oil production slid 140,000 barrels a day to 12.45 million. The IEA, which mostly kept forecasts for supply and demand unchanged, said that while the rebalancing of the oil market is progressing, brimming inventories remain “a threat to the recent stability of oil prices.”

Theresa May is Britain’s new prime minister, replacing David Cameron. The appointment was official today. May will face immediate pressure from EU leaders to serve formal notice of Britain’s withdrawal and set the clock ticking on a two-year countdown to its final departure. May has already started naming new members of her cabinet. She appointed former foreign minister Philip Hammond to take charge of the finance ministry. He replaces George Osborne, whose determination to balance Britain’s books made him synonymous with austerity.

May also named Boris Johnson, the former mayor of London and a leading Eurosceptic who had until recently been seen as her main rival for the prime minister’s job, to take over as foreign secretary. Meanwhile, the Bank of England holds a policy meeting tomorrow and they are expected to cut the key lending rate to 0.25% form 0.5%, to try to ward off a recession and to reassure markets.

PC sales in the US are growing again. Both Gartner and IDC data shows that PC shipments in the US have returned to growth for the first time in over a year. Gartner data, which includes Windows tablets, showed that PC shipments grew 1.4% in the second quarter. IDC data, which doesn’t include Windows tablets, showed growth of 4.9%.

A federal appeals court ruled General Motors’ 2009 bankruptcy does not shield it from lawsuits over a deadly ignition-switch defect that led to criminal charges against the automaker and prompted the recall of 2.6 million vehicles in 2014.  The 2nd Circuit’s decision affects some injury and death cases stemming from pre-bankruptcy crashes. It will also impact claims from customers who say their vehicles lost value as a result of the ignition switch and recalls involving other parts, which plaintiffs’ lawyers have estimated to be worth between $7 billion and $10 billion.

A bankruptcy judge ruled in 2015 that New GM was shielded from liability over Old GM’s pre-bankruptcy actions, but he allowed some “independent” claims based solely on New GM’s conduct to proceed. Lawyers for GM customers argued that New GM should not be protected because it knowingly concealed the switch defect for more than a decade before it recalled the vehicles in 2014. The ruling allows the cases to proceed but does not address the underlying merits of the claims.

Line Corp. shares are getting popular in the gray market ahead of this week’s trading debut, which will mark the largest initial public offering for a tech company in 2016. According to Cantor Fitzgerald, investors are willing to buy shares for $36, 15% higher than the IPO price. Line will debut in a dual listing in the U.S. tomorrow and Tokyo on Friday.

The FTC has requested additional information from Abbott Laboratories and St. Jude Medical, which are attempting to complete a $25 billion deal combining two of the leading makers of heart-related devices. The request extends the waiting period – the time frame before companies can close a transaction – by 30 days.

One year after hackers showed they could control a moving Jeep; Fiat Chrysler has a new solution to get computer whizzes to work more closely with the company: pay them. The automaker is launching a bug bounty program aimed at compensating hackers between $150 and $1,500 every time they uncover potential cyber-security flaws in vehicles and alert the company.

Elon Musk has no plans to disable Tesla’s Autopilot function in the wake of a fatal Model S crash in May that used the technology, and instead plans to redouble efforts to educate customers on how the system works. Tesla also confirmed that the weekend crash involving Autopilot in Montana, the third serious accident tied to the self-driving feature, resulted from the driver’s hands not being on the wheel ahead of the collision.

Seven years ago, chemistry researchers from Oregon State University were conducting an experiment testing materials for applications in circuit boards and semiconductors; they heated manganese oxide and other substances to 2000 degrees Fahrenheit, when one of their samples came out a vivid blue. They had accidentally created a new color and they named it YInMn, after the elements yttrium, indium and manganese that compose it. Some artists have already given the new color a nickname – Mas Blue. In about a month, the new color will be available as paint.

While the same shade could be created in other ways, what makes this pigment particularly special is its durability and color-fast properties as a chemical coloring agent. Most blue dyes tend to fade, but Mas Blue is resistant to water, oil or acid and non-toxic. The paint will be distributed by the Ohio-based color supplier Shepherd Color Company. Scientists are also exploring the use of Mas Blue as an energy-saving roofing material, since the compound has been found to reflect 40% of infrared light.

Stocks Manage Mild Moves and Mixed Finish

Charles Schwab: On the Market

Posted: 7/13/2016 4:15 PM ET

Stocks Manage Mild Moves and Mixed Finish

U.S. stocks paused a bit from their recent rally with the major indexes closing mixed and near the flatline as a drop in crude oil prices weighed on energy issues. Investors may have been exercising some additional caution ahead of some key earnings reports out of the financial sector later this week. In economic news, the Fed released its Beige Book, mortgage applications jumped for a second-straight week and import prices rose. Treasuries and gold were higher, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) rose 24 points (0.1%) to 18,372, the S&P 500 Index was flat at 2,152, and the Nasdaq Composite shed 17 points (0.3%) to 5,006. In moderate volume, 823 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $2.05 lower at $44.75 per barrel, wholesale gasoline declined $0.05 to $1.38 per gallon and the Bloomberg gold spot price increased $8.70 to $1,343.62 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% lower at 96.29.

CSX Corp. (CSX $28) released 2Q earnings about an hour before the closing bell, correcting information that was released via Twitter earlier in the day. CSX announced earnings-per-share (EPS) of $0.47 versus the FactSet estimate of $0.44, while revenues declined 11.9% year-over-year to $2.68 billion, just shy of forecasts. The company noted that looking forward it continues to expect 2016 full-year earnings per share to decline, reflecting the ongoing transition in the energy markets, along with the impact of the strong U.S. dollar and low commodity prices. Shares of CSX traded higher.

Juno Therapeutics Inc. (JUNO $30) rallied after the company announced that the U.S. Food and Drug Administration (FDA) has removed the clinical hold on the Phase 2 clinical trial of its blood cancer treatment. As a result, JUNO said the trial, known as ROCKET, will resume.
Teva Pharmaceutical Industries Ltd. (TEVA $54) gained ground after the company raised its 2Q EPS and revenue guidance. Both figures were above FactSet estimates.

Fed releases Beige Book, mortgage applications jump back-to-back

The Federal Reserve's Beige Book, a tool summarizing economic activity across the nation used by the Federal Open Market Committee (FOMC) to prepare for its next two-day meeting set to conclude on July 27, was released in afternoon action. The report showed that U.S. economic activity continued to expand at a modest pace across most regions and while employment continued to increase during the period, the rate of growth ranged from little change to moderate. Consumer spending, though positive, was reported as showing some signs of softening and manufacturing was mixed and reporting districts noted that the outlook remained positive but deteriorated. As noted in the recent Schwab Market Perspective: Looking Beyond Britain, while we agree that the July FOMC meeting is likely off the table for a move on rates, we aren’t dismissing the possibility of a hike later in the year. A lot can happen in a few months and if financial markets stabilize, the job market remains healthy, and inflation pressures rise the Fed could look to move toward a more “normal” rate, while also giving it some room to act if/when the U.S. economy begins showing recession risks. Read the whole article at www.schwab.com/marketinsight.

The MBA Mortgage Application Index rose 7.2% last week, after jumping 14.2% in the previous week. The second-straight solid weekly gain was led by a 11.2% rise for the Refinance Index, while the Purchase Index came in flat. The average 30-year mortgage rate fell 6 basis points (bps) to 3.60%.

The Import Price Index (chart) rose 0.2% month-over-month (m/m) for June, compared to the Bloomberg projection of a 0.5% increase, and May's unrevised 1.4% gain. Compared to last year, prices were lower by 4.8%, versus the 4.6% forecasted drop, and following May's unrevised 5.0% fall.

Treasuries were higher, with the yield on the 2-year note declining 2 bps to 0.67%, the yield on the 10-year note decreasing 4 bps to 1.47% and the 30-year bond rate falling 5 bps to 2.17%. Bond yields gave back some of their two-day recovery from recent pressure that has come from the U.K. Brexit fallout, which exacerbated global growth concerns, as well as dampened expectations for a Fed rate hike this year. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will yield the release of the Producer Price Index, expected to have increased 0.3% for May after rising 0.2% the month prior, and weekly initial jobless claims, forecasted to show an increase to a level of 265,000.

Europe modestly retreats from steep rally, Asia extends winning streak

European equities finished slightly lower on the heels of a four-session rally that came as the global markets recovered from the fallout from the late-June vote in the U.K. to leave the European Union, known as a Brexit. Financials lagged as Italian banking worries festered, while energy issues were bogged down by a drop in crude oil prices in the wake of a mixed U.S. oil inventory report. However, the appointment of Home Secretary Theresa May as the new U.K. Prime Minister cleared up some political uncertainty, while hopes of further stimulus measures in Japan and expectations of a rate cut from the Bank of England tomorrow added some support. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, eurozone industrial production in May dropped more than expected. The euro traded higher and the British pound fell versus the U.S. dollar, while bond yields in the region lost ground.

Stocks in Asia extended their recent winning streak to three days as the global markets continued to recover from the post Brexit fallout pressure, remaining buoyed by expectations of further Japanese stimulus measures, and some political clarity in the U.K. Japanese equities rose, adding to the rally as of late as expectations continued to be elevated that Prime Minister Abe, coming off his ruling party's convincing weekend upper house election victory, is close to announcing more aggressive stimulus measures. Gains in Japan came even as the yen rebounded somewhat from its recent drop and as a Japanese government spokesperson denied an earlier media report that suggested government officials are considering "helicopter money" as a policy option. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational.

Stocks trading in mainland China and Hong Kong extended their recent gains on speculation that the government is taking steps to support investor sentiment, per Bloomberg. After the closing bell, China reported a slightly smaller-than-expected drop in June exports, which came ahead of Thursday night's release of the nation's 2Q GDP report, expected to show year-over-year growth slowed to 6.6% from 6.7% in 1Q. Finally, equities in Australia and South Korea advanced, while Indian securities were mostly flat, despite late-yesterday's mostly upbeat data on the nation's industrial production and consumer price inflation.

The international economic docket for tomorrow will be limited, with expected economic reports consisting of inflation expectations, employment data and new vehicle sales from Australia. Meanwhile, in central bank action, tomorrow the Bank of England is expected to announce a 25 basis point reduction to its official bank rate, which would lower the rate to 0.25%, while the Bank of Korea will also meet and is expected to leave its benchmark interest rate unchanged at 1.25%.

Financial Review

Earnings Reporting Season

Sinclair Noe — July 11, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 80 = 18,226
SPX + 7 = 2137
NAS + 31 = 4988
10 Y + .07 = 1.43%
OIL – .65 = 44.76
GOLD – 10.80 = 1355.60

The S&P 500 Index traded at a new intra-day high this morning, topping 2143, and closing at a record high 2137, taking out the old high of 2130 from May of last year.

And just because we hit a new high, doesn’t mean we’ve reached the top.  Typically, a breakout results in a bullish rally. The market has broken its multiyear record 17 times, and each of those instances has been followed by prolonged growth. After these 17 multiyear highs, the average return for the S&P 500 has been 8.5% over the next six months and a whopping 15.5% over the next year. Not a guarantee, just an indication of past performance. If you are a bit cautious, wait for confirmation, such as a weekly close above the old high.

So it may come as a surprise that the S&P 500 is also poised to match its longest earnings recession since 1936. At 25 times reported profit, the S&P 500 is trading at a higher multiple than it has for 90 percent of the time in the past eight decades. Earnings have been declining for four consecutive quarters, and if the second quarter numbers do not improve we will have a fifth consecutive quarter of declining earnings. Earnings are not expected to improve; they will probably be down about 5.6% from a year earlier, according to FactSet. And yet, a majority of stocks will probably report better than expected earnings. The average “beat rate” – the percent of the time a company beats the consensus earnings estimate – is 61% for the broad market.

Wall Street analysts lower the bar for earnings and then cheer when a company steps or stumbles over the bar. The “typical” quarter sees companies in aggregate report better-than-expected numbers, with the average margin of upside running around four percentage points. If the pattern persists, companies have an outside shot of ending about even with the 2015 period. The current forecasts for the third quarter are for a slight dip of less than 1 percent in profits, followed by a more notable bounce-back in the fourth quarter.

As far as deciphering the actual earnings reports, well I’ve been reading and analyzing reports for a couple of decades and it just keeps getting tougher and tougher to make sense of the numbers. An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the “adjusted” profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years. At one of every five companies, these “adjusted” profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money.

Lynn Turner, chief accountant at the Securities and Exchange Commission, said companies are still touting “made-up, phony numbers” as much as they did 15 years ago, perhaps more, and few experts are calling them out on it. Turner said, “The analysts aren’t doing enough to get behind the numbers that management gives them to find out what’s really going on.” And this of course, begs the question, what is the job of Securities and Exchange Commission?

Alcoa used to be one of the Dow 30 stocks, and with the ticker symbol AA, it kicks off the earnings reporting season. Not only is Alcoa first in line, it is the poster child for what we might expect. Alcoa reported quarterly earnings and revenue that beat analysts’ expectations. The company posted adjusted second-quarter earnings per share of 15 cents on revenue of $5.3 billion. Analysts expected the company to report earnings of about 9 cents per share on $5.2 billion in revenue.

Despite beating expectations, Alcoa’s second-quarter adjusted earnings per share declined from 19 cents in the comparable year-ago period. Revenue also fell — from $5.9 billion — compared to the same quarter last year. After the announcement, Alcoa shares jumped more than 4 percent in after-hours trading.

Earlier in the year, oil and stocks were trading in concert. Oil prices fell more than 1 percent today, hitting two-month lows on extended selling after the market’s break below a key technical support level last week due to oversupply fears. Last week, oil slumped nearly 8 percent in its biggest weekly losses in six months and already hit a two-month low on Thursday after disappointing drawdowns in U.S. crude and gasoline inventories pointed toward weak demand.

Interior minister Theresa May will become Britain’s next prime minister on Wednesday, after her only rival abruptly quit the race today, removing the need for a drawn-out leadership contest. May was left as the only candidate to succeed David Cameron, who announced he was stepping down after Britons voted last month to leave the European Union. May favored a vote to Remain in last month’s referendum.

The Bank of England is weighing a raft of emergency measures to stem the flood of money out of Britain’s biggest property funds that caused fresh market panic last week. These could include “enforced notice periods before redemptions, slashing the price for investors who rush to the door, or additional liquidity requirements for funds.”

Australia’s Malcolm Turnbull declared victory on Sunday in a marathon national election, with his coalition government retaining power and the opposition Labor Party conceding defeat. It’s still unclear whether the prime minister will lead a majority government or one that needs the support of smaller parties and independents. The coalition has so far won 74 of 150 House of Representative seats and is projected to take 76, or the slimmest majority possible.

Prime Minister Shinzo Abe’s Liberal Democratic Party and its allies won a stronger majority in Japan’s Upper House election on Sunday, in a development that will make it far easier to push through his economic agenda. Abe later confirmed a new round of stimulus, nearly $100 billion worth of measures, including loans. To fund a supplementary budget, they said the cabinet will consider the first additional issuance of new government bonds in four years. The announcement on new stimulus measures helped send the yen down 2% against the dollar and pushed the Nikkei up 4%. Other Asian markets also moved higher this morning.

Japanese messaging service Line Corp., set for a dual New York and Tokyo listing this week, has priced its initial public offering at the top of its marketed range, and is expected to raise as much as $1.3 billion and value the company at $6.9 billion. Line’s offering will be the biggest tech IPO of the year and it will mark the first Japanese company to list new shares in the U.S. since 2000.

The hacking outfit OurMine has already been responsible for a few high-profile Twitter account takeovers, but the latest may be particularly embarrassing for the company. Twitter CEO Jack Dorsey had his account briefly hacked Saturday morning, as OurMine tweeted out a link to its website and a message that it was “testing your security,” along with a Vine clip that has since been deleted.

UFC was sold. The mixed martial arts promoter was sold for $4 billion to a consortium of investors, led by the talent agency WME-IMG. Backing the transaction are private equity firms Silver Lake, Kohlberg Kravis Roberts and Michael Dell. Ultimate Fighting Championship fights are now shown in more than 156 countries and claim millennials as some 45% of its audience.

Thomson Reuters agreed to sell its intellectual property and science business to private equity firms Onex Corp and Baring Private Equity Asia for $3.55 billion in cash. The business, which has 3,200 employees, provides intellectual property and scientific information and associated tools and services to governments, universities and companies.

All Starbucks store employees and managers in the U.S. are in for at least a 5% raise starting in October. Employees with at least two years of service will also now be eligible for double the amount of stock award in the company, which is doled out each November as an equity reward that turns into shares of Starbucks stock after a specific time period. The wage increase combined with the new stock award policy means compensation will increase between 5% and 15%.

Black Friday is coming four months early for some retailers. Stores including Target, Sears, Banana Republic, Express, the Gap and Old Navy are offering deals around the same time as Amazon’s big Prime Day sale, which starts tomorrow. Wal-Mart has even eliminated the $50 minimum spending requirement for shoppers to receive free shipping on their online orders. Amazon shares hit a record on Friday, and gained another 1% today.

That all comes ahead of Tuesday’s second annual Prime Day, when subscribers will get access to over 100,000 deals. It will be Amazon’s biggest day ever. Countdown deals rolled out last week, and on Friday Amazon started offering specials. Starting at midnight Pacific time, members of the $99 a year Prime service will see deals as frequently as every five minutes throughout the day.

Today is July 11, or 7-11. Free Slurpees for everyone! At least at participating 7-Eleven convenience stores. Between 11 a.m. and 7 p.m. at participating stores, visitors can receive a free small Slurpee drink available in various flavors.  This is the 14th year the retailer has offered free Slurpee drinks on its birthday.

Maybe Slurpees aren’t your thing. I understand. Just wait until tomorrow July 12, Cow Appreciation Day at Chik-fil-A. The chicken chain will offer a free entrée to anyone dressed in cow attire, whether “head-to-hoof” or sporting a cow-spotted accessory, like a purse or hat.