Financial Review

Pause

Sinclair Noe — November 16, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 54 = 18,868
SPX – 3 = 2176
NAS + 18 = 5294
10 Y – .40 = 45.41
OIL – .02 = 2.22%
GOLD – 3.40 = 1225.00

The Dow Jones Industrial Average had posted record closes for four straight sessions, before hitting the pause button today. Still, the Dow is up about 8.25 percent year to date, outperforming the S&P 500 and the Nasdaq composite, which were up 6.6 percent and 5.8 percent for the year, respectively.

The last two times the Dow outperformed the S&P and Nasdaq in a year when all three were higher year to date were in 2006 and 1996. If the Dow can break 19,000 it would likely just keep running higher. Based on market data from the past 30 years, when the Dow has crossed levels like 2,000, 3,000, 4,000 – all the way to 18,000, we can expect traders to push it up even higher.

The trend is true not just for a quick one-week return, but also one-month and one-quarter returns. If nothing else, a move through a thousand-point level attracts attention, encouraging more people to jump on board. Of course, we’re not there yet, and it is a probability, not a guarantee.

The producer price index was unchanged in October. The PPI measures inflation at the wholesale level. Higher costs of natural gas and gasoline were offset last month by declines in prices of food as well as services such as financial advice and hospital outpatient care. Still, some modest inflationary pressure is building.

Wholesale costs have risen 0.8% in the past 12 months. That’s the strongest one-year change since the end of 2014. A separate measure that strips out the volatile food, energy and trade margin categories is rising at an even faster rate. So-called core producer prices have climbed 1.6% in the past 12 months, the fastest pace in two years.

Industrial production was unchanged in October after a big drop in output as warmer-than-normal temperatures reduced the demand for heating; utility output dropped 2.6%. Manufacturing output edged up 0.2%, while mining output jumped 2.1% higher, its best performance since March 2014.

The National Association of Home Builders’ index was steady was unchanged at 63 in November. Any reading over 50 indicates improvement.

A measure of mortgage application activity fell to a 10-month low as 30-year mortgage rates jumped to their highest levels since January. Borrowing costs to buy a home and to refinance posted their steepest weekly increase since June 2013. Interest rates on 30-year fixed-rate mortgages with conforming loan balances of $417,000 or less averaged 3.95 percent, which was up from 3.77 percent the previous week and the highest since January

Federal Reserve Bank of St. Louis President James Bullard said there’s a chance the US economy could get a medium-term boost if President-elect Donald Trump increases infrastructure spending and reforms taxes. Bullard said a “single policy-rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting.” Prices of federal funds futures contracts indicate investors see a more-than 90 percent probability the U.S. central bank will hike when officials meet Dec. 13-14.

Not everybody expects a Trump boost for the economy; Bill Gross, manager of the Janus Global Unconstrained Bond Fund, writes: “There is no new Trump bull market in the offing. Investors must drive with caution, understanding that higher deficits resulting from lower taxes raise interest rates and inflation, which in turn have the potential to produce lower earnings.” Gross writes many of the policies Trump favors represent the status quo – and a Clinton administration would have been no better. “Neither party as they now stand has bold policies beyond the reach of K Street lobbyists.”

So far, the Trump transition team does not seem particularly concerned about a transition team staffed heavily with lobbyists from energy, agriculture, transportation, and banking. Meanwhile, Senate Republicans voted to keep Mitch McConnell of Kentucky as the majority leader. Democratic senators elected Chuck Schumer of New York as minority leader.

Now, it is important to remember that Bill Gross is a bond guy; and while stocks have enjoyed record highs since the election, bond prices have tanked. The bond market largely believes Trump’s policies can lead to economic growth at the expense of deficit spending and inflation. And with bond prices dropping, volatility in the bond market has surged. Fixed income markets and equity markets are following completely different narratives after the election.

So, the question is which one is right. And the answer might be that they are both wrong. Stocks are probably overbought and bonds are probably oversold, and that can continue to play out in the near term. The most like course is a reversion to the mean. But absent equilibrium, Gross makes a good point about inflation and higher rates eventually dragging stocks lower.

But the market has not yet determined a clear direction. On Monday, something very rare happened: more than 300 issues on the New York Stock Exchange advanced to new 52-week highs, and more than the same number of issues fell to new lows. It happened for the first time ever.

The number of stocks setting new 52-week highs should normally outnumber those setting new lows (and vice versa,) reflecting some uniformity and clarity of direction. However, a wide dispersion between new highs and lows is not seen as a good market indicator. The high number of stocks making new highs and lows at the same time show that this is a confused market.

Snapchat, the messaging service, has filed to go public in one of the most eagerly anticipated market debuts of 2017. Snapchat is aiming for a valuation of more than $30 billion, which would make it the third-most-valuable technology company at the time of listing, after Alibaba and Facebook.

Snap, the parent company, aims to have shares trading as soon as March. Its last round of financing came in May to the tune of $1.8 billion, which valued the company at around $17.8 billion. Snapchat accounts for 32 percent of social network users in the United States, it’s only getting 2.3 percent of social network ad dollars.

No one questions Snapchat’s ability to engage its users. But turning that engagement into money is another story.

Amazon for the first time has filed lawsuits against counterfeit sellers, after several businesses voiced concern that knockoffs were killing their sales and endangering consumers. Amazon has increasingly relied on third-party sellers to fuel its growth, but opening its website brought with it a greater chance for fake goods to enter its warehouses.

Twitter has launched a counteroffensive against trolls who have been on the attack for too long. The company is expanding its “mute” function, allowing users to block specific content – like words, phrases or conversations – from appearing in their notifications section. The damage to Twitter’s reputation caused by abuse and harassment was reportedly one of the factors that swayed Salesforce against buying the platform earlier this year.

Seeking to ease concerns over its largest ever deal, Microsoft has offered concessions to EU antitrust regulators over its $26 billion bid for LinkedIn. The European Commission, which will rule on the deal by Dec. 6, did not provide details. It’s expected to seek feedback from rivals and customers before deciding whether to accept the concessions, demand more, or open a full investigation.

EU antitrust regulators are set to fine HSBC, JPMorgan and Credit Agricole by the end of the year for rigging financial benchmarks linked to the euro. Charges were levied in May 2014 against the three banks, which denied wrongdoing. Deutsche Bank, RBS and Societe Generale admitted guilt in December 2013, while Barclays avoided a fine because it alerted the European Commission.

Despite years of delays, the SEC has finally approved a plan to introduce a vast surveillance system to oversee trading on the US stock market, in response to the 2010 “Flash Crash.” The creation of a Consolidated Audit Trail will establish a regulatory central database and monitor every trade order, execution, modification and cancellation in real-time.

Boeing will cut 500 jobs over four years and shut two plants as it revamps its defense and space unit. The company also said it would create a new global operations group that would include its defense units in Australia, Saudi Arabia, and UK. Boeing’s defense, space and security business accounted for 31.4% of the plane maker’s total revenue of $23.9 billion in the latest quarter.

During his campaign Donald Trump singled out Ford by name, calling on the American car manufacturer to stop sending jobs to Mexico and threatening to slap tariffs on any cars imported from south of the border. Ford CEO Mark Fields says Ford still intends to move small car production to Mexico, but he hopes to work openly with the new president and Congress.

The Fiesta Bowl has a new sponsor for this year’s game, and not a moment too soon. Six weeks before the Fiesta serves as one of 2016’s two College Football Playoff semifinals, the game is now the PlayStation Fiesta Bowl.

Financial Review

Cookies, Milk, Cannoli

Sinclair Noe — November 15, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 54 = 18,923
SPX + 16 = 2180
NAS + 57 = 5275
10 Y + .02 = 2.24%
OIL + 2.51 = 46.45
GOLD + 6.50 = 1228.50

Another record high for the Dow.

The dollar pulled back from close to 14-year highs, euro zone government bond yields fell and the price of copper tumbled as traders cashed in recent gains. US Treasury yields fell slightly; the carnage in bonds placed on temporary pause but it didn’t last.

Oil prices, which hit three-month lows on Monday, rose after the U.S. Energy Information Administration said U.S. shale oil production was expected to fall in December for the 12th month in 13. Still, the US has more gasoline than it knows what to do with.

Exports have risen above imports for three consecutive weeks as recurring pipeline outages and higher production levels by refiners caused Gulf Coast inventories to grow. The abundance of gasoline pushed Gulf Coast gasoline prices to an eight-month low last week and spurred the longest losing streak since 2012 in futures, making U.S. gasoline an affordable buy.

Valero Energy shipped excess supplies to Canada instead of Colombia and Phillips 66 sent the first gasoline shipment in 16 months to Egypt. Oil trader Mercuria Energy Group is said to be storing a 60,000-ton parcel of gasoline blending components produced in India at an offshore site in the Bahamas. U.S. gasoline exports reached 1.07 million barrels a day in the week ended Nov. 4, the first time the figure has topped 1 million in U.S. Energy Information Administration data going back to 2010.

Retail sales increased 0.8 percent last month, as households bought cars and a wide range of other goods, including building materials – as households cleaned up and made repairs in the wake of Hurricane Matthew. Adding to the report’s bullish tone, September retail sales were revised up to show a 1.0 percent increase instead of the previously reported 0.6 percent rise. The combined September and October sales gain was the largest two-month rise since early 2014.

Sales were up 4.3 percent from a year ago. The strong retail sales suggest that third quarter GDP estimates could be revised higher. It also reinforced views that the Federal Reserve will raise interest rates at its Dec. 13-14 policy meeting.

Manufacturing in New York State improved more than expected in November. The Empire manufacturing index came in at 1.50, above economists’ expectations of -2.50. This was the first time the headline number pulled out of negative territory in four months.

U.S. import prices rose for a second straight month in October as the cost of oil and automobiles increased, but a strong dollar continued to keep underlying imported inflation subdued. The Labor Department said import prices increased 0.5 percent last month after an upwardly revised 0.2 percent gain in September. It was the second straight month of gains.

In the 12 months through October, import prices fell 0.2 percent, the smallest decrease since July 2014, after declining 1.0 percent in September. The strong dollar has resulted in the country importing deflation, helping to hold inflation persistently below the Federal Reserve’s 2 percent target.

At a meeting of almost 200 nations in Morocco to work out ways to implement the 2015 Paris agreement to limit greenhouse gas emissions, U.N. Secretary-General Ban Ki-moon said action on climate change has become “unstoppable” and predicted that President-elect Donald Trump would drop plans to quit the global accord. China worked closely with the US to build momentum ahead of the 2015 Paris Agreement on climate change. The partnership of the two biggest greenhouse gas emitters helped get nearly 200 countries to support the pact at the historic meet in France’s capital.

Trump has called global warming a hoax created by China to give the country an economic advantage, and said he plans to remove the United States from the historic climate agreement; he has appointed noted climate change skeptic Myron Ebell to help lead transition planning for the Environmental Protection Agency.

Beijing is poised to cash in on the goodwill it could earn by taking on leadership in dealing with what for many other governments is one of the most urgent issues on their agenda. Zou Ji, deputy director of the National Centre for Climate Change Strategy and a senior Chinese climate talks negotiator, told Reuters: “China’s influence and voice are likely to increase in global climate governance, which will then spill over into other areas of global governance and increase China’s global standing, power and leadership.”

But before we deal with meaty issues such as the environment or the global supply chain, the Trump Transition team has to get through the actual transition. Former congressman Mike Rogers announced in a statement today he parted ways with President-elect Donald Trump’s transition team. Rogers, who had been working on the transition team for months under Chris Christie, was sidelined as the campaign and transitions merged into one presidential team.

Meanwhile, Paul Ryan unanimously won the nomination of his House Republican colleagues to continue as speaker. Ahead of the vote, Ryan told reporters, “Welcome to the dawn of a new unified Republican government.”

Britain has no overall plan for Brexit and the strategy for leaving the EU might not be agreed for six months due to divisions in Theresa May’s government, that per a leaked memo seen by BBC and The Times. The document, apparently, an internal report by the consultant firm Deloitte – not commissioned by the government, said government departments were discussing more than 500 Brexit-related projects and might require an additional 30,000 civil servants to cope with the immense workload.

The report detailed what is widely understood: The government has not yet finished its internal debate on what kind of relationship it wants with the European Union, nor has it set its priorities for any negotiation; and the cabinet remains divided between those favoring as clean a break with Brussels as possible and those who want to preserve duty-free access to the huge European market.

Alphabet’s Google and Facebook have announced measures aimed at halting the spread of “fake news” on the internet by targeting how some purveyors of phony content make money: advertising. Google said it is working on a policy change to prevent websites that misrepresent content from using its AdSense advertising network, while Facebook updated its advertising policies to spell out that its ban on deceptive and misleading content applies to fake news.

WhatsApp is finally launching video calling for all its one billion users (the service will be fully encrypted). It’s simple – just click the call icon to make a voice call then select “video call” to activate it. A major plus for WhatsApp’s video calling is cross-platform support, unlike FaceTime, which only works with Apple devices, and Google Duo, which isn’t compatible with older versions of iOS.

Close but no cigar… Reynolds American has rejected British American Tobacco’s $47 billion takeover bid, but B.A.T. may be willing to up its offer. More M&A? Estee Lauder is buying millennials-focused makeup brand Too Faced for $1.45 billion and Regency Centers has agreed to acquire Equity One for about $5 billion, creating the largest shopping center REIT by market cap.

General Electric said its software unit bought ServiceMax, a cloud-based provider of software used in inventory and workforce management, for $915 million. GE said the deal was part of GE Digital’s strategy to advance its “Industrial Internet” vision.

Warren Buffett is loading up on airlines. A 13-F filed on Monday showed Buffett’s Berkshire Hathaway amassed holdings in American Airlines, Delta Air Lines, Southwest, and United Continental. Buffett wouldn’t say why he’s now investing in a sector that in the past he’s labeled a “death trap” for investors. He’s been down on airlines since getting burned on a USAir Group investment in 1989. But Warren has always been a fan of buying at “stupid cheap” levels, and that probably explains the purchases.

George Soros’s hedge fund Soros Fund Management bought stakes in Google’s holding company Alphabet and Netflix in the third quarter, per a regulatory filing on Monday. The hedge fund also reported ownership of Biogen, Hewlett Packard Enterprise and Priceline Group at the end of September. During the same period, Soros liquidated its shares of Disney, General Motors, Hershey, Anthem, Delta Airlines, Monsanto, and Pandora.

David Einhorn’s Greenlight Capital bought Calpine and US Steel, and trimmed stakes in Apple and GM. David Tepper’s Appaloosa hedge fund took new stakes in Apple, Yahoo, Bank of America and Facebook, while dumping shares of 21^st Century Fox.

The head of the SEC is stepping down. Securities and Exchange Commission Chair Mary Jo White announced that she will leave her post at the end of the Obama administration.

Home Depot reported third-quarter profit and sales that beat analysts’ estimates. Home Depot said the number of customer transactions rose 2.4 percent in the third quarter. Customers also spent 3 percent more on average per transaction, which was the strongest in two years. The company also raised its full-year earnings forecast. Housing data for September had also suggested that overall residential construction may rise again in the current quarter.

Financial Review

Like a Bird on a Wire

Sinclair Noe — November 11, 2016

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

Subscribe: iTunes | Android | RSS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Not exactly draining the swamp.

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

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

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

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

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

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

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

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

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

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

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

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

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

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