Financial Review

Peace Out

Sinclair Noe — February 17, 2017

DOW + 4.28 = 20,624
SPX + 3.94 = 2351
NAS + 23.68 = 5839
RUT + .73 = 1399
10 Y – .03 = 2.42%
OIL + .04 = 53.37
GOLD – 5.60 = 1236.00

Starting Presidents’ Day a bit early, so today’s review is a bit on the light side. Thanks for your patience.

US stocks have spent the past week setting new record after new record. The S&P 500 and the Nasdaq posted 5 consecutive record high sessions before slipping yesterday. The Dow managed to hang on for a small gain and a sixth straight record.  European markets are sinking in early trading. The majority of Asian markets closed the week with small losses.

Samsung’s chairman is in jail. Jay Y. Lee will be indicted tomorrow, per South Korea’s special prosecutor, after he was arrested over his alleged role in the nation’s widening corruption scandal. It throws the firm into a leadership crisis for the first time in its corporate history, and is a huge blow to Samsung Electronics, the key unit where Lee serves as vice chairman. Other Samsung executives may also be arrested.

All that remains of Hanjin Shipping will be liquidated following a South Korean court order which pulled the plug on the company. Previously the world’s seventh-largest container shipper, Hanjin applied for court receivership in late August after its creditor banks halted further support.

Eurozone finance ministers and the International Monetary Fund seem likely to miss next week’s deadline to agree on a €7-billion-euro bailout for Greece. The two sides remain at loggerheads over an IMF demand that Athens be granted debt relief and easier surplus targets, meaning a pact may now be months away. While Greece won’t face bankruptcy trouble until July, Eurozone officials were racing to strike a deal so the drama wouldn’t be forced into the upcoming Dutch and French elections.

Complications in restructuring Saudi Arabia’s state-owned oil company and segregating its finances from those of the government are slowing the march toward what is expected to be the biggest IPO in history. The Wall Street Journal reports the listing of a minority stake in Saudi Aramco is now unlikely to happen until late 2018 at the earliest.

S&P Global said it could cut its rating of Toshiba credit by several notches should the Japanese firm receive financial support that includes debt restructuring.

Unilever has rejected a proposed $143 billion-dollar merger offer from Kraft Heinz, saying the bid was too low and it fundamentally undervalues the company.

Mmm, Mmm, NOT good. Campbells Soup said earnings for the latest quarter fell to $205 million, or 33 cents per share, from $414 million, or 85 cents per share in the year-earlier period. Revenue also fell. Topline was a miss; bottom line was a beat.

Deere & Company posted better than expected earnings, even as revenue slipped. Agriculture and turf and construction and forestry sales topped expectations. Deere shares have rallied about 20% in the past 3 months.

Wells Fargo will give investors a peek into its efforts to rebound from its fake account scandal when it releases monthly customer account numbers and holds a conference call later today. The bank has reported a dramatic decline in consumer checking account openings in recent months. It’s now looking to shut more than 400 branches.

The Justice Department has joined a 2011 lawsuit accusing UnitedHealth of gaming the Medicare program and fraudulently collecting hundreds of millions of dollars by claiming patients were sicker than they really were.

The five-year investigation, unsealed yesterday says UnitedHealth, the nation’s largest Medicare Advantage insurer, allegedly collected payments from false claims that it treated patients for conditions they didn’t have, for more severe conditions than they had, conditions that had already been treated, or diagnoses that didn’t meet the requirements for risk adjustment.

General Motors chief Mary Barra visited Opel’s German headquarters and gave assurances the GM unit would remain independent and current management would remain in place in any deal with Peugeot parent PSA Group. The two companies previously said they were in talks regarding a PSA purchase of GM’s European car operations.

AT&T opened its unlimited wireless data plan to all customers, a few days after a similar move by Verizon. Previously, AT&T had only offered such plans to customers of its DirecTV service. The move leaves all four national wireless carriers, including T-Mobile and Sprint, offering similar unlimited plans and leaving price and network claims as the major differences.

A muzak-streaming service launched its global offensive. The Spotify-backed “Soundtrack Your Brand” plans to push into global markets with its own music catalog and $22 million in fresh, outside funding. It already has deals to pipe its music into McDonald’s and Tag Heuer stores, and is now going up against Canada’s Mood Media, the market leader in commercial background music.

Amazon was awarded a patent earlier this week for a system in which a package would be “forcefully” propelled from a drone, and would be helped to land by measures including a parachute.

SpaceX launches a Falcon 9 rocket on Saturday. The mission, taking off from the Kennedy Space Center in Florida, will carry a Dragon supply ship to the International Space Station.

US markets will be closed Monday in observance of Presidents Day.

Financial Review

Rarely the First

Sinclair Noe — January 9, 2017

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DOW – 76 = 19,887
SPX – 8 = 2268
NAS + 10 = 5531 (record close)
RUT – 9 = 1357
10 Y – .04 = 2.38%
OIL – 2.16 = 52.71
GOLD + 9.20 = 1182.40

Oil prices were sharply lower this morning, as Iran upped exports and U.S. drillers increased activity again, moves undermining efforts by international producers to curb global oversupply.

Treasuries rose with gold today as the risk-on trade wobbled. Treasury yields sit lower than where they were before the Federal Reserve raised interest rates last month, while the dollar remained near a 14-year high.

The Dow, S&P 500, and Nasdaq all hit intraday highs on Friday – the Dow came within a fraction of a point of 20,000. Earnings for the S&P 500 are expected to increase by 6.1 percent in Q4, with the S&P financial sector see having the biggest gains, up 15.7 percent, per estimates from Thomson Reuters. Fourth quarter earnings season ramps up Friday, when JPMorgan Chase, Bank of America, and Wells Fargo report. Financial stocks have gained more than 30 percent since Election Day.

This is a busy week for Federal Reserve policymakers. Today, Atlanta Fed President Dennis Lockhart said the recovery from the economic crisis is “largely done,” and officials should now turn to addressing longer-term issues like how to boost productivity, raise investment, and try to counter trends that are holding down potential growth.

Lockhart said, the economy is near full employment, inflation is close to the Fed’s two percent goal, and the United States appears locked in for steady growth of around 2 percent annually. Lockhart did not address rate hikes directly, though he said he expected any future increases to come at a “gradual” pace.

Boston Fed President Eric Rosengren at a speech in Boston this morning said, “economic circumstances have evolved and now imply the need for a different stance of monetary policy,” Including “somewhat more regular” increases in short-term interest rates.

Rosengren said that what happens with fiscal policy will play a role in the exact timing of rate hikes. The commentary from Fed policymakers has taken a decidedly hawkish tone, and after a yearlong delay between rate hikes, I’m starting to get the feeling they will be more aggressive this year.

The British pound was tumbling to two-month lows this morning after U.K. Prime Minister Theresa May said in her first interview of the year that she was not interested in keeping “bits of membership” of the European Union in the execution of Brexit. The one priority that May has marked out – limits on EU migration – implies that British companies will face new barriers in selling goods and services to hundreds of millions of consumers in Europe.

The prime minister’s position runs counter to rules that require all members of Europe’s single trading market to allow free movement of people across their borders. UK Foreign Secretary Boris Johnson was in Washington today to meet with some of Donald Trump’s top advisers as Britain looks to build ties with the incoming administration ahead of the country’s withdrawal from the European Union.

Nine confirmation hearings begin on Capitol Hill this week, starting tomorrow with lawmakers questioning Attorney General-designate Sen. Jeff Sessions and Homeland Security Secretary-designate retired Gen. John Kelly. The lineup also includes five hearings on Wednesday, including: Rex Tillerson, the nominee for secretary of state; Betsy DeVos, for education secretary; CIA director designate Mike Pompeo; commerce pick Wilbur Ross; and Labor nominee Andrew Puzder; the same day the Senate is expected to vote on a step toward repealing much of the Affordable Care Act, and Wednesday marks Trump’s first news conference since the election.

State-run Chinese tabloid Global Times warned President-elect Donald Trump that China would “take revenge” if he reneged on the one-China policy, only hours after Taiwan’s president made a controversial stopover in Houston.

McDonald’s unloads its business in China. The fast-food giant sold 20-year rights to most of its business in Hong Kong and China to Citic and Carlyle Group for up to $2.1 billion. About one-third of McDonald’s 2,400 restaurants in mainland China and Hong Kong are franchised; this deal will franchise the rest of them. The new partnership plans to add 1,500 in the two areas over the next five years.

Yum China, spun off by its U.S. parent last year, is relaunching the Taco Bell brand in the country, after a near-decade-long absence, opening the first store in Shanghai today.

Fiat Chrysler will invest $1 billion in 2 manufacturing plants in the Midwest, which will add 2,000 new jobs in the U.S. and expand its sports utility and truck lineup. Fiat Chrysler will retool factories in Ohio and Michigan to build new Jeep sport utility vehicles, including a pickup truck, and potentially move production of a Ram heavy-duty pickup truck to Michigan from Mexico. The announcement comes days after Ford decided to scrap a plan to build a facility in Mexico, instead opting to invest in a plant in Michigan.

General Motors CEO Mary Barra says GM  has no plans to change where the automaker produces small cars because of Trump’s Twitter threat of a border tax.

Self-driving cars are a big theme at the North American International Auto Show, which kicked off yesterday in Detroit. Alphabet’s Waymo revealed that it has built all of its sensor hardware in-house and was ready to offer its autonomous-drive technology in “millions” of vehicles at a competitive price. A package of LIDAR sensors and radar, which used to run approximately $75,000 a few years ago, has fallen by more than 90%.

The FBI has arrested Volkswagen’s regulatory compliance executive, Oliver Schmidt, who faces conspiracy charges linked to Dieselgate. The arrest comes as VW nears a deal to pay the Department of Justice more than $3 billion to settle the emissions scandal’s criminal investigation, on top of the nearly $18 billion the automaker will pay to resolve civil claims.

Japan’s Takeda Pharmaceutical will buy cancer drug maker Ariad Pharmaceuticals in a deal valued at $5.2 billion, to beef up its oncology pipeline. Takeda has agreed to pay $24 in cash for each Ariad share, a premium of about 75 percent to its Friday close.

United Health Group is buying Surgical Care Affiliates, an outpatient surgery chain for $2.3 billion. The deal is expected to close in the first half of this year. Surgical Care Affiliates operates 205 surgical facilities, including specialized hospitals, in partnership with surgeons in 30 states.

Candy maker Mars said it will buy VCA, which makes Whiskas and Pedigree pet food and is also the largest operator of pet hospitals in the country. Price tag $7.7 billion.  Mars became the No. 1 pet food maker in 2014, after buying Procter & Gamble’s pet foods business, known for brands such as Iams and Natura, for $2.9 billion.

HMD Global, the Finnish company that owns the rights to use Nokia’s brand on mobile phones, launched the first new smartphone carrying the iconic handset name since 2014 when Nokia chose to sell its entire handset unit to Microsoft. The new device, Nokia 6, runs on Google’s Android platform and is manufactured by Foxconn. It will be sold exclusively in China for about $246.

IBM is the patent winner, again; that’s a 24-year streak and counting. In 2016, IBM filed 8,088 patents (22 per day; 2,700 related to artificial intelligence, cognitive and cloud computing) granted across its more than 8,500 inventors in 47 states and territories, and 47 countries. Samsung filed the second most patents, a mere 5,518.

Ten years ago, today, Steve Jobs introduced a new device called the iPhone. Jobs took to the Macworld stage and announced that “we’re going to make some history together today.” There were skeptics, including Microsoft CEO Steve Ballmer, who in 2007 said there was “no chance” the iPhone would get “any significant market share.”

Since then Apple has sold more than one billion iPhones, passing its billionth last July. The iPhone has grown to dominate the U.S. smartphone market. Its mobile operating system, iOS, is ranked second globally, behind Alphabet’s Android. And Apple’s market cap has climbed to over $628 billion. Current Apple CEO Tim Cook says the “best is yet to come.”

That remains to be seen. A lot can happen in a very short period of time. Apps, touch screens, voice recognition, fingerprint scanners, selfies; that’s all within the past 10 years. What will the next 10 years bring? Many people say AI is the next wave – computers we can talk to; and right now, Apple does not have a leadership position.

Amazon.com has a hit with the voice-based assistant Alexa. Alphabet’s Google is close behind. Partners with both companies spent several days at the CES tech show in Las Vegas last week introducing a deluge of devices powered by these competing technologies. Apple is working on its own device but it doesn’t have one yet. That doesn’t mean Apple is out of the game though. The history of Apple is rarely about being first—think of the iPod—but becoming dominant through superior design and execution.

Tonight, the Alabama Crimson Tide will take on the Clemson Tigers for the national college football championship – and the winner is: Nike. Last year Nike’s stock was the biggest Dow dog – down 20% – and one of only three in the index to fall in 2016. (Coca-Cola and Disney were the other laggards.)

So far in 2017, Nike is up about 5% and tonight’s championship game is basically a 3-hour ad for Nike. Both Alabama and Clemson have multi-year agreements in place with Nike. The Crimson Tide has an eight-year, $30 million deal that runs out in 2018. Clemson’s agreement with Nike, also for eight years, is worth $23 million and lasts until 2022.

Financial Review

Tug of War

Sinclair Noe — January 19, 2016

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DOW + 27 = 16,016
SPX + 1 = 1881
NAS – 11 = 4476
10 Y un 2.04%
OIL – 1.13 = 28.29
GOLD – 1.30 = 1088.50

Just a reminder that last Friday saw the Dow drop 390 and the S&P too down 41, taking out the August lows of 1867 with an intra-day low of 1857. This morning Wall Street started the session with a bounce, but it didn’t hold; in the afternoon the major averages turned negative; the S&P went back down to test support at 1865. We are seeing an important level of support at 1857 to 1867 on the S&P.

We told you on Friday that we would need to see confirmation in the form of a close below 1867. It did not happen today. The Nasdaq Composite did close below the September low of 4487. The Dow Industrials are still above the August lows off 15,666. You don’t even want to look at charts of the Russell 2000 index or the Dow Transports; they are just ugly.

And then if you move away from Wall Street, the economy doesn’t look too bad: 70 consecutive months of job growth, the unemployment rate at 5%, GDP growth probably around 2% to 2.5% (not great but compared to the rest of the world it looks decent), oil prices falling, which should be a big positive for the largest consumer of energy in the world.

Back on Wall Street, everything we know about everything is reflected in price. And prices have been shocked. Eventually prices will drag down the broader economy or the broader economy will lift prices. Right now, it is a tug of war. In time we will see which side carries the most weight.

Global markets were mainly higher, including Japan, most of Europe and the UK. The Shanghai Composite gained 3.2% today. China’s economy grew at its weakest pace in a quarter of a century last year. Growth for 2015 as a whole hit 6.9 percent after the fourth quarter slowed to 6.8 percent. There was relief in the markets, however, that growth at least matched forecasts, and a growing expectation that the People’s Bank of China would provide further stimulus.

China’s slowdown, along with the slump in commodity prices, prompted the International Monetary Fund to cut its global growth forecasts again on Tuesday, and it said it expected the world’s second-largest economy to see growth of only 6.3 percent in 2016. The IMF expects the global economy to grow at 3.4 percent in 2016 and at 3.6 percent in 2017. The numbers for both the years are 0.2 percentage points less than what IMF had estimated in October.

The International Energy Agency says unseasonably warm weather and rising supply will keep the crude oil market oversupplied until at least late 2016. The IEA left its estimate of growth in global demand for 2016 unchanged from its previous monthly report at around 1.2 million barrels per day.

The US and other major powers have removed sanctions on Iran’s exports after the previously isolated Islamic republic complied with the nuclear deal. According to Reuters, the sanctions removed about 2 million barrels per day of production, dropping Iran’s output to just more than 1 million barrels a day. On Monday, Iran issued an order to increase its production by 500,000 barrels a day.

I’ve talked with you about the idea that oil in the ground might be worth-less at some point in the future. It has happened (much faster than I imagined). Bloomberg reports Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude. It had previously posted a price of negative 50 cents for a barrel.

This is for a low quality of crude that is expensive to refine and it comes from an area where it is expensive to transport, but still this sends a pretty clear message to oil producers to shut down their wells, or at least some of them. Producers outside the US are also feeling pain. The price for Canadian bitumen – the thick, tar-like oil at the center of the debate over the Keystone XL pipeline – fell to $8.35 last week, down from as much as $80 less than two years ago.

Puerto Rico is running out of money faster than expected, leaving an increasing hole in the amount needed to operate and pay back investors. According to an updated fiscal plan, the island now estimates it is $16 billion short of the money it needs to cover debt payments over the next five years, a 15% bigger figure than the one released in September. The gap over 10 years is almost $24 billion, even with planned fiscal adjustments.

Earnings reporting season this week will feature a bunch of the big tech names, including:  IBM, Verizon, SAP and Apple. Netflix and IBM reported after the closing bell today.

Netflix posted fourth-quarter adjusted earnings of 7 cents per share, down from 10 cents a share in the previous year, but they still beat analysts’ estimates of 2 cents. Revenue was $1.8 billion compared to $1.4 billion a year ago. Netflix added 5.5 million total net subscribers in the quarter, up from 4.3 million additions in the previous year, beating expectations. Netflix has been popular, up 124% over the past year.  NFLX up 3.85 today, and in after-hours it gained 7.36 to 107.89.

IBM reported fourth quarter earnings of $4.84 a share on $22.06 billion in revenue; topping estimates for profit and revenue, even though earnings were down 17% from the year earlier period.  IBM’s cloud, analytics, mobile, social and security businesses grew 26 percent to $29 billion in 2015; those units now represent 35 percent of IBM’s total revenue. IBM down 1.92 and then down another .91 in after-hours at 127.20

UnitedHealth earned $1.22 billion in the final three months of the year, down from $1.51 billion in the previous year’s quarter. Earnings totaled $1.40 per share, topping estimates by 3-cents. Total revenue jumped 30 percent to $43.6 billion, beating estimates.

UnitedHealth is struggling to make money on the ACA health exchanges, but they are making up for it with their Optum division where earnings jumped 50% in the quarter. Optum runs the company’s pharmacy benefits management business. UNH up 3%

Johnson & Johnson is planning to cut about 4% to 6% of the global workforce in its medical devices business over the next two years, as part of a restructuring that aims to save $800 million to $1.0 billion by the end of 2018. JNJ gained 50 cents to 97.50.

Although it expects “tougher market conditions” in 2016, Unilever reported fourth-quarter sales that beat estimates amid higher prices for its goods in Latin America. Revenue rose 4.9%, while core operating profit increased 12%. UNL up 3.9%.

Morgan Stanley posted earnings of $908 million, or 39 cents a share. That compares with a loss of $1.6 billion, or 91 cents a share, in a year-earlier period that included a $2.6 billion settlement over the sale of mortgage bonds. Profit and revenue beat estimates. Morgan Stanley previously announced big cuts to their fixed income business; today they announced the cuts will be even deeper. MS up 1.1%

Bank of America said its fourth-quarter profit rose to $3.3 billion, or 28 cents a share. Revenue rose to $19.5 billion. Profit and revenue beat estimates. Bank of America said its provision for credit losses in global banking increased by $264 million in the quarter ended Dec. 31, mainly due to higher energy-related charge-offs and reserve increases for energy exposure. The bank has $21.3 billion in energy-related loans, representing about 2 percent of total loans. BAC down 1.5%.

Already troubled by lawsuits and official investigations, Deutsche Bank is facing another challenge – it’s about to be sued in British court for using high-speed trading software. That lawsuit asserts the lender used a platform known as Autobahn to take advantage of millisecond changes in exchange rates to give clients worse prices than they were entitled to. Deutsche Bank has denied the claims.

WhatsApp is scrapping its subscription fee and will explore other ways to allow businesses to interact with its users (but will not introduce third-party ads) to make up for the lost revenue. The Facebook-owned app had previously charged an annual renewal fee of $0.99 for all users after their first year.

For the third time in roughly a year, Elon Musk’s SpaceX on Sunday failed to successfully land the main part of a spent rocket on a floating ocean platform, although it came pretty close. The booster maneuvered back to its destination as intended, but touched down harder than planned, causing it to tip over and explode. Last month, SpaceX made a successful, first-of-its-kind return of a used booster that hurtled back from space and made a pinpoint touchdown on land without incurring any significant damage.

French carmaker Renault will recall more than 15,000 vehicles to tweak their engines to ensure that they comply with emissions standards. The company committed to the recall after it was found that the filtration system in some of its vehicles did not comply with emission standards under real world conditions. The announcement comes after French investigators raided Renault’s headquarters near Paris earlier this month. French authorities widened their probe following the Volkswagen emissions cheating scandal, and later found discrepancies between real-world tests and lab results in four Renault models.

The world’s political and business leaders, plus the usual smattering of celebrities are heading to Davos, the Swiss Alpine resort where the World Economic Forum’s annual conference begins this evening. The official theme of the 2016 meeting is “mastering the fourth industrial revolution.” In WEF-speak, that means the “fusion of technologies that is blurring the lines between the physical, digital and biological spheres.” Which raise the question: Has anything worthwhile and meaningful ever come out of the World Economic Forum in Davos?

Glenn Frey, the prolific guitarist, singer, songwriter and founding member of the Eagles, died on Monday at age 67. Frey and Don Henley co-founded the Eagles in 1971 in Los Angeles after playing backup for rock singer Linda Ronstadt. The Eagles album, “Their Greatest Hits 1971-1975,” is the second-best-selling record of all time in the United States.