Financial Review

Earth Day

Sinclair Noe — April 22, 2016

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DOW + 21 = 18,003
SPX + 0.10 = 2091
NAS – 39 = 4906
10 Y + .02 = 1.89%
OIL + .55 = 43.75
GOLD – 15.80 = 1233.20

Most of the session, stocks were in negative territory, and as expected, Alphabet and Microsoft kept the Nasdaq in the red. The stock market hit a wall today. After a rally that pushed the Dow above 18,000 and the S&P 500 above 2100 – close to record high, we have now hit resistance.

And we are about to move into May. Remember the old wisdom: sell in May and go away. For the week, the Dow added 0.6 percent, the S&P 500 gained 0.5 percent and the Nasdaq lost 0.6 percent. Oil gained about 11% on the week.

Investors withdrew $7.3 billion from stocks in the week to April 20, the largest outflows in nine weeks, while continuing to shovel money into corporate and emerging market debt. The equity redemptions were led by $4.2 billion of outflows from U.S. stocks and $2.6 billion from Japan.

Caterpillar reported first-quarter earnings that were weaker than forecast, and lowered its expectations for the rest of the year. The company warned in March that its sales and earnings would drop amid low commodity prices, weak demand and the strong dollar.

McDonald’s reported first-quarter earnings of $1.23 per share on $5.90 billion in revenue; beating top line and bottom line estimates. McDonald’s introduced all-day breakfast at its U.S. restaurants in October. The move boosted sales last quarter and appears to be a factor in the Golden Arches’ earnings beat.

General Electric posted an operating profit and higher revenue in the first quarter, compared to a year earlier, but profit fell short of Wall Street’s expectations. GE technically posted a net loss of $98 million in the first quarter, up from a loss of $13.6 billion, although it recorded a profit of $210 million from continuing operations. The company is selling off a substantial portion of its GE Capital unit as it refocuses its efforts on its industrial businesses.

American Airlines said it was disappointed with its first-quarter revenue. Passenger revenue for each seat flown a mile, a benchmark gauge for airlines, will continue falling all year. Still, first-quarter profit topped analysts’ expectations as tumbling jet fuel prices helped reduce operating costs.

The first tech IPO of 2016 is already a disappointment. Dell’s spinoff SecureWorks priced its initial public offering at $14 per share. This was below the $15.50 to $17.50 range that the company was hoping for. The pricing gives the cyber-security firm a market cap of about $1.13 billion. SecureWorks will trade on the Nasdaq under the ticker ‘SCWX.’ Opened at $14, closed at $14.

Looking to return to profitability, Sears Holdings is closing 68 Kmart stores and 10 Sears stores in late July. The company says that, together with $1.2 billion in debt financing raised earlier this month – to provide capital to execute its transformation and meet its financial obligations – it believes it has taken important steps toward its 2016 objectives. Liquidation sales are expected to start in the coming days.

SunEdison is vowing to press ahead with plans to build solar projects across India, despite filing for Chapter 11 on Thursday. The bankruptcy excluded India, the clean-power giant’s largest market outside the US.

Volkswagen has struck an agreement with the Justice Department to either repair or repurchase approximately 500,000 cars in the US, as part of the reparations for its emissions-cheating scandal. Lawyers in the case are still negotiating details. Volkswagen estimates the cost of the scandal has escalated to more than $18 billion, more than double the amount the company had previously set aside

More emissions trouble… Daimler reported net profit dropped 32% in the quarter, but that was overshadowed by news that the German automaker was reviewing its emissions certification process.

Leaders from 170 nations gathered today in New York for the formal signing of the climate change accord reached in Paris four months ago. The event, at the United Nations headquarters, coincided with Earth Day and marked the largest number of countries ever to sign an international agreement in a single day.

The goal of the climate accord is to keep global temperatures “well below” 2-degrees Celsius increase and “to pursue efforts to limit the temperature increase to 1.5-degrees Celsius above preindustrial levels”. By signing the accord today, leaders from China, Brazil, France, Congo, Italy, Morocco and other nations affirmed that climate change is indeed real and vowed to address it.

Signing the accord is not the same as “joining” it. For it to become law, at least 55 countries representing at least 55% of global emissions have to formally join it by ratifying or approving it within their national governments. There is no fixed timeline for this to happen, but at a minimum it is expected to take several months.

The United States and China, which represent about 40% of all emissions, have said they intend to join this year. Different countries have different ways of approving the accord. The United States is among the countries that will enter it through executive action. China’s centralized government is expected to approve it quickly. The European Union, which accounts for about 12%, has met delays in its effort.

The stated goal of the accord is to keep global temperatures well below 2 degrees Celsius, or 3.6 degrees Fahrenheit, above preindustrial levels. That is a level scientists have said could avert the most damaging effects of climate change. Yet other scientists say 2 degrees is too much, prompting a continuing effort to strengthen the goal to 1.5 degrees. But that climate accord might not be enough. The US has said it will reduce its greenhouse gas emissions by 26% to 28% below its 2005 level by 2025, but the plans currently in place fall short of that target. Still, things are starting to change.

The growth in demand for coal has been dropping. Several countries are suspending coal production, or have announced their intention to go coal-free, including China, as have several US states. President Obama announced in January that he would end most new coal leasing on public lands, but his Clean Power Plan to reduce emissions from power plants was temporarily stayed by the Supreme Court in February while a lower court considers a challenge by some states and industries that say the Environmental Protection Agency lacks the authority to enforce it.

Still, the Paris climate accord has accelerated some of the trends that were evident going in. Last year the world spent a record high of $329 billion investing in renewable energy, with more than half coming from developing countries; keep in mind the increase in investment happened while oil prices were crashing, and also as prices for solar photovoltaics were dropping.

Moreover, 40 countries have adopted or are planning carbon pricing, and 28 countries are undertaking energy subsidy reforms, helped by lower oil prices. Also, more than 1,000 major companies and investors have indicated they support the carbon pricing approach. The issuance of “green bonds” for sustainable infrastructure has tripled to $37 billion during the past year.

Countries, companies, academic institutions, and others have begun divesting from fossil fuels, and turning to clean energy.  JPMorgan, for example, has decided against further financing coal mining projects, and the Rockefeller Family Fund with a long and profitable history of fossil fuel investments, announced last month that it was getting out. Valuation procedures often now include reviewing a company’s environmental impact, including its investment in clean energy.

More than 200 religious leaders gathered in New York this week to say they support the climate change accord negotiated in Paris last week and they want it to be put into effect quickly. They released a statement to the General Assembly of the UN, basically stating that the Earth is a gift, not just a commodity; that we need to consider the long-term protection of life, not just short-term economic gain; and environmental stewardship is a fundamental moral and religious value shared by traditions across the world.

The Paris agreement spurs countries to increase their goals over time. The next target is in 2018. The response to climate change is happening, and that is an irrefutable fact. In the very near future the marketplace for energy will change. The Bank of England and World Bank have warned of the risks to the global economy of climate change and the G20 has asked the international Financial Stability Board to investigate the issue.

In January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016. A new study, published in the peer-reviewed journal Nature Climate Change, used economic modelling to estimate the impact of unchecked climate change. It found that in that scenario, the assets were effectively overvalued today by $2.5 trillion, but that there was a 1% chance that the overvaluation could be as high as $24 trillion.

If action is taken to tackle climate change, the study found the financial losses would be reduced overall, but that other assets such as fossil fuel companies would lose value. Scientists have shown that most of the coal, oil and gas reserves such companies own will have to stay in the ground if the global rise in temperature is to be kept under 2C. The total stock market capitalization of fossil fuel companies today is about $5 trillion.

In other words, there is no scenario in which the risk to financial assets are unaffected by climate change. There will be winners and losers. Fortunes will be lost; fortunes will be made. And while climate change is a huge story for science, and nature, and religion. This is, quite simply, the biggest financial story in the world.

Financial Review

Canoe Trips on Mars

Sinclair Noe — September 28, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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