Financial Review

Heading into the Holiday

Sinclair Noe — June 29, 2017

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DOW – 167 = 21,287
SPX – 20 = 2419
NAS – 90 = 6144
RUT – 9 = 1416
10 Y + .05 = 2.27%
OIL + .12 = 44.86
GOLD – 3.40 = 1246.40
BITCOIN – 0.21% = 2556.09 USD
ETHEREUM – 4.42% = 289.77

We had a nice trend so far, this year. The stock market has been moving forward in small, steady gains. Volatility has been low, almost imperceptible. The markets just kept moving higher. When we have had a pullback, it was followed the next day by a rally, even if there was no conviction.

That was the case this week. Down on Tuesday, back up on Wednesday. Today throws a wrench in the pattern, with the S&P 500 and the Dow industrials suffering their worst daily percentage drops in about six weeks. The tech sector was the worst performing group today. There’s a lot more volatility in tech this month and that’s in part due to stretched P/Es.

At this point, it’s just a couple of down days, and we are heading into a long holiday weekend, a good time to take profits off the table and enjoy a barbeque without worries. Still, valuations are high and it’s one of the longest bull markets in history. Bull markets don’t last forever.

June has not been kind to the FAANG stocks, – Facebook, Apple, Amazon, Netflix, and Google, which were market leaders and then hit a down draft. There is no question the FAANGs have become pricey. The market caps are so huge they dominate the indexes. But markets can stay exuberant and irrational for a very long time. And this is not the first time we have seen a sell-off in the FAANGs, only to watch them move higher.

Today, money was rotating from tech and into the financials after the big banks passed the Fed stress tests and now can offer bigger dividends and buybacks. JPMorgan, the nation’s largest lender, said it’s boosting its quarterly dividend 12 percent and may increase share repurchases to $19.4 billion over the next 12 months — roughly 90 percent more than in the prior year.

Citigroup plans to double its dividend and may purchase up to $15.6 billion. Bank of America hiked its dividend 60 percent and will buy back up to $12 billion. Shares of all three rose at least 2 percent in early trading in New York. They, along with Wells Fargo and Morgan Stanley, may collectively buy as much as $64 billion in stock. Goldman Sachs has yet to make an announcement.

The Commerce Department posted its third and sort of final revision to first quarter Gross Domestic Product, and the revision came in higher; up 0.2% to 1.4%, instead of the 1.2% reported last month. The government had pegged first-quarter growth at a paltry 0.7% in its first estimate in April.

First-quarter economic growth was boosted by an upward revision to consumer spending, which accounts for more than two-thirds of U.S. economic activity. Consumer spending rose at a 1.1 percent pace, the weakest reading since the second quarter of 2013 but almost double the 0.6 percent reported last month. A sustained average growth rate of 3 percent has not been achieved in the United States since the 1990s.

The U.S. economy has grown an average 2 percent since 2000 and it expanded only 1.6 percent in 2016, which was the weakest growth in five years. Initial signs that economic growth re-accelerated sharply in the second quarter have also faltered in the face of recent disappointing data on retail sales, manufacturing production and inflation. Housing data has also been mixed.

Exports for the period were revised to show a 7.0 percent rate of growth from the previously reported 5.8 percent. Exports in the fourth quarter fell at a rate of 4.5 percent. Business spending on equipment was revised to show it increasing at a rate of 7.8 percent in the January-March period rather than the 7.2 percent previously estimated.

The government also reported that corporate profits after tax with inventory valuation and capital consumption adjustments fell at an annual rate of 2.7 percent in the first quarter after rising at a 2.3 percent pace in the prior three months.

The Bank of International Settlements, or BIS, is the central bank for the central bankers of the world. According the BIS’s annual report, the global economy faces four risks, “(i) financial cycle risks for financial stability; (ii) risks to consumption growth from household debt; (iii) risks to investment from weak productivity growth and high corporate debt; and (iv) risks from rising protectionism.”

From the report:
“These risks may appear independent, but they are not. For instance, policy tightening to contain an inflation spurt could trigger, or amplify, a financial bust in the more vulnerable countries… Indeed, an overarching issue is the global economy’s sensitivity to higher interest rates given the continued accumulation of debt in relation to GDP, complicating the policy normalization process.

“As another example, a withdrawal into trade protectionism could spark financial strains and make higher inflation more likely. And the emergence of systemic financial strains yet again, or simply much slower growth, could heighten the protectionist threat beyond critical levels.”

Of all those risks, protectionism is the only one a government can fully control. A government can choose to engage in global free market capitalism, or it can aggressively try to distort the market by blocking competing goods and services. It can either work amicably with neighbors and allies, or it can create tension felt across the globe.

A revised version of President Trump’s travel ban approved by the Supreme Court is set to take effect at 8:00 p.m. ET on Thursday. The justices implemented an exemption for travelers from six-Muslim majority countries with a “bona fide relationship” to people or entities in the US.

The Trump administration has adopted a narrow definition of “bona fide relationship.” According to guidelines the Trump administration has sent to US embassies and consulates, only a family member who is a parent, spouse, child, adult son or daughter, son-in-law, daughter-in-law, or sibling of US residents will be allowed to enter the country.

Fiancées, grandparents, grandchildren, aunts, uncles, nieces, nephews, cousins, and other extended family members are not considered to have “close familial ties”. And if you think this might lead to mass confusion, well…

The Congressional Budget Office has come out with a long-term analysis of Senate Republicans’ health-care legislation found that the bill would slash spending on Medicaid by about 35 percent over the next 20 years. The analysis follows a 10-year look by the agency released earlier this week.

The new CBO estimate doesn’t include a projection of how many people would be covered under the Republican bill. The CBO estimate shows that states would be forced to make trade-offs in how to allocate their far more limited funds.

Drugstore chain Walgreens Boots Alliance scrapped its deal to buy Rite Aid after failing to win antitrust approval, but said it would instead buy nearly half of the smaller rival’s U.S. stores for $5.18 billion. Rite Aid’s shares plunged about 28 percent to $2.85, while Walgreens shares were up 1 percent at $77.97.

Walgreens also ended a related deal to sell as many as 1,200 Rite Aid stores to Fred’s, sending Fred’s shares down 19 percent. Walgreens’ plan to buy 2,186 Rite Aid stores accomplishes many of the same goals as the merger – including eliminating Rite Aid as a rival – but does so in a way that makes it harder for the FTC to take the companies to court to stop the transaction.

The FTC will review the new deal. Walgreens also reported better-than-expected profit and sales for the third quarter, helped by a rise in prescription volumes in its U.S. pharmacy business. The company also authorized a $5 billion buyback program and raised the lower end of its full-year profit forecast.

Nike reported quarterly revenue and profit that topped Street estimates as the company kept a lid on costs and saw greater demand in Western Europe, China and emerging markets. Shares of the Dow component were up nearly 3 percent.

Britain intends to subject Rupert Murdoch’s takeover of European pay-TV group Sky to a lengthy in-depth investigation after finding that Twenty-First Century Fox’s $15 billion deal risks giving the media mogul too much power over the news agenda.

The proposed entity would have the third largest total reach of any news provider – lower only than the BBC and ITN – and would, uniquely, span news coverage on television, radio, in newspapers and online. Regulators will make a final decision on July 14, giving Fox two weeks to address concerns.

Blue Apron shares debuted today. The IPO stumbled but did not fall. Blue Apron’s 30-million share offering was priced at $10 per share late on Wednesday, after the company slashed its valuation expectations by a third. Shares gained 1% in the first day of trading.

Blue Apron spent roughly 18 percent of its $795 million revenue in 2016 on marketing, posting a net loss of $54 million. It has also faced steep costs of building out delivery infrastructure for fresh food. The biggest problem for Blue Apron might be Amazon-Whole Foods, which looks well-positioned to offer competition.

This should be a very interesting Fourth of July celebration in Las Vegas. Recreational marijuana becomes legal to buy Saturday in Nevada. That doesn’t mean it can be smoked everywhere only in private homes, yards or porches.

It’s prohibited in casinos, bars, restaurants, parks, concerts and on any federal property. You can’t walk down the street, or the Strip, smoking a joint. Also, prohibited in all forms at airports. No driving while stoned. And what’s smoked in Vegas stays in Vegas.

Financial Review

Ban Blowback

Sinclair Noe — January 30, 2017

Podcast: Play in new window | Download (Duration: 12:13 — 5.6MB)

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DOW – 122 = 19,971
SPX – 13 = 2280
NAS – 47 = 5613
RUT – 18 = 1352
10 Y un = 2.48%
OIL – .50 = 52.67
GOLD + 3.70 = 1196.00

On Saturday, a federal judge in New York temporarily barred the US from deporting detainees from the countries covered in an executive order restricting travel to the US from 7 countries. The White House also clarified its policy regarding green card holders, stating the travel ban would not apply to those with legal permanent residence in the United States.

Several businesses and trade organizations responded to the travel ban over the weekend. Many airlines, caught off-guard by the sudden policy change, scrambled to follow the new directive while attending to their customers. Shares of airline companies were knocked lower. American – 4.3%, Delta – 4%, United – 3.6%

Delta Air Lines suffered a systems failure. The airline grounded US domestic flights on Sunday evening as it dealt with a systems failure. Early this morning, Delta tweeted: “UPDATE: Systems return to normal; some flight cancellations linger.” Delta said it canceled about 170 flights on Sunday, and approximately 110 flights have been cancelled today. The airline also warned that a few additional cancellations are possible.

Starbucks CEO Howard Schultz said the company planned to hire 10,000 refugees in 75 countries. Brian Chesky, a founder of Airbnb, wrote on Twitter that his company, would provide “free housing to refugees and anyone not allowed in the U.S.” The New York taxi drivers’ union joined a protest at Kennedy International Airport on Friday night. Drivers temporarily halted pickups at the airport.

Google has created a $4 million crisis fund and recalled staff to the US, UBER will establish a $3 million defense fund and LYFT said it would donate $1 million. And while the ban met with opposition from most Silicon Valley tech companies, it was also opposed by the likes of General Electric and Ford Motor.

Also, Morgan Stanley, JPMorgan Chase, Citigroup and Goldman Sachs all came out in opposition to the ban and told their employees they will provide support to individuals and families affected by immigration restrictions.

President Trump also made  phone calls to world leaders on Saturday as he began shaping his new administration’s foreign policy. A conversation with Vladimir Putin discussed combating terrorism, confronting ISIS, the Ukraine crisis and the Iran nuclear deal, but the topic of easing U.S. sanctions against Russia over its 2014 annexation of Crimea didn’t come up. Trump is expected to announce his Supreme Court nominee tomorrow.

This morning Trump signed an executive order to cut regulations. The measure will expand regulatory review with the goal of revoking two regulations for every new one put forward. Under the order, federal agencies will propose rules they want to drop and the White House will review them.

It sets a budget each year for what new regulations would cost the economy, companies and employers. For fiscal 2017, it gives a budget of $0 for new regulations. The Office of Management and Budget will have discretion to give the agencies guidance. There are some 80,000 pages in the Federal Register, where all federal rules are published; but to repeal a regulation, a federal agency must go through the same notice and comment rule making process used to formulate new regulations. And that generally takes at least a year.

This week’s economic calendar includes the December Jobs Report on Friday. Consensus estimates call for 170,000 new jobs last month, with the unemployment rate holding below 5%. The Federal Reserve is almost certain to stand pat and leave U.S. interest rates unchanged when FOMC policymakers meet Tuesday and Wednesday.

The central bank wants to see more evidence of faster growth, and perhaps get a more detailed look at some of Trump’s plans, before committing to another increase in borrowing costs for consumers and small businesses. What we know is that the economy is solid but growth is slowing. Friday’s first assessment of fourth quarter GDP came in at 1.9% for the quarter, with the economy rolling along at 1.6% growth for calendar year 2016.

Remember that the Fed has been unusually accommodative over the past 8 years, with near zero interest rates and QE 1,2,3 and Operation Twist; and all this helped Wall Street, even if it didn’t offer much relief to Main Street. And now the Fed and other central banks are tightening at the same time the economy is losing steam.

So, just as stocks have been hitting record highs, we are now faced with headwinds in the form of less Fed stimulus, higher borrowing costs and an economy that is slowing. The aggregate revenue for the 30 companies in the Dow is $2.69 trillion. Revenues are lower than they were in 2011. Yet investors push the price of the Dow north of 20,000? Why are so many content to pay 2016 prices for 4.4 % less revenue than occurred in 2011?

Consumer spending rose 0.5% last month; that’s the biggest increase in spending in December since the last month of 2009. The increase in spending outpaced the 0.3% gain in individual incomes. As a result, the U.S. savings rate fell 0.2 percentage points to 5.4%, marking the lowest level since early 2014.

Overall, consumer spending rose a solid 3.8% in 2016 after a 3.5% advance in 2015.  The PCE inflation index has climbed 1.6% in the past year, the fastest 12-month gain since September 2014.

The PCE index rose 0.2% in December. The core rate that strips out food and energy edged 0.1%. The core rate was flat at 1.7% over the past 12 months.

The National Association of Realtors’ index of pending home sales jumped 1.6% to 109. That’s 0.3% higher than a year ago. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Supply is the big question for 2017, NAR noted in a release. The group is concerned that tighter inventory will continue to push home prices higher even as borrowing costs rise. In December, there was more inventory of higher-priced homes than in other price ranges, a sign that more affordable properties are being snatched up quickly.

The number of active US rigs drilling for oil climbed for a second consecutive week, feeding expectations that growth in domestic output may outweigh efforts by other major crude producers to ease global supplies. Baker Hughes reported on Friday a weekly rise of 15 in U.S. oil drilling rigs to total 566 and government data released last week showed a rise of 17,000 barrels a day in total domestic crude production for the week ended Jan. 20.

After selecting Citigroup as its financial adviser, Puerto Rico’s federal oversight board has voted to give the commonwealth more time to submit a fiscal turnaround plan and restructure $70 billion in debt without fear of lawsuits. A stay on litigation over missed payments will be moved to May 1 from Feb. 15, while a deadline for a fiscal blueprint will be extended to Feb. 28 from Jan. 31.

Volkswagen is the world’s biggest automaker. Despite a scandal involving tampering with diesel emission software, VW sold 10.31 million vehicles worldwide in 2016, surpassing Toyota, which had held the title for four straight years.

Japanese trust banks are preparing to sue Toshiba Corp over its 2015 accounting scandal. The news follows an announcement by the struggling conglomerate on Friday that it will sell a minority stake in its memory chip business to raise funds and that its overseas nuclear division – the cause of its current woes – was now under review.

Fitbit said it expects an adjusted loss per share of 51 cents to a loss of 56 cents, after previously announcing guidance of a profit of 14 cents to 18 cents. To reduce expenses, the company said it plans to cut about 110 employees or 6% of its workforce, which is expected to cost the company $4 million in the first quarter of 2017.  FIT down 16%.

Shares of Tempur Sealy dropped 28% and hit a three-year low in very-active trade, after the mattress seller said it terminated all contracts with key customer Mattress Firm.

Walgreens Boots Alliance and Rite Aid’s giant drugstore merger got smaller today after the companies said they would cut the value of the deal, may divest more stores to satisfy antitrust regulators and will extend the deadline by which the takeover will be completed. Walgreens will now pay $6.50 to $7 a share for Rite Aid (depending on how many stores Walgreens must divest), that’s down from the $9 a share. The new agreement also includes a six-month extension to July 31. Rite Aid down 17%.

If you haven’t signed up for health insurance through the Affordable Care Act, you are running out of time. You have until Tuesday, Jan. 31, to apply for 2017 coverage through state and federal marketplaces. More than 11.5 million people have signed up for insurance through the exchanges as of Jan. 10. And even though President Trump has talked about repealing the ACA, it is still the law for 2017, and whatever happens in 2018 is still a mystery.

It’s the Year of the Fire Rooster! Chinese markets will remain closed for most of the week as Lunar New Year celebrations kick off for much of Asia. The People’s Bank of China pumped roughly $165 billion into domestic money markets last week via its routine operations as consumers prepared for shopping sprees and to hand out red packets filled with fresh notes to friends and relatives. Markets will reopen on Friday.

Congress Reaches Tentative Budget Deal, CB Consumer Confidence Falls

Financial Review

Barn Cleaning

Sinclair Noe — October 27, 2015

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DOW – 41 = 17,581
SPX – 5 = 2065
NAS – 4 = 5030
10 YR YLD – .03 = 2.03%
OIL – .78 = 43.20
GOLD + 4.10 = 1168.00
SILV + .03 = 15.97

Congressional leaders have reached a tentative budget deal with the White House in a breakthrough that would set government funding levels for the next two years and extend the nation’s debt limit through 2017. The bill would raise the spending caps set in place in 2011 that would result in deep cuts to both defense and non-defense spending, called sequestration.  This deal would provide $80 billion in sequester relief.

The bipartisan agreement would include long-term entitlement reforms to the Social Security Disability Insurance (SSDI) program, the first major reform to Social Security since 1983.  The Social Security Disability Insurance program would be amended, in part to tighten and standardize eligibility requirements that now vary by state. That change was projected to save the government $5 billion. It also prevents a spike in Medicare B premiums for millions of seniors. The increases would have been caused by the rare absence of a cost-of-living increase in Social Security benefits, because of unusually low inflation.

The deal still needs Congressional approval, but for outgoing House Speaker John Boehner this was a matter of wrapping up unfinished business before his departure, or as Boehner described it “cleaning the barn.” Representative Paul Ryan, the likely successor to House Speaker said he would likely vote for the deal but he said “the whole process stinks.”

The U.S. plans to sell millions of barrels of crude oil from its Strategic Petroleum Reserve from 2018 until 2025 to pay for spending in that budget bill. The proposed sale equates to more than 8% of the 695 million barrels of reserves. Sales are due to start in 2018 at an annual rate of 5 million barrels, rising to 10 million by 2023 and totaling 58 million barrels by the end of the period.

Also, the two-year budget deal produces savings from one of the most popular programs in farm country, federally subsidized crop insurance, and farm state lawmakers are furious. Senators and House members said they weren’t notified of the cut before the deal was struck. Budget-writers in Washington have long eyed the crop insurance program, which costs more than $9 billion annually, as a pot of available money. But farm-state lawmakers have fought to protect it, saying it makes more sense than other farm subsidies since it pays out when farmers suffer losses.

Meanwhile, 62 Republicans have joined 184 Democrats to pass a “discharge petition” to renew the Export-Import Bank’s charter. Monday’s vote means that, barring any other last-minute obstacles, a vote on reauthorizing the bank should pass the House shortly. The bill would then go to the Senate, where it awaits an uncertain fate.

The U.S. Federal Reserve kicks off its two day monetary policy meeting today, with their decision to be announced at 11 AM tomorrow. There’s virtually no chance that the Fed will hike interest rates this week, certainly not if they want to claim they are data dependent. Figures on U.S. jobs, retail sales, manufacturing, inventories and exports all disappointed, while new jobless claims and housing data — for the most part — have showed continued strength. The challenge for policy makers will be to keep their options open for a move this year, while acknowledging weak data that could tilt the tone of the statement toward liftoff in 2016.We had another batch of tepid data today.

Orders for long-lasting or durable goods fell a seasonally adjusted 1.2% in September; a sign of widespread softness in the manufacturing sector. The auto industry was one of the few bright spots again, with orders snapping back 1.8% after a decline in August. Orders for core capital goods – a proxy for business investment – declined 0.3% to mark the second straight drop.

The Conference Board said that consumer confidence in October fell to a reading of 97.6, down from a revised 102.6 in September.

Service sector output growth fell to a nine-month low in October. The Markit Flash U.S. services purchasing managers index fell to 54.4 in October from 55.1 in September, which means it’s still above the 50 mark indicating growth. Markit attributed the slowdown to slowing new business growth and more cautious spending patterns.

Home prices rose 0.4% in August to stretch year-on-year gains to 5.1%, according to the S&P/Case-Shiller 20-city composite. Eighteen out of 20 cities reported monthly gains. That’s not unusual for the summer, and after seasonal adjustment, five were down, 11 were up, and four were unchanged. Portland and Denver had the strongest monthly gains, while only fast-growing San Francisco saw a decline, of 0.1%. Phoenix posted a monthly gain of 0.6%, and a 4.9% gain for the past 12 months.

After the closing bell, Apple reported higher-than-expected quarterly revenue and profit as sales of iPhones increased 35%, driven by the launch of the 6S and 6S Plus models last month. Apple’s sales in China nearly doubled to $12.52 billion, accounting for nearly a quarter of its total revenue. Apple’s net income for the quarter rose to $11.1 billion, or $1.96 per share, from $8.4 billion, or $1.42 per share, a year earlier. Net sales rose about 22% to $51.50 billion.

Apple offered holiday guidance that is a little light of expectations, about 4% growth at the high end of the range, but remember that Apple never seems to miss guidance. Apple shares were up about 2.5% in after-hours trade.

Meanwhile, Chase is launching its own competitor to Apple Pay that will allow consumers to pay retailers using their smartphones in stores, and it has already won the endorsement of a major group of companies. For merchants, it’s promising fixed pricing and no additional fees for network, processing or fraud liability, and will work not via NFP (tap-and-pay) but by using existing gift-card scanners. Chase Pay will be available mid-2016.

Also, after the closing bell, Twitter reported earnings. Revenue was up 58% to $569 million, beating estimates. Earnings per share were 10 cents, twice as good as estimates.  Twitter missed estimates on the number of users they added over the quarter, only 4 million new Twitterers. Shares down 11%.

Despite a slowdown in China, Alibaba, the Internet giant, experienced a surge in revenue in the latest quarter, driven by strong growth in mobile. Alibaba reported that sales rose 32 percent in the latest quarter to $3.5 billion. Earnings per share increased 30 percent.

Ford Motor reports third-quarter profit that rose sharply but still fell short of estimates as higher taxes reduced the payoff from its aluminum-bodied F-Series pickups. Earnings excluding some items were 45 cents a share, compared with the 47-cent average of estimates. Net income more than doubled to $1.9 billion from $835 million a year earlier when Ford was changing over to the new F-150 pickup. Shares were down 5% today. Go figure.

Novartis has agreed to pay $390 million to resolve a lawsuit claiming the company paid kickbacks to increase sales of several prescription medicines. Novartis reported that third quarter net income fell 42% to $1.8 billion.

Pfizer reported better-than-expected third-quarter results and raised its full-year outlook. Earnings fell to $2.13 billion, or 34 cents a share, from $2.67 billion, or 42 cents a share, in the same period a year ago.

BP’s earnings in the third quarter were nearly cut in half compared to a year earlier, as low crude prices and charges related to its 2010 Gulf of Mexico spill weighed on its financial performance.

United Parcel Service beat third-quarter profit expectations, but missed on sales. A decline in international package revenue offset increases in domestic and supply chain and freight revenue.

IBM fell to its lowest price in five years after disclosing that the Securities and Exchange Commission is conducting an investigation related to the technology seller’s revenue recognition. IBM last week cut its full-year profit forecast and reported its 14th straight quarter of shrinking sales. No doubt another stock buyback announcement is in the offing.

Walgreens Boots Alliance will acquire Rite Aid; at least that was the rumor floating about today. That was enough to send Rite Aid share prices up 39%, which would value the company at about $8.9 billion. The actual announcement came after the close of trade, and it values the company at $9.4 billion. Still, it sounds like somebody leaked some important news.

Starwood Hotels & Resorts Worldwide jumped the most in six years after the Wall Street Journal reported that at least three big Chinese companies are competing to buy the company. Chinese investors have been pretty aggressive in the hotel market over the last year or so. Starwood has some pretty powerful brands, and they announced in April that it was exploring
strategic options including a possible sale.

Walmart has applied to the FAA for permission to test drones for home delivery, curbside pickup and checking warehouse inventories, a sign it seeks to compete with Amazon in using drones to fill and deliver online orders. A Walmart spokesperson said: “There is a Walmart within five miles of 70% of the U.S. population, which creates some unique and interesting possibilities for serving customers with drones.”

In about one month, Black Friday will descend on American retailers and shoppers will be whipped into a frenzy. One retailer thinks there are better ways to spend the day after Thanksgiving. Outdoor sporting goods company REI will shut its stores on Black Friday, no online sales either, and it is paying employees to take the day off.

The CEO of REI issued a statement: “Black Friday is the perfect time to remind ourselves of the essential truth that life is richer, more connected and complete when you choose to spend it outside. We’re closing our doors, paying our employees to get out there, and inviting America to OptOutside with us because we love great gear, but we are even more passionate about the experiences it unlocks.”

Financial Review

While the Getting is Good

Sinclair Noe — April 9, 2015

 

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DOW + 56 = 17958
SPX + 9 = 2091
NAS + 23 = 4974
10 YR YLD + .06 = 1.96%
OIL + .37 = 50.79
GOLD – 8.70 = 1194.50
SILV – .36 = 16.25

Initial claims for unemployment benefits increased 14,000 to 281,000 in the week ending April 4^th.  Over the past 4 weeks, jobless claims have averaged 282,500 a week; the lowest level in 15 years. While companies are maintaining headcounts, job listings also have climbed. Openings rose to 5.1 million in February, the most since January 2001, according to the JOLTS report on Tuesday.

Wholesale inventories rose 0.3% in February as wholesale sales fell 0.2%, perhaps a sign that companies experienced less demand in late winter that could cause them to temporarily scale back production.

In a televised speech today, Iran’s  supreme leader, the Ayatollah Ali Khamenei said Tehran would agree to a final nuclear accord with the US and five other nations only if all sanctions over its disputed nuclear work were lifted.  In remarks apparently meant to keep hardline loyalists on side, he warned about the “devilish” intentions of the United States. Meanwhile, Iran’s oil minister, speaking today in China said that OPEC would “coordinate” to accommodate Iran’s return to oil markets without causing a price crash.

Samsung Electronics expects to ship record numbers of its new Galaxy S6 smartphone after it goes on sale tomorrow, but will have problems fulfilling demand for the curved-edged version due to difficulties in manufacturing the screens. The hope is that the launch of the flagship device will help spark a turnaround at Samsung following a slump in earnings over the past year or so.

American Airlines and US Airways received their single operating certificate from the Federal Aviation Administration on Wednesday, an important step in the integration of the two airlines. The merger between the airlines closed in December 2013, but the carrier still operated separate American and US Airways flights. Passengers will not see much change. Flights will still be operated under the American and US Airways brands until the carriers merge their reservation and passenger ticketing systems this year. Once that is done, the US Airways brand, ticket counters and website will change to American.

Walgreens will close 200 of its 8,232 US drugstores. The company will also reorganize corporate and field operations and revamp its technology, which along with the store closings will help cut an additional $500 million in costs by the end of fiscal 2017. That would extend a $1 billion cost-cutting initiative announced in August.

Yesterday we talked about the idea that the prospect of higher rates has been pushing consumers away from revolving debt, like credit cards, even as they take on more non-revolving debt, such as car loans; it might also be leading to more borrowers locking in low rates of floating rate mortgages. And mergers and acquisitions are back in a big way. Yesterday was a $100 billion dollar day for M&A.  It started with a big deal in the energy sector; Royal Dutch Shell’s $70 billion acquisition of BG Group of Britain signals that the kinds of mega-energy-mergers that reshaped the industry in the late 1990s may be due for a revival. Mylan’s $29 billion approach to Perrigo, meanwhile, underscores just how red-hot consolidation in health care continues to be. Both of the generic drug makers had done their own deals in just the last two years.

This afternoon, news that Blackstone Group and Wells Fargo are nearing a deal to buy a real estate portfolio from General Electric worth as much as $30 billion. It could be one of the largest real estate deals since Blackstone acquired Equity Office Properties Trust for $39 billion in 2007 at the height of the last property boom. Commercial values in the US have since reached records as investors from around the globe seek places to put money at a time of near-zero interest rates. Unloading the assets would further Chief Executive Officer Jeffrey Immelt’s goal of shrinking GE Capital, whose lack of access to credit during the 2008 financial crisis put the parent company at risk. GE Capital has been disposing billions of dollars in holdings, including foreign bank stakes, while Immelt works to bulk up the industrial side of GE’s business.

Bankers and hedge fund managers are licking their chops as a spree of M&A, fueled by the expectation that a multi-year run of cheap money may be coming to an end is expected to push transactions that could top record value amounts.  Deal value has already surged to $1 trillion for 2015. A projected $3.7 trillion worth of deals this year would be second only to 2007, when all M&A surpassed the $4 trillion mark. Part of that comes on growing sentiment that, whenever the Federal Reserve finally decides to increase rates, this won’t be coming until after summer; so get the deals done while the getting is good. Data housed by S&P Capital IQ says seven of the 10 biggest M&A transactions in the wake of the financial crisis have all been announced within the last 16 months. What’s more, S&P Capital data shows, the year-to-date announced deal value is, right now, as high as it has ever been, including the bellwether year 2007. That also means that deals are attracting a premium.

It does not mean that every deal will work out. Altera stock dropped after reports that talks to be bought by chipmaker Intel Corp. have fallen apart. Intel has been on the hunt for growth as it faces a slowdown in the market for PCs that forced a $1 billion cut in its first-quarter sales forecast last month. Altera shares had jumped 28 percent on March 27 after reports of the talks.

In his annual letter to shareholders, Jamie Dimon, the chief of JPMorgan Chase, warns “there will be another crisis” – and the market reaction could be even more volatile, because regulations are now tougher; but the next crisis won’t be caused by the banks because there are so many regulations in place that they would not be the likely cause of a meltdown.  He argued the crackdown on the financial sector, added to more-stringent requirements for capital and liquidity, will hamper banks’ capacity to act as a buffer against shocks in financial markets. Of course, not having enough funds set aside for an emergency didn’t work out so well in 2008. Then he goes on to say the bank is in a better position than before and is much more prepared to handle a downturn. If it all sounds a bit confused; not really; Dimon doesn’t like regulations; JPMorgan share price has not been great and Dimon blames regulations.

Remember that this was an annual letter to shareholders, which means it is basically a 39 page sales brochure. There were plenty of nice charts and graphs, and everything seemed to move from the bottom left side of the page to the upper right side of the page. There is some revisionist history when it came to the acquisitions of Bear Stearns and WaMu, see page 19 of the letter.

Dimon also blamed legal and regulatory costs for weighing on the firm’s share price, writing: “While we acknowledge that our P/E ratio is lower than many of our competitors’ ratio, one must ask why. I believe our stock price has been hurt by higher legal and regulatory costs and continues to be depressed due to future uncertainty regarding both.” The letter mentions continuing foreign-exchange settlement negotiations as an area of uncertainty. Dimon calls for some serious policy discussion about the way regulators regulate, and he thinks the legal costs will “diminish” over time; and they would probably diminish faster if he can change the regulatory policies. He didn’t provide a chart on legal costs, but if he did, the numbers for the past five years would have been about $32 billion; which is bigger than all the credit they extended to small business in 2014, and bigger than the bank’s net income last year. Dimon said he expects the firm’s legal costs to “normalize” in 2016. Deep in the footnotes you can find that the bank is still looking at nearly $6 billion in legal expenses. Which is actually about the average paid for legal expenses in the past few years, but I don’t know if that means it is normal.

The European Central Bank bolstered its emergency funding for Greece’s stricken banks, as Athens made good on its promise to pay back the International Monetary Fund, averting an unprecedented default. Having threatened to deliberately miss a €448m loan repayment to the Fund without a guarantee of fresh bail-out cash, Athens sent its latest payment this morning. Christine Lagarde, the director of the IMF confirmed the payment while speaking in Washington, saying: “Yes, I got my money back.”

The Greek government has warned its paymasters it would run out of funds to make its loan obligations and continue to pay out a €1.7bn monthly social security bill without a release of bail-out cash. A two-month stalemate in Greece’s bail-out negotiations has seen capital flee the country’s banks, which have repeatedly hit the limit on the emergency cash. The ECB’s latest move will just cover the €1.1bn that was withdrawn from banks from March 30 to April 8.

Greece is currently negotiating a short-term bailout extension that it doesn’t really want, offered by European institutions which don’t trust the Greek government and approved by other governments that are running out of patience. That’s the bottom line. Athens currently has until about April 15 to present a completed reform list to its creditors.

But even if Greece gets the bailout deal when European finance ministers meet on April 24 (which isn’t assured), we’ll be back in the same place in about two months. Then, the government isn’t going to want another extension. It’s going to want the major debt deal it promised to deliver when it won the election. A deal to reduce debt is actually a good idea, even if Germany doesn’t want it. Greece’s far-left government is correct about the country’s debt burden; it’s completely unsustainable under the current plans. Greece is about to get some relief for a few months. After that, Athens, Frankfurt and Brussels go back to the brutal negotiations.

Tuesday, August 05, 2014 - Go Firgure

Financial Review with Sinclair Noe

DOW – 139 = 16,429
SPX – 18 = 1920
NAS – 31 = 4352
10 YR YLD - .01 = 2.48%
OIL - .86 = 97.43
GOLD + .40 = 1289.60
SILV - .39 = 19.84

We start with a couple of economic reports: The Institute for Supply Management’s services index rose to 58.7 last month, the highest level since December 2005, from 56.0 in June. A reading above 50 indicates expansion. Orders jumped to a 9 year high. A sub-index gauging services industry employment also rose as did order backlogs, but export order growth moderated.

In a separate report, the Commerce Department said orders for manufactured goods increased 1.1% in June, more than reversing May's 0.6% decline. Orders for non-defense capital goods excluding aircraft hit a record high; this might indicate a renewal in business confidence and equipment spending plans. Factory orders rose across all categories, with bookings for electrical equipment, appliances and components recording their largest gain since November 2010. In another sign of strength, unfilled orders saw their largest rise in seven months.

So, a couple of good reports on the economy, and the stock market tumbles. Go figure.

The situation in Ukraine appears headed to a tipping point. Ukrainian forces have been pushing back against Russian backed separatists in eastern Ukraine. Meanwhile, Russia is massing troops on the border. Some 20,000 troops are now stationed about 50 kilometers from the border, closer than they had been stationed previously. In April, Russian President Vladimir Putin had briefly deployed about 40,000 troops at the border. The latest troops include Russian Elite forces, armored brigades, artillery and anti-aircraft units. Poland’s foreign minister thinks Russia is preparing to invade Ukraine; he didn’t flat out say an invasion was imminent, just that the Russians are getting ready.

Putin has ordered his government to prepare retaliatory measures against US and European economic sanctions imposed on Russia. We don’t know what Putin means by retaliatory measures. Russia may limit or ban flights over Siberia by European carriers bound for Asia as a response to sanctions levied against the country. Russia has also called for the UN Security Council to hold an emergency meeting on the humanitarian situation in Ukraine. It isn’t a humanitarian situation when the pro-Russian rebels shoot a plane full of civilians out of the sky, but it is a humanitarian situation when the rebels start getting their butts kicked.

One thing that hasn’t happened yet is a disruption in oil and gas supplies from Russia to Europe. Russia derives half its tax revenue from the oil sector; Europe relies on Russian supplies. As the weather changes and winter sets in, Europe’s resolve, which has already been soft, will weaken further. For now, energy prices are moving lower, despite violence in Eastern Europe, Libya, and Iraq. Global oil demand has been running below supply over the last few months, building up a glut of high quality crude oil in the West African, European and Asian markets. The US Energy Information Administration reported last week that gasoline supplies rose by 400,000 barrels at a time when market bulls hoped to see a reduction. Oil prices are at their lowest levels since February.

Yesterday we told you about the collapse of Portugal’s Banco Espirito Santo; today we report on the fallout. The French bank Credit Agricole held a 14% stake in Banco Espirito Santo and two seats on its board. Crédit Agricole's ties to the Portuguese group go back to 1986 when it helped the Espírito Santo Group set up Banco Internacional de Crédito. Over the years, the French bank raised its stake in the Portuguese group, as part of a larger international expansion plan in southern Europe.The French bankers say they never detected any “slip or difficulties” at Banco Espirito Santo. The collapse of the Portuguese bank nearly wiped out all the second quarter profits at the French bank.

Standard& Poors today announced that it was dropping its 10-year estimate of annual GDP growth in the US from 2.8% to 2.5%, which over a decade amounts to a pretty significant reduction. Why are they cutting the growth forecast? Here’s what S&P says: "Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population... At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold...."

S&P analysts say it basically boils down to the idea that high levels of income inequality cause more affluent households to save more of their increasing income rather than spend it, and as that cash is withdrawn the economy slows. At the other end of the economic scale, as income declines, households go into debt to try to maintain their standard of living, a strategy that is simply unsustainable over time. And when the unsustainable ceases to be sustained, you get a breakdown, much like that of 2008. In fact, S&P notes, as income inequality increases, an economic system becomes more and more vulnerable to a boom-and-bust cycle. It cites research demonstrating that income distribution plays a much more important role in sustaining long-term economic growth than any other factor.

Although the issue of income inequality is often addressed in moral terms, S&P concludes, at its foundation it is really an economic issue, saying: "A rising tide lifts all boats … but a lifeboat carrying a few, surrounded by many treading water, risks capsizing."

Earnings reporting season:

Retailer Target cut its second quarter earnings estimates due to higher promotions and more discounting; they also lost about $148 million related to that data breach, where hackers gained access to customer credit card info; that’s a small number compared to total sales at Target, but it apparently proved a costly distraction. Morgan Stanley reduced its second quarter earnings by 2 cents per share due to increased legal settlements. Disney posted better than expected earnings; shares moved just a smidge higher in after-hours trading. Cablevision cut back on its promotions and subscriber losses doubled in the second quarter. First Solar posted profits that missed estimates by a wide margin; they blamed project delays. Groupon fell in after-hours trading after posting a second quarter loss nearly triple the loss from a year ago. Zillow announced a second quarter loss, even as revenue increased; and they raised their full year revenue outlook. This was Zillow’s first quarterly report since they announced a $3.5 billion deal to acquire rival Trulia.

Time Warner and Fox both report earnings tomorrow, but the big news came today. Fox withdrew its offer for Time Warner. Game over. When Fox made the hostile bid, its stock dropped and Time’s stock soared; meanwhile Time’s board and management opposed the takeover and refused to discuss the offer. Now that Murdoch has dangled a huge windfall in front of Time Warner shareholders, only to take it away, one imagines that some of those shareholders may soon be venting their frustration to Time Warner's board and management.

Several America corporations have found a loophole in the tax code, which allows for a company to acquire a partial interest in a foreign company, and then change the address of its headquarters in order to evade US taxes; it’s called an inversion. There have been 22 such deals since 2011, most have been in the pharmaceutical industry, where overseas sales generate significant income that cannot be brought back to the US without suffering a major tax hit; but there have also been inversion deals in the media, consumer and manufacturing sectors. Some of those deals have collapsed, amid disputes over price and political scrutiny.

Walgreens was next on the list; closing in on a deal to buy the 55% of British pharmacy retailer, Alliance Boots; Walgreens already owns 45% of Alliance Boots. Walgreens will buy out Alliance Boots, but it won’t move its corporate headquarters abroad and it will not change its corporate citizenship to a lower tax country. They say they won’t do the inversion move because they would have had to renegotiate an existing agreement, and Alliance Boots wasn’t willing. There may also have been some political pressure.  President Obama has denounced tax inversions as unpatriotic and has urged Congress to stop them; which is like asking a Kleenex to stop a freight train. So, now the Treasury Department says there may be an executive order to provide a partial administrative fix, you know, until Congress gets back from its 5 week vacation.

As Ebola spreads, pharmaceutical giants are sitting this one out. That's mainly because treating a disease that affects a relatively small number of people who typically don’t have a lot of money doesn’t offer a great return on investment. It's unclear how much profit it would take to get Big Pharma interested in finding an Ebola cure, but right now such a project could well be a money-loser. Instead, small biotech firms, academics and government agencies are leading the search for an Ebola cure. And in a twist of fate, they may have found a way to treat the virus: tobacco.

A tiny San Diego-based company provided an experimental Ebola treatment for two Americans infected with the deadly virus in Liberia. The biotechnology drug, produced with tobacco plants, appears to be working. Mapp Biopharmaceutical produced an experimental drug called ZMapp, an antibody that had been tested only on infected animals; now it’s been given to human patients, and it seems to make a big difference. The antibody work came out of research projects funded more than a decade ago by the U.S. Army to develop treatments and vaccines against potential bio-warfare agents, such as the Ebola virus.

The tobacco plant production system was developed because it was a method that could produce antibodies rapidly in the event of an emergency. To produce therapeutic proteins inside a tobacco plant, genes for the desired antibodies are fused to genes for a natural tobacco virus. The tobacco plants are then infected with this new artificial virus. The infection results in the production of antibodies inside the plant. The plant is eventually ground up and the antibody is extracted. The whole process takes a matter of weeks.