Financial Review

Meh

Sinclair Noe — October 27, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 26 = 18,169
SPX – 6 = 2133
NAS – 34 = 5215
10 Y + .05 = 1.84%
OIL + .44 = 49.62
GOLD + 2.10 = 1240.00

This has been a tough month for global bonds and the selloff continued today. Treasuries tumbled and the dollar rose to a seven-month high amid increasing wagers the Federal Reserve will boost borrowing costs in December. Tomorrow we’ll get the first read on third quarter GDP, and it is expected to show a notable improvement after a sluggish first half. Traders sent bonds toward their worst month since 2014.

A few days ago we told you that Qualcomm was in talks with NXP Semiconductor; today they announced a deal. Qualcomm will acquire NXP for about $38 billion, or $47 billion including debt. Qualcomm will pay $110 a share in cash for each NXP share outstanding, which represents an 11% premium to Wednesday’s closing price.

Qualcomm has been a leader in chips for smartphones, a market which is starting to cool off. NXP, based in the Netherlands, became the world’s biggest maker of automotive electronics after it bought U.S.-based Freescale Semiconductor for about $12 billion last December. NXP provides chips for the Internet of Things, which includes everything from refrigerators to cars. By 2020, some 21 billion IoT devices will be in use worldwide, up from fewer than 5 billion last year.

This is the busy time for earnings reports; 60 S&P 500 companies report today; one-third of S&P companies are reporting this week.

After the closing bell, Alphabet (the parent company of Google) reported revenue rose 20% to $22.4 billion from $18.6 billion a year earlier. Net income rose to $5.06 billion, or $7.25 per Class A and B share and Class C capital stock, from $3.98 billion, or $5.73 per share, a year earlier. Beating estimates on the top and bottom lines.

Google’s Other Revenue, which includes the company’s increasingly important cloud business, jumped 38.8 percent after rising 33 percent in the second quarter. Alphabet’s Other Bets generated revenue of $197 million, but reported an operating loss of $865 million. Other Bets includes broadband business Google Fiber, home automation products Nest, self-driving cars as well as X, the company’s research facility that works on “moon shot” ventures. Alphabet also announced it would repurchase about $7 billion of its Class C stock. Shares moved a little higher in after-hours trade.

For years, Amazon.com would disappoint on earnings or more likely, losses. Then in the first quarter, Amazon posted strong earnings, and that set the bar high. Today Amazon did not clear that bar. The company posted EPS of $0.30, short of expectations for $0.82. Revenue came in at $32.7 billion, in line with estimates for $32.6.  Amazon Web Services (“AWS”) continues to be an important driver for the company, with third quarter revenue for the segment coming in at $3.2 billion, up 54%. Amazon issued fourth quarter guidance at the low range of estimates. Amazon is down almost 5% in after-hours trade.

Ford Motor’s net income fell 56% in the third quarter as safety-recall expenses and softer sales in the U.S. market cut profits. Ford reported net income of nearly $1 billion for the quarter, down from $2.2 billion recorded in the same year-ago period. Operating profit equaled 26 cents a share, beating estimates of 20 cents.

Volkswagen made €2.3-billion-euro in net profit in the third quarter after a massive loss a year ago over its emissions cheating scandal. VW also raised its full-year guidance for group revenue despite setting aside an additional €400-million-euro relating to Diesel-gate.

Deutsche Bank reported a third-quarter profit on lower than estimated litigation and restructuring costs, but set aside an additional €501-million-euro as it works to settle a mortgage probe with the Department of Justice. Net income came in at €256-million-euro compared with a €6-billion-euro loss in the year-earlier period.

The Deutsche Bank earnings call was one of the more interesting of this quarter. CEO John Cryan admitted that the bank is struggling, saying: “…we know that when our name is in the headlines for the wrong reasons, the phone doesn’t ring as frequently…. So, expect some revenue attrition.”

Samsung’s mobile division profit and global market share both went up in smoke in the third quarter as the damage from the company’s recalls and cancellation of its flagship Galaxy Note 7 began to take shape. Samsung’s revenue slid 7% on year to $42 billion and operating income tumbled 30% to $4.6 billion. Those were the bright points in Samsung’s report, believe it or not — Samsung’s mobile division reported operating income dropped a staggering 96% from the same quarter last year.

Nokia’s quarterly profit fell less than expected, boosted by resilient broadband demand and a patent licensing payment from Samsung.

Twitter reported slower revenue growth – even as revenue increased 8% and beat estimates. The company earned 13 cents per share, beating the average estimate of 9 cents. Twitter said it will cut 9 percent of its global workforce to keep costs down. After the report, Twitter announced it was shutting down Vine, the 6 second video looping app. We should all be thankful.

Aetna said revenue and profit rose in its latest quarter, topping estimates.

F5 Networks jumped nearly 10 percent and was the biggest gainer on the S&P, after its quarterly revenue beat estimates.

Belgium reached a deal with the country’s southern region of Wallonia to approve a trade agreement between the European Union and Canada, ending a deadlock that delayed the accord’s signature. The approval removes the last major obstacle for the EU and Canada to move ahead with one of the world’s most ambitious and far-reaching trade pacts. Wallonia’s stance had tied the hands of the Belgian federal government, which had been in favor of the agreement but needed the endorsement of regional authorities. The other 27 EU nations support the deal.

The UK economy grew in the three months after the Brexit vote. Britain appears to be shrugging off Brexit worries: its GDP grew 0.5% in the third quarter—analysts expected 0.3%—but it was down from 0.7% in the second quarter.

The number of people who applied for unemployment benefits last week fell by 3,000 to 258,000. Initial claims have been below the key 300,000 threshold for 86 straight weeks. The last time that happened was in 1970.

The National Association of Realtors’ pending home sales index hit 110.0, thanks to surging demand in the West and South. The index is now 2.4% higher than it was a year ago.

Orders for long-lasting goods made in the U.S. fell slightly in September, a weak performance owing largely to lower demand for military hardware and computers. Excluding defense spending, durable-goods orders rose 0.7%. Customers ordered more heavy machinery, new autos and commercial planes. Orders for autos climbed 1.2% and bookings for commercial aircraft accelerated by 12.5%.

Although the level of overall demand was decent enough, orders for core capital goods that are viewed as a key measure of business investment sank by the largest amount since February; down 1.2% last month and down 4.1% over the past year.

United Parcel Service said it ordered 14 Boeing 747-8 cargo jets, a deal worth $5.3 billion at list prices that potentially breathes new life into an aircraft Boeing had warned it might cancel. The UPS order, which includes options for 14 more of the hump-backed planes, suggests the freight company expects an upturn in air cargo after years of anemic growth.

 IPO news… A Shanghai-based logistics company tied to China’s online-shopping industry has raised $1.4 billion in the largest U.S. initial public offering so far this year. ZTO Express, which delivers parcels for businesses including Chinese e-commerce giants Alibaba and JD.com, priced its 72 million shares at $19.50 each, giving it a market value of more than $12 billion. The company trades under the ticker symbol “ZTO.” And the first day hit with a thud, down about 15%.

Apple unveiled its updated MacBook Pro today with a fingerprint reader and faster ports; it’s thinner, lighter, faster, brighter, etc. The Mac line accounted for about 11 percent of Apple sales in the just-finished fiscal year. Also, they came out with their big idea for TV and it’s an app. Try to curb your enthusiasm. The app will get you shows and movies from all your TV apps that you’re signed into and will show them on all your devices. And that’s all well and good but nothing seems earth shattering.

Exxon Mobil and accounting firm PwC must turn over documents related to the oil major’s representations of the impact of climate change on its business and assets, according to a New York Supreme Court ruling. New York Attorney General Eric Schneiderman’s office asked the court in August to compel PwC to hand over the filings, but Exxon refused, citing accountant-client privilege.

Not only are Obamacare premiums on the rise for 2017, deductibles will also be getting more expensive, according to an analysis by insurance comparison site HealthPocket. Deductibles for individuals enrolled in the lowest-priced Obamacare health plans will average more than $6,000 next year, the first time that threshold has been cracked in the three years that Affordable Care Act marketplaces have been operating.

The latest National Weather Service forecast predicts wide variation in temperature and precipitation this winter across the U.S., capping off a year of record-breaking heat. Residents of the southern part of the U.S. from Los Angeles to Atlanta should expect above-average temperatures and below-average precipitation, while people in northern states from Washington to the Midwest should expect below-average temperatures and above-average precipitation. For Arizona, expect warm and dry, with no end in sight for the drought.

Financial Review

Wallonia World

Sinclair Noe — October 21, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 16 = 18,145
SPX – 0.18 = 2141
NAS + 15 = 5257
10 Y – .01 = 1.74
OIL + .57 = 51.00
GOLD + .50 = 1266.70

The Dow and S&P 500 ended well off their lows of the session, while the Nasdaq rallied and all three indexes ended a string of back-to-back weekly declines. For the week, the Dow advanced 0.04%, the S&P gained 0.38% and the Nasdaq picked up 0.83%.

And we are seeing higher oil prices even as the dollar continues to strengthen, back to the highest level since February; the Dollar Index topped 98. A higher dollar should affect commodity prices as well as US exports. The US is likely to embark on raising interest rates in December while others such as England and the EU are still discussing easing monetary policies. The CME FedWatch Page now puts the odds of a rate hike in December at slightly over 74%.

There are no economic reports on today’s calendar but we do have speeches from a couple of Federal Reserve officials; Fed Governor Daniel Tarullo is kind of the Fed’s point person on regulation; he spoke today at the Columbia Law School and said the Fed may introduce new more measures to test big banks’ capital and liquidity levels are strong enough to safeguard the financial system.

San Francisco Federal Reserve Bank President John Williams called for gradual rate hikes “sooner than later,” saying that waiting too long to do so could end up forcing sharp rate hikes that could choke economic growth. Williams is not a voting member of the FOMC this year. For Williams, raising rates soon and gradually has the best chance of keeping the economy growing without letting inflation get out of control, a circumstance that would require aggressive rate increases that could tip the economy into recession.

Last week Fed Chair Janet Yellen suggested that running a “high pressure economy” may be the best way to reverse damage from the financial crisis. That phrase was taken to mean a willingness to overshoot on the Fed’s inflation and employment goals for some time.

British American Tobacco has offered to acquire the 58% in Reynolds American it doesn’t already own for $47 billion in cash and shares. BAT’s proposal is worth $56.50 a share, or 20% above Reynold’s closing price of $47.17 yesterday. The deal would bring together Newport, Kent and Pall Mall cigarettes under one umbrella and create the world’s largest publicly traded tobacco company.

Qualcomm might finally put its cash to work. CNBC reports they have agreed in a handshake deal that Qualcomm will pay $110 a share for NXP Semiconductors, in a deal that would be close to $40 billion. Qualcomm has about $30 billion in cash, most of which is overseas, so acquiring a foreign company is attractive. NXP works on chips for cars, security and the internet of things, all emerging business for Qualcomm, which specializes in wireless technology like mobile phones.

AT&T and Time Warner are reportedly discussing a merger. The two sides held informal talks to discuss potential business opportunities, including a merger. Time Warner has a stock market value of nearly $73 billion. AT&T is much larger, with a market value of $231 billion. There seems to be a theme for wireless carriers to diversify by acquiring companies that offer content. And if you are experiencing a little déjà vu right now, it means you are probably old enough to remember the last time that Time Warner was one-half of a massive merger, a catastrophically ill-fated marriage to AOL 16 years ago.

At the time, AOL was an Internet juggernaut at the peak of the dot-com bubble, with a market cap of $224 billion and an aggressive appetite for growth. The deal made a certain sort of sense: Buying Time Warner would give AOL access to the old media company’s deep well of movies, TV programming and news, while Time Warner would be vaulted into the future of online distribution. “Synergy” was the buzzword. The deal went wrong; very, very wrong. AOL Time Warner had to write off $99 billion in goodwill. Just sayin.

Yesterday we told you the Wall Street Journal was planning major revisions to the newspaper, including combining sections. Today, word the paper is telling all news employees worldwide they are eligible for an “enhanced voluntary severance benefit” – that’s the first step; the next step is “involuntary layoffs”.

The earnings season is picking up pace as investors gauge the strength of corporations amid uneven economic growth. More than 80 percent of the S&P 500 Index’s companies that have released third-quarter results so far beat expectations, but it might not be enough to avoid another quarter of declining earnings.

Schlumberger reported earnings that beat estimates, but 82 percent lower than a year ago. The oilfield services company’s revenue fell slightly short of analyst forecasts. Schlumberger said there were early signs of recovery in most parts of the world, following a two-year slump in oil prices that put the brakes on global drilling activity.

McDonald’s reported third-quarter results that beat estimates. Global same-restaurant sales increased 3.5%, and same-restaurant sales in the U.S. grew 1.3%.

General Electric posted worse-than-expected revenue growth in its latest quarter. GE’s power, aviation and renewable energy segments drove industrial revenue growth, as transportation and oil and gas continued to post declines. GE said it would increase its stock-buyback program by $4 billion.

Two weeks ago, Honeywell lowered its sales and profit outlooks and preannounced the third-quarter results, saying an unexpectedly weak September and lackluster performance in the aerospace segment hurt profit. This morning, they reported results that matched the lowered expectations. For the fourth quarter, Honeywell expects sales to fall 7% to 9% due to weakness in the business jets, defense and space areas.

SAP SE climbed as it boosted its earnings and sales estimates.

Daimler AG fell amid a lower revenue forecast.

Ericsson AB slid after posting a loss.

Dyn is one of a number of outfits that host the Domain Name System, or DNS, which functions as a switchboard for the internet. The DNS translates user-friendly web addresses into numerical addresses that allow computers to speak to one another. Without the DNS servers operated by internet service providers, the internet could not operate.

And today, the internet stopped operating, at least for a while, mainly along the east coast. Dyn was attacked, a distributed denial of service attack where hackers flood the servers that run a target’s site with too much internet traffic, until the site collapses. In this case, the attack was aimed at the Dyn infrastructure that supports internet connections.

The result is that millions of internet users temporarily lost access to some of the world’s most popular websites, including: Twitter, Spotify, Reddit, CNN, Etsy and PayPal. It was a big attack, but it is too early to determine who was behind the attacks, but they appear to be precisely calibrated and on a very large scale.

It’s not just Samsung products that are overheating — Apple now has a problem, but with counterfeits. Apple said it has been buying accessories on Amazon bearing the Apple name and found that a whopping 90 percent of those are counterfeit. Even more troubling, Apple said, the phony products “pose an immediate threat to consumer safety,” because they haven’t been put through the rigorous industry standard testing Apple uses. Apple filed a lawsuit in U.S. District Court in San Francisco against Mobile Star, the company selling many of the products Apple bought on Amazon.
 
Will Japan ever escape deflation? This should come as no surprise to anyone, but Bank of Japan Governor Haruhiko Kuroda says the Bank of Japan may once again push back its 2% inflation target, which currently sits somewhere in fiscal 2017. Kuroda started his job in early 2013 and began his turbo-charged asset-purchase policy that continues to this day; he originally hoped that inflation would hit 2% by late 2014 or 2015. Almost four years later, inflation has disappeared after an initial rise.

U.K. Prime Minister Theresa May marks her first 100 days in office today, a term that has thus far been completely dominated by the Brexit debate. Prime Minister May clashed with her European counterparts in her first EU summit, where she was only allowed to give a brief update on Brexit over dinner. Though British diplomats have been calling for preparatory talks, EU leaders have remained united that no negotiations will occur until Article 50 of the EU’s treaty, which begins the official process to leave the EU, is triggered.

Have you ever heard of Wallonia? It is not some fictional country from a Marx Brothers movie, rather it is a province in Belgium, and it is the unlikely cog in the wheel of a trade deal between Canada and The Euro Union.

The fate of the trade pact with Canada — the Comprehensive Economic and Trade Agreement, or CETA — has become a symbol of how the European Union’s ability to act decisively on the world stage is losing out to parochial concerns and rising discontent with globalization. Belgium’s prime minister can only sign off on the trade pact if all provinces approve. Wallonia’s prime minister opposes the deal because he says the accord could undermine public services and industries like farming.

MetLife decided earlier this year to cut most of its U.S. life-insurance business. Now it is cutting ties with Snoopy. The 148-year-old company first used the Peanuts’ cartoon character in advertising 31 years ago as it tried to connect with U.S. consumers.

Snoopy, created by cartoonist Charles Schulz, now appears on everything from MetLife blimps to the company’s marketing and sales materials. But that need to reach consumers will shrink when MetLife spins off the bulk of its U.S. life-insurance business in the first half of 2017. Afterward MetLife will sell mostly to corporate clients in the U.S.