Financial Review

Halftime

Sinclair Noe — June 30, 2017

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DOW + 62 = 21,349
SPX + 3 = 2423
NAS – 3 = 6140
RUT – 0.84 = 1415
10 Y + .03 = 2.30%
OIL + 1.40 = 46.33
GOLD – 4.20 = 1242.20
BITCOIN + 0.39% = 2509.80 USD
ETHEREUM – 6.64% = 279.09

I’m not sure we established a trading pattern this week. Down, up, down, up. We did see a return to volatility. The indexes saw big moves, much sound and fury amounting to very little. It might just be window dressing to finish out the quarter and heading into a long holiday weekend.

The markets will be open for a half day on Monday, but, this is the beginning of a long holiday weekend.

As we wrap up the second quarter and the first half of the year, let’s check where we stand.
For the month: the Dow gained 1.6%, the S&P gained 0.5%, the Nasdaq lost 0.9% for the month, and the Russell gained 3%.

For the second quarter: the Dow gained 3.3%, the S&P up 2.6%, the Nasdaq up 3.9%, and the Russell up 3.9%.

For the first half: the Dow is up 8%, the S&P up 8.2%, the Nasdaq up 14%, and the Russell up 6.1%.

So, the Nasdaq is the big winner so far, this year, but seemed to lose momentum in June. The S&P 500 recorded its biggest percentage first-half gain since climbing 12.6 percent in the first six months of 2013. The Nasdaq posted its biggest first-half gain since 2009.

Oil is down 14% from the start of the year and down 5% for the month of June. OPEC and certain other oil-producing countries agreed to extend their production cuts, originally set to expire at the end of June, by nine months (ending March 2018). They didn’t count on US shale producers ramping up production to fill the void.

The count of working oil rigs in the US fell this week for the first time in 24 weeks, breaking the record streak of increases. After several upward revisions, the International Energy Agency currently expects U.S. crude production to end the year 0.8 mmb/d higher than year-end 2016; although some traders are expecting closer to 1 mmb/d.

As such, the rapid U.S. shale growth in the back half of the year could meaningfully increase U.S. oil supply. Meanwhile, when OPEC cuts fall off in early 2018, look for the global oil glut to come roaring back.

The yield on the 10-year Treasury note has dropped 14 basis points from the start of the year, however the yield has been climbing in the past week or so, after hitting a low for the year at 2.13%.

This is still the most contrary move among major asset classes because the Federal Reserve has raised interest rates twice in the first half, and promises another cut in the second half plus plans to trim its balance sheet.

US 10-year yield has now moved above 200-day moving average, and broke the down trendline from March.

Second-quarter corporate results are set to begin in earnest in the coming weeks, with S&P 500 companies expected to post an 8-percent rise in earnings. Investors have been looking for earnings to support historically high valuations, with the S&P 500 trading at about 18 times earnings estimates for the next 12 months compared to the long-term average of 15 times.

We’re bumping right along the top end of historic valuation levels. It’s getting harder to find undervalued stocks with so much optimism factored into stock prices.

The U.S. dollar recovered slightly today, but posted its biggest quarterly decline against a basket of rival currencies in nearly seven years after hawkish signals from foreign central banks this week pressured the greenback further. The dollar index declined 4.6% in the second quarter to mark its steepest quarterly percentage drop since the third quarter of 2010.

The euro accelerated more than 7 percent against the greenback for its biggest quarterly percentage gain since the third quarter of 2010.

In late May, we told you the Midwest experienced flooding that damaged corn and wheat crops. Since then, the northern Plains states have experienced a drought that left crops withering in the field. Spring wheat, traded on the Minneapolis Grain Exchange, has soared 32 percent in June. Spring wheat is a thinly traded commodity, but it was a big winner, especially considering futures contracts are leveraged, this was a killer trade.

As we wrap up the first half we are once again reminded that the heavyweight champion of traders is still Warren Buffett. Warren Buffett is set to pull in $12 billion in profits on a single deal with Bank of America. Buffett invested $5 billion in Bank of America in 2011. That move came at a critical time for Bank of America with the company trying to leave behind the financial crisis with its new CEO Brian Moynihan.

Buffett negotiated a favorable deal with the bank, due to his investment acting as a public vote of confidence in the company’s future. His $5 billion investment in preferred shares came with the option to convert those to common stock shares until 2021. The preferred shares paid $300 million annually in dividends.

Buffett’s common stock shares are currently worth about $17 billion, $12 billion more than the purchase price. Warren Buffett’s Berkshire Hathaway is now the biggest owner of two of the world’s largest banks: Bank of America and Wells Fargo.

Consumer spending rose modestly in May and inflation cooled, pointing to a slow-but-steady economic expansion. Consumer spending rose 0.1 percent last month. Consumer prices excluding food and energy rose 1.4 percent on a yearly basis, compared to a 1.5 percent gain in April.

The Fed’s preferred gauge of inflation, the personal consumption expenditures (PCE) price index fell 0.1 percent in May from April, dragged lower by drops in prices for consumer goods and energy. When food and energy were excluded, the index was up 0.1 percent.

The slowdown in inflation has boosted consumer spending power. After-tax personal income adjusted for inflation rose 0.6 percent in May, the largest gain since April 2015.

Even so, the University of Michigan’s consumer sentiment index fell to 95.1 this month, its lowest since November, according to a final reading for the gauge published today. The index has been rising steadily since 2008 and in November it hit its highest level since before the 2007-09 recession.

Senate Republicans still don’t have a healthcare deal. Senate Republicans headed home for a week-long recess without coming to an agreement on their bill, named the Better Care Reconciliation Act. This represents another delay for the Trump agenda.

Illinois is poised to enter its third straight fiscal year without a budget. The Illinois House adjourned on Friday, the last day of the budget year, without enacting a plan and will reconvene at 11 a.m. local time on Saturday. While negotiations continue, it signals the legislature will blow the midnight deadline and extend the unprecedented impasse that’s left Illinois without a full-year budget since mid-2015.

Without a deal around July 1, S&P Global Ratings has warned that the nation’s fifth-most-populous state will likely get downgraded again, losing its investment-grade status. The state of Illinois will be rated junk. Without a spending plan, the state has effectively been on autopilot, leaving it with a record $15 billion of unpaid bills as it spent over $6 billion more than it brought in over the past year.

The impasse has devastated social-service providers, shuttering services for the homeless, disabled and poor. The lack of state aid has wreaked havoc on universities, putting their accreditation at risk. If the standoff isn’t resolved, Illinois officials have said they won’t be able to pay contractors and road construction will shut down, putting thousands out of work.

The yields on the state’s bonds have risen as investors anticipate a downgrade. Without a budget that includes borrowing to pay down the bill backlog, Illinois by August will run out of money for key expenses. That means school funding, state payroll, and pension payments could be affected. This won’t jeopardize debt-service payments. Illinois hasn’t missed any bond payments and state law requires it to make monthly deposits to its debt-service funds.

President Trump says he is “sending in Federal help” to Chicago to help curb gun violence. The president tweeted early Friday that crime in Chicago has reached “epidemic proportions,” citing more than 1,700 shootings in the city so far, this year.

So, the Feds are sending in a strike force of 20 Alcohol, Tobacco, and Firearm, or ATF agents for what officials called a “laser focus” on the illegal trafficking of weapons. They join 41 ATF agents already in Chicago. The force will also focus on investigating and prosecuting repeat gun offenders. Don’t hold your breath.

This week saw a couple of important anniversaries. 20 years ago, the British handed over rule of Hong Kong to the Chinese. 10 years ago, the first iPhone was sold. Apple sold more than 50 million iPhones in the first three months of 2017 alone, bringing in $33.2 billion.

Drivers are set to pay the lowest Independence Day price for gasoline since 2005 — and for the first time on record, the Fourth of July holiday per-gallon cost will run below the price from New Year’s Day, according to GasBuddy.

Motorists on the road for the Fourth of July holiday weekend are expected to pay an average of $2.21 a gallon for gasoline, well below the 10-year average of $3.14. If you are driving, be careful out there, and have a great Independence Day.

Financial Review

Take 65

Sinclair Noe — June 22, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW – 12 = 21,397
SPX – 1 = 2434
NAS + 2 = 6236
RUT + 5 = 1404
10 Y – .01 = 2.15%
OIL + .21 = 42.74
GOLD + 3.70 = 1251.00

BITCOIN – 0.11% = 2709.21 USD
ETHEREUM – 2.77% = 328.37

BITCOIN + 1.13% = 2771.78 USD
ETHEREUM – 1.81 % = 330.40

BITCOIN – 0.11% = 2709.21 USD
ETHEREUM – 2.77% = 328.37

The Senate health care bill was unveiled today. The 142-page bill was written entirely behind closed doors and today is the first time the public and most senators have seen the bill. The latest version of Trumpcare is officially titled as the Better Care Reconciliation Act of 2017, which is a rewrite of the House of Representatives American Health Care Act, which is a rewrite of the Affordable Care Act.

The bill would repeal Obamacare’s individual mandate, drastically cut back federal support of Medicaid, and eliminate Obamacare’s taxes on the wealthy, insurers and others.

The bill will have to undergo scrutiny to ensure that it meets the strict requirements on what can or can’t be included in a bill under the budget reconciliation process. The non-partisan Congressional Budget Office, will analyze and score the bill and present its findings early next week.

The CBO analysis will shed light on how much money the bill would cost and how many people would be covered. Senate Republicans hope to see better headlines from this CBO report than the one that the House GOP legislation received. CBO said the House bill would result in 23 million fewer people insured in 2026 than under Obamacare.

Here are some of the key points that we know. The Senate bill would require insurers to cover those with pre-existing conditions and charge everyone the same regardless of health history. But it would allow states to waive the federal mandate on what insurers must cover, known as the essential health benefits.

This would allow insurers to offer less comprehensive policies, so those with pre-existing conditions may not have all their treatments covered.

The bill would continue the enhanced Medicaid expansion funding from Obamacare until 2021 and then phase it out over three years. The Senate bill would keep the House plan to send a fixed amount of money to states each year based on enrollment or as a lump sum block grant.

But it would shrink the program even more over time by pegging the annual growth rate of those funds to standard inflation, rather than the more generous medical inflation, starting in 2025.

This would likely force states to cut enrollment, benefits or provider payments. Several independent analyses have concluded that this funding structure would lead to large-scale shortfalls in every state, which would need to be closed by reducing enrollment or benefits, and cutting capacity to respond to disasters and public-health crises.

Those affected most would be poor children, people with mental-health issues, and disabled people.

The Senate bill would also largely maintain Obamacare’s premium subsidies structure, but tighten the eligibility criteria starting in 2020. Fewer middle class folks would get help because only those earning up to 350% of the poverty level would qualify, rather than the 400% threshold contained in Obamacare.

It also allows even less generous plans to stand as benchmarks for exchange and employer coverage, which could likewise contribute to disruptions and deductible increases. In recognition of the disruptions to the state-level exchanges through which individuals purchase coverage, the House bill set up a “Patient and State Stability Fund,” which would inject over $100 billion into state high-risk pools and reinsurance funds.

The Senate largely replicates this approach with slightly less funding, although it does add an additional $2 billion fund for fighting the opioid crisis in 2018.

The bill would also aim to shore up the existing Obamacare market by allocating funds for the cost-sharing subsidies until 2019. This might placate insurers, who were upset by Trump’s refusal to commit to continue making these payments, leading many carriers to hike rates or drop out of the exchanges for 2018.

The draft bill proposes repealing the 3.8 percent net investment income tax on high earners retroactively to the start of 2017, not at some point in the future. The tax cut will be offset by reducing aid to the poor to cut costs. We’ll have to wait for the CBO score to see if the math works, and how many people would see higher premiums or see coverage eliminated. That could be followed by a vote on the bill as soon as next week.

Democrats appear to have a solid bloc of opposition; if 3 Republicans oppose the bill, it will not pass. The bill could be changed over the next few days. Sens. Rand Paul of Kentucky, Ron Johnson of Wisconsin, Ted Cruz of Texas and Mike Lee of Utah said in a joint statement they’re “not ready to vote for this bill.”

Many other GOP senators are avoiding outright supporting the new health care bill, saying they need more time to read the fine print before taking a stand. The CBO score will be key – if it is not significantly better than the score of the House version, this bill could be DOA.

Hospital stocks traded sharply higher after the bill was released, adding to gains from earlier in the session. HCA Healthcare Inc rose 3.8 percent, while Tenet Healthcare Corp surged 8.4 percent. Health insurers also traded broadly higher, with large players Aetna and UnitedHealth Group each up more than 1 percent. Insurers that specialize in Medicaid also gained, with Centene up 3.4 percent and Molina Healthcare rising 2.6 percent.

About those tapes President Donald Trump suggested (or warned) that he (or someone) may have had of his one-on-one conversations with then–FBI Director James Comey: They don’t exist. Or, if they did, he didn’t make them. Trump took to Twitter today to say: “I have no idea… …whether there are “tapes” or recordings of my conversations with James Comey, but I did not make, and do not have, any such recordings.”

Thirty-four of the largest banks operating in the U.S. cleared a Federal Reserve stress test of their ability to withstand economic shocks. Every bank subject to the annual tests’ first phase exceeded minimum thresholds, though Morgan Stanley trailed the rest of Wall Street on a key measure of leverage — the second year it performed worse than peers on one of the test’s main metrics.

The Conference Board’s leading economic index climbed 0.3% in May and offered further proof the U.S. continues to grow at a steady clip, suggesting the economy is likely to remain on, or perhaps even moderately above, its long-term trend of about 2% growth for the remainder of the year.

Mortgage rates are keeping close pace with U.S. Treasury yields, and the yield on the 10-year Treasury note is hovering around the lowest levels of the year, and the lowest since the November election. Mortgage rates fell to one of the lowest levels of the year in the most recent week, following a short-lived rebound. Freddie Mac said  the 30-year fixed-rate mortgage averaged 3.90% in the June 22 week. The 15-year fixed-rate mortgage averaged 3.17%

The number of Americans filing for unemployment benefits increased 3,000 to a seasonally adjusted 241,000 last week.

Qatar Airways, the Gulf country’s state-owned airline, has expressed interest in buying as much as a 10 percent stake worth at least $808 million in American Airlines Group. The potential investment comes against the background of diplomatic and competitive turbulence for Qatar Airways, its home country and U.S. airlines.

Operations at Qatar Airways were disrupted after four Arab nations cut diplomatic and economic ties with Qatar this month in the worst diplomatic crisis in the region in years. Separately, American, United Continental, and Delta have pressed the U.S. government to act to curb U.S. flights by Qatar Airways and rival Gulf carriers Emirates Airline and Etihad Airways. The U.S. carriers charge that their Gulf rivals have received billions of dollars in unfair state subsidies.

Qatar Airways said in a statement that it sees a “strong investment opportunity” in American and that it “intends to build a passive position in the company with no involvement in management, operations or governance.” American said its rules prohibit “anyone from acquiring 4.75 percent or more of the company’s outstanding stock without advance approval from the board.”

As expected, Sears Canada has filed for bankruptcy protection and 2,900 employees countrywide are losing their jobs.

Warren Buffett’s Berkshire Hathaway is extending a 1.5 billion credit facility to Home Capital Group, Canada’s largest non-bank lender. Berkshire also agreed through its Columbia Insurance unit to buy up to $300 million of Home Capital shares for a 38.4 percent stake, pending shareholder and regulatory approvals. The credit line carries an interest rate of at least 9 percent.

Reuters reports Staples is in advanced talks to be acquired by Sycamore Partners in a $6 billion deal.

After leading the stock market for months, the big name tech stocks hit pause to catch a breath. And that allowed an old name to sneak into rally mode. Oracle was late to the cloud revolution, allowing upstarts like Salesforce.com Inc. to find significant market share with software delivered over the internet, and has suffered while making an acquisition-fueled push into the space.

But it looks like Oracle is figuring out the cloud. Late yesterday, they reported fiscal fourth quarter earnings, and today, shares topped $50, sending the market cap over $200 billion. Oracle posted full-year revenue growth of 1.8% and profit growth of 4.9%, and raised guidance.

Facebook CEO Mark Zuckerberg revised the world’s largest online social network’s mission statement. The previous mission was “to give people the power to share and make the world more open and connected.” Facebook’s new mission is to “give people the power to build community and bring the world closer together.”

Financial Review

Time Waits for No One

Sinclair Noe — May 8, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW + 5 = 21,012
SPX + 0.09 = 2399 (record)
NAS + 1 = 6102 (record)
RUT – 5 = 1391
10 Y + .02 = 2.38%
OIL + .28 = 46.50
GOLD – 1.90 = 1227.00

Emmanuel Macron defeated Marine Le Pen in France’s presidential election. The euro fell from six-month highs against the dollar in what looks like a “sell the news” reaction.

The dollar rose with Treasury yields on confirmation of Macron’s widely expected victory. The CBOE Volatility Index dropped to 9.77, marking its lowest close since 1993. The S&P 500 and the Nasdaq Composite traded at new intraday record highs. Macron won by a margin of 66 percent to 34 percent.

The rise of Le Pen’s National Front and France’s persistent economic and industrial problems made this campaign a referendum on Europe and globalization. Macron repeated that the big divide was between those who see an open economy as an opportunity and those who, like Le Pen, seem to fear the challenges it offers.

Macron’s decisive triumph over the anti-euro Marine Le Pen will likely strengthen the EU and deal a blow to the populist wave that has roiled western democracies for the past year.

On assuming office next Sunday as France’s youngest leader since Napoleon, the 39-year-old Macron faces the immediate challenge of securing a majority in next month’s parliamentary election to have a realistic chance of implementing his plans for lower state spending, higher investment and reform of the tax, labor and pension systems.

With the two mainstream parties – the conservative Republicans and the left-wing Socialists – both failing to reach the presidential runoff, his chances of winning a majority that supports his election pledges will depend on him widening his centrist base. Macro’s toughest task may be keeping the Euro Union intact.

The largest global banks in London plan to move about 9,000 jobs to the continent in the next two years. Thirteen major banks including Goldman Sachs, UBS, and Citigroup have given an indication of how they would bulk up their operations in Europe to secure market access to the European Union’s single market when Britain leaves the bloc.

Last week Standard Chartered and JPMorgan were the latest banks to outline plans for their European operations after Brexit. Talks with financial authorities in Europe have been underway for several months, but banks are increasingly firming up plans to move staff and operations.

Demand for bank loans from commercial and industrial firms was weaker in the first quarter. The Federal Reserve survey of senior loan officers showed standards for loans were basically unchanged. The officers said that they continued to tighten standards for commercial real estate, a process that economists said started in late 2015. Many officers cited regulatory reasons for tightening commercial real estate standards. There was also weaker demand for auto loans and credit cards.

The Arizona Regional Multiple Listing Service (ARMLS) reports that overall sales in in the Phoenix market April were up 4.5% year-over-year.  Cash Sales (frequently investors) were down to 22.5% of total sales. Active inventory is now down 11.0% year-over-year.  This is the sixth consecutive month with a YoY decrease in inventory following eight months with YoY increases. Supply and demand formulas would indicate higher prices.

Black Knight Financial Services reported that in the fourth quarter of 2016, 44% of refinances were cash-outs. The housing ATM is now back in working order. This percentage was the highest level of cash-outs in the last eight years.  What was happening eight years ago?

Straight Path surged more than 30 percent after an unnamed telecommunications company (possibly Verizon) raised its offer to buy the wireless spectrum holder for about $3.1 billion, topping a bid by AT&T.

Tyson Foods was the biggest S&P loser, down nearly 6 percent after the meat processor reported a slump in quarterly profit.

Sinclair Broadcast Group said it would buy Tribune Media, one of the largest U.S. television station operators, for about $3.9 billion cash and stock, and assume about $2.7 billion in debt. The $43.50 per share offer represents a nearly 8 percent premium to Tribune’s Friday close. Tribune operates 42 television stations in 33 markets.

Handbag maker Coach said it would buy Kate Spade for $2.4 billion as it looks to tap the popularity of its smaller rival’s quirky satchels and totes among millennials. The $18.50 per share offer in cash represents a premium of 9 percent to Kate Spade’s Friday close.

Amazon has a knack for making simple hardware popular. First, it was the humble e-reader. Now, it’s the voice-controlled speaker. Amazon holds a 70% market share in the new category, which it invented with the Amazon Echo in 2014, according to research from eMarketer.

The report says Google holds a 23% market share but may be poised to take more of the market in 2017. Researchers say 60 million Americans will use Amazon’s Alexa, Google Now, Microsoft’s Cortana, or Apple’s Siri at least once per month in 2017. For Amazon, this is great news.

The company has recently begun a campaign to make Alexa synonymous with voice assistants: Other developers can now use Alexa in their own applications, and the virtual personal assistant was shoe-horned into dozens of products on display at this year’s Consumer Electronics Show.

Amazon’s market share in voice-controlled speakers mirrors its success in another business, e-books. After killing off the competition from physical book stores like Borders, Amazon now enjoys a 74% share of the e-book market.

The Ira Sohn Conference is different things to different people. For young hedge-fund strivers, it’s high-priced networking. For the old guard, it’s a good show for a good cause. And for the hedge-fund presenters, the annual confab serves as a sort of debutante’s ball for new investment theses, a highly orchestrated and ritualized setting in which to trot out your most darling idea, primped and permed for the admiring gaze of the investing public.

Bill Ackman, Pershing Square, dragged one of his oldest investments out of the basement, threw a shiny new bow on top and presented it as if it were fresh goods. Ackman pimped Howard Hughes Corporation, a position he has held since its 2010 split from General Growth Properties. And it worked to the tune of a 4.5% gain today.

Meanwhile, Doubleline Capital’s Jeff Gundlach’s Sohn 2017 investment these: long emerging markets, short the S&P 500 (an actively managed index, Gundlach reminded us), and leverage it all once over. So, Jeff Gundlach wins Sohn 2017.

This weekend also marked a slightly more bourgeois shindig, the 2017 edition of the Berkshire Hathaway annual shareholder meeting. Much of the discussion centered around the advanced ages of Warren Buffett and Charlie Munger; Warren is 86 and Charlie is 93. Both seemed to acknowledge that time waits for no one.

Buffet said he would continue to run Berkshire until he is buried in the ground. Charlie looks more and more like Yoda with each passing year. Charlie Munger said the Chinese stock market is cheaper than the American stock market. Charlie also says that single-payer healthcare is the answer to fix the nation’s healthcare system woes.

Mr. Buffett said, “The tax system is not crippling our business around the world.” A specter much more sinister than corporate taxes is looming over American businesses: health care costs. And chief executives who have been maniacally focused on seeking relief from their tax bills would be smart to shift their attention to these costs, which are swelling and swallowing their profits.

Warren riffed on his misses as much as his hits. The investing legends twice talked about their failure to invest in Amazon despite having high praise for CEO Jeff Bezos. The Berkshire executives issued a mea culpa on missing out on Walmart and Google. Buffett called missing out on the two growth stories his “worst mistake” and told the nearly 40,000 assembled that he “blew it.” Buffet admitted he was disappointed with IBM, and he has dumped about one-third of his position recently.

Buffett has defended the Brazilian buyout house with which he attempted to take over Unilever, by saying 3G was only following a “standard capitalist” stance to doing business by slashing costs and cutting staff. He also acknowledged, though, that cutting jobs can be a “painful process”.

It wasn’t all bad news. Berkshire’s net worth increased by $27 billion last year, and the conglomerate has $86 billion of cash on hand. Berkshire Hathaway disclosed it more than doubled its stake in Apple during the first quarter. The stock hit an all-time intraday high and Apple’s market capitalization topped $800 billion.

The good news for Americans: life expectancy in the US increased more than five years from 1980 to 2014, up to 79.1 years. The bad news for Americans: your actual life expectancy could vary by more than 20 years depending on where in the US you happened to be born.

University of Washington researchers reported in a study published  today that the life expectancy from birth in the US varies from 67 years in Oglala Lakota County, South Dakota to 87 years in Summit County, Colorado. Counties with lower life expectancies tended to have higher rates of health conditions like obesity and diabetes, higher poverty rates, and higher proportions of minority residents.

In 13 counties across the U.S., Americans can now expect to die younger than their parents did. And the eight counties with the largest declines in life expectancy since 1980 are all in the state of Kentucky.

Globally, the US ranks 42nd in average life expectancy; Monaco has the longest, at 89.5 years, and Japan and Singapore tied for second with an average longevity of 85 years.

Stocks Manage Late-Day Advance

Charles Schwab: On the Market

Posted: 5/5/2017 4:15 PM ET

Stocks Manage Late-Day Advance

U.S. stocks managed a mid-afternoon advance to finish the trading session higher as domestic markets grappled with a jobs report that showed growth rebounded but wages were mixed. Treasury yields were mostly lower and the U.S. dollar dipped, while crude oil prices rebounded from a recent drop to power gains in the energy sector. Political uncertainty remained after yesterday's passage in the House of a health care bill and ahead of this weekend's second round of the French Presidential election. Dow member IBM was lower after Warren Buffett said he trimmed his stake in the company. Gold was little changed.

The Dow Jones Industrial Average (DJIA) gained 55 points (0.3%) to 21,007, the S&P 500 Index added 10 points (0.4%) to 2,399, and the Nasdaq Composite ticked 25 points (0.4%) higher to 6,101. In moderately-heavy volume, 830 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.70 to $46.22 per barrel and wholesale gasoline increased $0.02 to $1.50 per gallon. Elsewhere, the Bloomberg gold spot price added $1.13 to $1,229.29 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 98.56. Markets were higher for the week, as the DJIA advanced 0.3%, the S&P 500 Index gained 0.6%, and the Nasdaq Composite increased 0.8%.

Dow member International Business Machines Corp. (IBM $155) saw pressure after Billionaire investor Warren Buffett told CNBC that his company Berkshire Hathaway Inc. (BRK/B $167) had sold about a third of its stake in the tech giant.

Cigna Corp. (CI $160) reported Q1 earnings-per-share (EPS) of $2.30, or $2.77 ex-items, versus the $2.45 FactSet estimate, as revenues rose 5.0% year-over-year (y/y) to $10.4 billion, above the forecasted $10.1 billion. CI raised its full-year profit and revenue guidance. The company noted continued strong growth in its Commercial Healthcare and Global Supplemental Benefits segments, partially offset by contraction, as expected, in its Seniors business. Shares traded higher.

Activision Blizzard Inc. (ATVI $54) posted Q1 EPS of $0.56, or $0.31 ex-items, compared to the projected $0.21, with revenues rising 31.7% y/y to $1.2 billion, versus the expected $1.1 billion. The game maker issued Q2 EPS guidance that missed estimates, while raising its full-year profit outlook that remains below expectations. Shares gained modest ground.

CBS Corp. (CBS $65) announced Q1 profits of $1.09 per share, or $1.04 ex-items, compared to the estimated $0.95, as revenues declined 6.8% y/y to $3.3 billion, roughly in line with expectations. Shares advanced on analyst optimism about the company's revenue diversification amid negative advertising revenue trends seen by some of its peers in the traditional pay-TV segment.

April nonfarm payroll report tops forecasts

Nonfarm payrolls (chart) rose by 211,000 jobs month-over-month (m/m) in April, compared to the Bloomberg forecast of a 190,000 increase. The rise of 98,000 seen in March was revised to a gain of 79,000 jobs. The total downward revision to the job gains in March and February was 6,000. Excluding government hiring and firing, private sector payrolls increased by 194,000, versus the forecasted gain of 190,000, after increasing by 77,000 in March, revised from the 89,000 rise that was initially reported. The report was led by job gains in leisure and hospitality, healthcare, professional and business services, financial activities and mining, while retail services job growth rebounded. Employment in construction and manufacturing remained sluggish.

The unemployment rate unexpectedly fell to 4.4% from 4.5%, hitting the lowest level since May 2007, versus forecasts to tick higher to 4.6%, while average hourly earnings rose 0.3% m/m, matching projections. However, y/y wage growth slowed to a 2.5% pace, missing the 2.7% projection, from the negatively revised 2.6% rise in March after the m/m gain was downwardly revised to 0.1%. Finally, average weekly hours came in at 34.4 from March's unrevised 34.3 rate, in line with estimates.

Despite the mixed wage picture, the jobs data adds credence to Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, view in his latest Schwab Sector Views: Is Retail Really Dead?, that the status of the U.S. consumer looks to us to be quite solid and is showing signs of improving.

The report may be easing concerns about the slowing of Q1 GDP growth, which the Fed characterized as likely being transitory as it keep its monetary policy stance unchanged on Wednesday. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, ½ Full: Seeing Through a Weak Q1, that leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read both these articles on the Markets & Economy page at www.schwab.com. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $16.4 billion during March, well above the $14.0 billion forecast of economists polled by Bloomberg, while February's figure was adjusted lower to an increase of $13.7 billion from the originally reported $15.2 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $14.5 billion, while revolving debt, which includes credit cards, increased by $2.0 billion.

Treasuries finished mostly higher in choppy action as the yield on the 2-year note was unchanged at 1.31%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point (bp) to 2.35% and 2.99%, respectively. For analysis of the interest rate environment, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, where you can also find our latest commentary, Cash: What to Consider in the New Rate Environment. Follow Schwab on Twitter: @schwabresearch.

Finally, the political front remained in focus in the wake of yesterday's passage in the House of an Affordable Care Act replacement bill, which now faces the Senate. For commentary on the political front, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's video, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Europe higher, Asia lower 

European equities finished higher, with basic materials and oil & gas issues rebounding amid recoveries from the recent slides in metals and crude oil prices, while the markets digested the favorable U.S. employment report. Commodity prices have tumbled amid some softness in economic data out of China and the U.S., along with exacerbated oil supply concerns. For a look at the sectors, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, articles, Materials Sector Rating: Marketperform and Energy Sector Rating Marketperform, on the Markets & Economy page at www.schwab.com.

Meanwhile, stocks appeared to shrug off lingering political uncertainty ahead of this weekend's second round of the French Presidential election, while Brexit negotiations continue with a looming U.K. election in June, which will be followed by a German election later this year. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. Eurozone business activity in the retail sector moved back to a level depicting expansion. The euro and British pound ticked higher versus the U.S. dollar and bond yields in the region finished mixed.

Stocks in Asia finished lower, with the recent drop in commodity prices, notably metals and crude oil prices, pressuring the basic materials and energy sectors, while the markets were likely cautious ahead of today's U.S. labor report. Also, China remained hamstrung by recent soft economic data and uneasiness toward regulatory crackdowns in the financial system. Shares trading in mainland China and Hong Kong fell, while securities in Australia and India also declined. Volume remained lighter than usual as markets in Japan remained closed for a holiday, while South Korea also took a holiday break. With political and geopolitical uncertainty festering, Schwab's Jeffrey Kleintop, CFA, offers the articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Stocks glide after digesting a plethora of mixed market sustenance

Coming off back-to-back solid weekly gains, stocks treaded water amid a plethora of divergent events. Political uncertainty on both sides of the pond lingered ahead of this weekend's French Presidential election and as the House passed a bill aimed at repealing and replacing the U.S. Affordable Care Act. The Fed kept its policy stance unchanged as expected but the markets seemed to continue to grapple with the prospect of the Central Bank trimming its bloated balance sheet. Friday's stronger-than-expected labor report was preceded by an upbeat ISM non-Manufacturing Index that showed key services sector activity grew faster than expected, but another disappointing monthly auto sales report exacerbated worries about hard data being soft. Commodity prices fell, headlined by a drop to multi-month lows for crude oil prices to weigh on the energy sector, though technology stocks continued to rally, shrugging off a mixed earnings report from Dow member Apple Inc. (AAPL $148), and financials led the way as Treasury yields continued a recovery. Earnings season reached the home stretch, continuing to mostly top elevated expectations. About 65% have bested revenue forecasts and 78% have exceeded profit projections out of the 410 companies that have reported thus far from the S&P 500, per data compiled by Bloomberg.

With earnings season well past the apex, the economic front will likely garner more attention next week, delivering April inflation readings such as the Import Price Index, Producer Price Index (PPI) and Consumer Price Index (CPI). Also, the all-important U.S. consumer will be on display, courtesy of the releases of April retail sales and the preliminary May University of Michigan Consumer Sentiment Index.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, a shift in sentiment has led to a sharp reversal in market action recently, with leadership shifting back toward cyclical areas of the market. We continue to believe the bull market will continue due to decent economic growth and a good profits picture, but there will likely be sentiment-driven dips and surges to come. We urge investors to remain disciplined and focus on longer-term horizons and the underlying fundamentals of the economy. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week that deserve a mention include: Australia—building approvals and retail sales. China—trade balance, CPI and PPI, and lending statistics. India—trade balance, CPI and industrial production. Japan—trade balance. Eurozone—industrial production, along with German factory orders, trade balance and Q1 GDP. U.K.—industrial and manufacturing production, trade balance and the Bank of England's monetary policy decision.

Financial Review

Boxcars

Sinclair Noe — February 27, 2017

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DOW + 15 = 20,837
SPX + 2 = 2369
NAS + 16 = 5861
RUT + 13 = 1407
10 Y + .05 = 2.37%
OIL + .06 = 54.05
GOLD – 5.00 = 1252.90

Another up day, another record close for the Dow and the S&P; this was the 12^th record close in a row for the Dow. For the month of February, the Dow is up about 970 points. The S&P up 91 points and the Nasdaq up about 250.

The White House will propose boosting defense spending and slashing funding for the Environmental Protection Agency in a set of marching orders to agencies as it prepares its budget for the coming fiscal year.

Tomorrow, Trump will address a joint session of Congress and he is expected to propose boosting defense spending by $54 billion in his first budget plan and offset that by an equal amount cut from the rest of the government’s discretionary budget. Most federal agencies other than those involved in security will see their budgets reduced to make room for 10 percent higher spending on defense.

Discretionary spending makes up about 30 percent of the $4 trillion budget. President Trump’s proposal for the 2018 budget year won’t make significant changes to Social Security or Medicare, per Treasury Secretary Steven Mnuchin. Trump campaigned on a promise of 4% economic growth, but Mnuchin walked back that pledge to 3%.

And this is an important point, because that forecast for 3% underpins Trump’s tax reforms – the idea being that Trump can deliver tax cuts without an explosion in deficit spending by growing the economy. And we can get to 3% growth because of tax cuts and deregulation.

The problem is, in interview after interview, Trump and his surrogates have demonstrated that they have no idea how to get there. Take for example Commerce Secretary Wilbur Ross’, confirmation hearing. He told Senators that a combination of tax reform, a more self-sufficient energy policy, and increasing exports would do the trick.

GDP growth is a function of how many workers enter the workforce, and how productive those are. It has nothing to do with energy consumption or how much we export unless that manages to bring more workers. And right now, the workforce is shrinking due to demographics of the boomer population transitioning to retirement.

Also, the unemployment rate is 4.8%, meaning that most people who were looking for jobs have jobs. And the productivity part of the equation – well, all we need something twice as big as the internet boom of the 90’s.

Trump called his plan a “public safety budget” focused on increasing law enforcement and keeping out terrorists. He also promised that “we’re going to start spending on infrastructure, big,” without giving details. Infrastructure-linked stocks, such as construction materials and steel producers, were among the best performing industries in the S&P 500 index today. Congress ultimately controls the government purse strings, and the White House budget is a baseline on negotiations to set a federal budget for the upcoming fiscal year. You can bet Wall Street will be look for details that it can sink its teeth into.

Trump reiterated his pledge to repeal and replace the Obamacare law in remarks at a black-tie dinner for the National Governors Association on Sunday. The president will offer details on how he would like to overhaul the Affordable Care Act on Tuesday. The administration has said the repeal and replace of Obamacare is its priority ahead of a tax overhaul. He also seemed to express surprise at the complexity of the reform process. “I have to tell you, it’s an unbelievably complex subject,” Trump said. “Nobody knew that health care could be so complicated.”

Trump is expected to sign a new refugee and immigration executive order on Wednesday, one day after addressing lawmakers at a joint session of Congress. Meanwhile, the president’s pick for secretary of the Navy, Philip Bilden,  has pulled out from consideration, citing concerns about privacy and separating himself from his business interests. Billionaire investor Wilbur Ross is headed toward confirmation as Commerce secretary. The Senate is set to vote on his nomination tonight.

Mexico’s top trade negotiator doubled down on threats to break off talks to rework NAFTA, saying his country will walk away if the U.S. insists on slapping duties or quotas on any products from south of the border. Mexican Economy Minister Ildefonso Guajardo said: “The moment that they say, ‘We’re going to put a 20 percent tariff on cars,’ I get up from the table. Bye-bye.”

Orders for durable goods rebounded in January, a sign companies remained upbeat at the start of the year. Bookings for goods meant to last at least three years rose 1.8 percent after a 0.8 percent decrease in December. Bookings for non-military capital goods excluding aircraft — a proxy for future business investment — fell 0.4 percent.

Pending home sales fell by 2.8% in January, per the National Association of Realtors. Buyer demand for housing is as strong as it’s been since the recession, the NAR said. However, “the significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay,”

Warren Buffett struck an upbeat tone on American business and what he called a “miraculous US economy” in part because of a “tide of talented and ambitious immigrants.” In his annual letter to Berkshire shareholders, the Oracle of Omaha urged a long-term view of the markets, saying a collection of conservatively financed companies are “virtually certain” to be worth more in the future.

He also defended share buybacks and spent a sizable section of the letter attacking investment fees. He estimated that investors wasted more than $100 billion on high-fee Wall Street money managers over the past 10 years.

He declared an early victory in his decade-long bet that a basket of hedge funds would fail to keep pace with an S&P 500 Index fund. He has a bet with a hedge fund, with the proceeds going to charity. He gave an update: A $1 million investment in the bundle of hedge funds would have generated a $220,000 gain in the nine years through 2016, compared with the index fund’s $854,000 increase.

That means it’s a near certainty Buffett will win when the bet ends on Dec. 31. Buffett estimated that about 60 percent of the gains that the hedge funds produced during that period were eaten up by management fees, which he called a “misbegotten reward.”

Buffett wrote, “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”

March may be the best month to work at Warren Buffett‘s Berkshire Hathaway, especially for college basketball fans. Buffett said his company will give $1 million a year for life to any employee who guesses which teams will play in the NCAA men’s basketball tournament’s round of 16, or “Sweet 16.”

Also, this weekend, Jeffrey Immelt, the CEO of General Electric wrote America “will be less of a leader in trade” in the coming years. And “We’re in an era when some very basic assumptions about the global economy are being tested,” he said in his annual letter to shareholders. “There is deep skepticism toward the ideas that powered economic expansion for a generation.” That said, globalization is not coming to an end, according to Immelt.

However, “It is the end of the ‘global elite,’ those who see the world only from financial centers or a website. Most ‘Global Institutions’ are 70 years old and must be modernized to address contemporary global challenges.”

The pound dipped below $1.24 in early trading after reports that U.K. Prime Minister Theresa May’s team is preparing for the possibility that Scotland calls a second independence referendum. Scotland held an independence referendum in 2014, with 55% of Scots voting to remain a part of the UK. But First Minister Nicola Sturgeon argues that Britain’s planned departure from the EU — which most Scots voted against — has significantly altered the terms of the national relationship.

A mega-merger between two European stock exchanges is in peril. Plans to combine the London Stock Exchange with Deutsche Boerse, which runs the main German stock market, have been in the works for more than a year. But late Sunday, the London exchange warned that the deal has run into trouble with European regulators.

Europe’s biggest tech showcase, Mobile World Congress, kicked off in Barcelona today with global smartphone makers launching devices. But the notable absence was a flagship smartphone from Samsung, which has its own event scheduled for late March to debut the S8.

Sony has announced a $1,587 projector that turns any surface into a touchscreen, and the first ever smartphone with a 4K high dynamic range screen.

Alphabet’s Google unit will implement its digital assistant to all smartphones running the latest version of the Android operating system, not just phones made by Google.

A series of bills in at least four U.S. states, Georgia, Maryland, Illinois, and Tennessee, could prevent Uber or Google from operating self-driving cars. The measures would only allow a network of self-driving cars to operate on public roads if the cars were owned by an automaker.

Walmart is running a new price-comparison test in at least 1,200 U.S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with grocery chains. Walmart launched the price test across 11 Midwest and Southeastern states, focusing on price competition in the grocery business that accounts for 56 percent of the company’s revenue. Wal-Mart’s tests are aimed at finding the right price point across a range of products that will attract more shoppers, and then adjusting prices as needed.

Favorite “La La Land” was mistakenly awarded the best picture Oscar, only to have it taken away from the cast and crew and handed to indie upstart “Moonlight” in an unprecedented Oscars mix up. And the loser is … PricewaterhouseCoopers.

The global accounting firm has apologized for the embarrassing envelope mix-up that resulted in mistake. Meanwhile, 2 streaming services and one television network went home with Oscar statuettes on Sunday night. The wins for Amazon, Netflix and ESPN showcase the evolving and expanding shape of the movie business.

Stocks Finish Mostly Higher Ahead of Holiday Weekend

Charles Schwab: On the Market

Posted: 2/17/2017 4:15 PM ET

Stocks Finish Mostly Higher Ahead of Holiday Weekend

The Dow was able to turn positive in the final minutes of trading, leading to a mostly positive finish for equities ahead of the three-day holiday weekend. Consumer staples stocks were among the top performers as the sector seemingly received a boost after Kraft Heinz submitted an unsuccessful $143 billion bid to acquire Unilever. Treasuries and the U.S. dollar advanced, gold declined and crude oil prices were mostly flat.

The Dow Jones Industrial Average (DJIA) increased 4 points to 20,624, the S&P 500 Index added 4 points (0.2%) to 2,351, and the Nasdaq Composite gained 24 points (0.4%) to 5,839. In moderately-heavy volume, 945 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.03 higher to $53.78 per barrel and wholesale gasoline was unchanged at $1.52 per gallon. Elsewhere, the Bloomberg gold spot price declined $3.52 to $1,238.85 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 100.93. Markets were higher for the week, as the DJIA increased 1.8%, the S&P 500 Index advanced 1.5% and the Nasdaq Composite gained 1.8%.

Kraft Heinz Co. (KHC $97) confirmed that it has delivered a comprehensive proposal regarding a merger with Unilever NV (UN $49). KHC added that while Unilever has declined the proposal, it looks forward to working to reach an agreement and there can be no certainty that any further proposal will be made. UN confirmed receiving the proposal, valued at $50.00 per share, or a total equity value of about $143 billion, noting that it sees no merit for its shareholders and that it does not see the basis for any further discussions. Shares of both companies rallied, and the announcement helped lift the consumer staples sector.

Deere & Co. (DE $110) reported fiscal 1Q earnings-per-share (EPS) of $0.61, above the $0.56 FactSet estimate, as net sales of equipment declined 1.5% year-over-year (y/y) to $4.7 billion, roughly in line with expectations. The farm and construction heavy-equipment maker said it started the year on a positive note in the continued face of soft market conditions, and it is seeing signs that after several years of steep declines key agricultural markets may be stabilizing. DE raised its full-year profit outlook. Shares finished higher in choppy action.

J.M. Smucker Co. (SJM $136) posted fiscal 3Q EPS of $1.16, or $2.00 ex-items, compared to the projected $2.00, with revenues declining 5.0% y/y to $1.9 billion, roughly in line with forecasts. The company lowered the high end of its full-year earnings guidance and its outlook for sales, due to reduced U.S. retail coffee segment net sales results in 3Q and forecasted sales in 4Q. Shares were lower.

General Mills Inc. (GIS $59) fell on the Kraft Heinz and Unilever news and after the company reduced its sales and earnings outlook for the fiscal year, driven largely by recent sales performance of U.S. yogurt and soup.

Schwab’s Chief Investment Strategist Liz Ann Sonders offers a look at the earnings front in her latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Leading Index tops forecasts

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) was up 0.6% month-over-month (m/m) in January, above the Bloomberg projection to match December's unrevised 0.5% gain. Support came from the components pertaining to the yield curve, building permits, jobless claims, ISM new orders and consumer expectations.

Treasuries were higher, with the yield on the 2-year note dipping 1 basis point (bp) to 1.19%, the yield on the 10-year note declining 3 bps to 2.42%, and the 30-year bond rate decreasing 2 bps to 3.03%. For a look at bond investing, see the video by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Schwab's Fixed Income Director, Collin Martin, CFA, titled, Can Bond Portfolios Benefit from "Floaters" in a Rising Rate environment, at www.schwab.com/insights.

The stock markets paused near record high territory, Treasury yields gave back some of their recent jumps and the U.S. dollar rebounded from losses as of late. The global markets continue to grapple with resurfaced optimism regarding President Donald Trump's reflationary policy promises, along with lingering trade and immigration concerns. For a look at the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington's Way: Why Trump's Policy Changes Could Take Time, at www.schwab.com/insights. Moreover continued solid economic data, including signs of inflation heating up, and this week's hawkish Congressional testimony from Federal Reserve Chairwoman Janet Yellen, are keeping the possibility of a March rate hike on the table.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Simple Indicators In A Complex World, noting that while markets may exhibit increasing volatility, we believe the bull market is being supported by tangible and effective indicators of global growth. For analysis of the indicators see Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Please note: All U.S. markets will be closed on Monday in observance of the President's Day holiday.

Europe mixed to close out the week, Asia mostly lower as global market rally stalls

European equities finished mixed on the heels of yesterday's pullback from a recent rally, and amid festering uncertainty regarding the political fronts in the U.S. and Europe. The markets appeared to assess the global rally that ushered in all-time highs in the U.S., bolstered by U.S. President Donald Trump's reflationary policy pledges, notably tax reform. Key elections loom on the horizon for the eurozone, which continued to hamstring sentiment. For further analysis, see Schwab's Jeffrey Kleintop's, CFA, article,  President Trump and Global Trade: How Will Campaign Promises Play Out? and Director of International Research, Michelle Gibley's, CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. However, shares of Unilever jumped on the news of Kraft Heinz's merger proposal, which helped lift the consumer goods sector and U.K. stocks, though technology, financials and oil & gas issues led to the downside. In economic news, U.K. retail sales missed expectations for January. The euro and British pound lost ground as the U.S. dollar rebounded from a two-day pullback, while bond yields in the region finished mixed. For our latest on international investing analysis, see Schwab's Jeffrey Kleintop's, CFA, articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read these articles at www.schwab.com/oninternational.

Stocks in Asia finished mostly lower, with the global market rally that has seen U.S. stocks hit all-time highs stalling as traders grapple with political uncertainty in the U.S. and Europe, while assessing the recent run. Japanese equities declined as the yen extended gains amid the pullback in the U.S. dollar. A retreat in banking stocks from a recent rally led Chinese stocks lower. Australian securities traded lower and South Korean equities dipped; however, Indian stocks extended a string of weekly gains after trading to the upside. Schwab's Director of International Research, Michelle Gibley, CFA, provides some timely analysis of global investing in her articles, Currency Hedging: 5 Things You Need to Know and Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

Stocks post another weekly rally to all-time highs, housing data due out next week

U.S. stocks headlined a global market rally for the week, posting more record highs as sentiment continued to shift focus to President Donald Trump's pledged reflationary policies, highlighted by last week's promise of a "phenomenal" tax plan in the coming weeks. This helped overshadow lingering political uneasiness toward U.S. trade and immigration and the looming key elections in Europe. Moreover, the economic front continued to suggest the economy is heating up, with retail sales easily topping forecasts, regional manufacturing output surging, small business optimism remaining at the highest since December 2004, and housing construction activity besting forecasts. This appeared to help the markets absorb a sign that the possibility of a March Fed rate hike remains on the table delivered by this week's semi-annual monetary Congressional testimony from Fed Chairwoman Janet Yellen.

Volatility in the currency and bond markets ensued, with the Dollar Index finishing little changed following a mid-week stumble, while Treasury yields nudged higher in choppy action. Stocks also showed some resiliency in the face of hotter-than-expected reads on consumer and producer price inflation. Earnings season continued to roll on but reached the home stretch as 411 companies have reported out of the S&P 500. So far, about 74% have topped earnings estimates, while 52% have exceeded sales projections, per data compiled by Bloomberg.

The holiday-shortened economic calendar next week will still bring a plethora of key reports for the markets to consider when grappling with whether a March rate-hike is in the offing. Housing will be in focus, courtesy of January existing and new home sales reports, while national business activity will be on display as Markit will release its preliminary February looks at manufacturing and services sector output. Rounding out the week, we will get the final University of Michigan Consumer Sentiment Index and the minutes from the Fed's monetary policy meeting that concluded with an unchanged decision on February 1st.

As noted in the latest Schwab Market Perspective: Not So Fast!, investor caution is rising, which contrarily should help the bull market continue. Economic data has continued to beat expectations, but the number of upside surprises may start to level off, and investor enthusiasm toward potential new policies from Washington could wane as political realities set in. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight.

International reports to look out for include: Australia—wage inflation. China—property prices. Japan—trade balance. Eurozone—the Consumer Price Index and Markit's business activity reports, along with German 4Q GDP and business confidence. U.K.—4Q GDP.

Financial Review

Cookies, Milk, Cannoli

Sinclair Noe — November 15, 2016

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

Another record high for the Dow.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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