Financial Review

Earnings Season Playlist

Sinclair Noe — October 26, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 30 = 18,199
SPX – 3 = 2139
NAS – 33 = 5250
10 Y + .03 = 1.79%
OIL – .76 = 49.20
GOLD – 6.40 = 1267.70

After the closing bell, yesterday, Apple reported its first decline in annual revenues in over a decade, profit just barely beat expectations. Apple forecast higher sales in the holiday quarter but that doesn’t seem to be enough to motivate investors. Meanwhile, iPhone sales continued their decline, falling 5% from the previous year, although that’s an improvement from the 15% drop seen in fiscal Q3.

Apple’s cash pile also continued to swell to a record of over $237 billion – if that was its own public company it would be the world’s fourteenth largest. Apple is still making money, about $9 billion in profits in the last quarter, but the bigger question is “what’s next?” The answer comes tomorrow, as Apple introduces the next generation of its MacBook laptop. And maybe something to do with Apple TV – possibly a playlist for TV. We’ll see. Apple sank 2.3 percent in today’s trading.

Boeing shares were trading at their highest level this year, after the world’s largest plane maker reported a jump in quarterly profit despite slower sales. The stock gave the biggest boost to the S&P and the Dow.

Coca-Cola reported better-than-expected quarterly revenue, helped by higher prices for sodas and strong demand for water and sports drinks in North America. Coke reported profit of just over $1 billion on revenue of $1.6 billion.

Tesla shares were up about 5% in after-hours trade, after the electric car maker reported results that were better than expected. Third-quarter was $2.3 billion in revenue, well above targets of about $1.9 billion. Tesla posted a profit of $111 million, or $0.71 on an adjusted per share basis, beating estimates that called for a loss. Tesla maintained its guidance for 24,500 vehicle deliveries in the third quarter, and its second-half estimate of 50,000 deliveries, at the low end of its full-year guidance of 80-90,000.

Chipotle is optimistic on next year. The burrito chain announced diluted earnings of $0.27 a share, missing Wall Street’s estimate of $1.56 by a wide margin. Same-restaurant sales dropped 21%. The company expects a rebound next year.

Pokémon Go didn’t help Nintendo much. Despite the success of the popular iPhone game, and a big one-time gain from selling its controlling interest in the Seattle Mariners baseball team, the Japanese games company’s figures were dented by the strength of the Japanese currency. The video-game maker posted an operating loss for the quarter and cut its operating profit outlook for the fiscal year.

Airbus missed forecasts on supply chain issues, but the aircraft maker maintained its full year guidance.

Brazil provided some bright side for Santander as a pick-up in performance lifted earnings above expectations.

Provisions ate into the quarterly profit at Lloyds, as the bank set aside another £1-billion-pounds to pay compensation for mis-sold payment protection insurance.

Bayer raised guidance for the full year on strong pharma results in its first quarterly scorecard since securing the Monsanto merger.

Southwest Airlines slid after saying a revenue measure may worsen this quarter.

Biogen rallied after its quarterly profit topped estimates.

Mondelez International rose after boosting its earnings forecast.

Northrop Grumman climbed to a record after raising its earnings outlook.

Comcast posted higher third-quarter revenue and profit, benefiting from its NBCUniversal unit’s broadcast of the Rio Olympics.

Google Fiber is halting its rollout in 10 cities and laying off staff, dealing a major setback to the Internet giant’s ambitions of blanketing the nation in super-speedy Internet. The change-up comes months after the company acquired Webpass, largely seen as an admission that fixed wireless might be a preferable route to laying fiber.

AT&T’s new streaming service is coming. DirecTV Now will offer more than 100 channels for just $35 a month. The service debuts in November.

New-home sales picked up in September, to an annual rate of 593,000. That was 3.1% higher than August’s figures. Sales in September were 29.8% higher compared to a year ago. The median price of new homes sold in September was $313,500, 6.7% higher than in August, and 1.9% higher than a year ago.

In part, that reflects dwindling supply. There were 4.8 months’ worth of homes available for sale at the current pace in September, fewer than in August. Despite robust demand, builders haven’t ramped up construction of new homes since the recession. Many continue to report difficulties in finding affordable labor and lots.

An early look at trade patterns in September points to a sharper than expected drop in the U.S. trade deficit – showing a deficit of $56.1 billion in September compared to $59.1 billion in August.

A smaller deficit boosts the official growth rate of the economy, or gross domestic product. The size of the decline in September could even be enough to generate 3% GDP. While exports of American-made goods rose 0.9% in September, imports fell 1.1% and retail and wholesale U.S. inventories rose in the month.

Britain will send fighter jets to Romania next year and the United States promised troops, tanks and artillery to Poland in NATO’s biggest military build-up on Russia’s borders since the Cold War.

Germany, Canada and other NATO allies also pledged forces at a defense ministers meeting in Brussels on the same day two Russian warships armed with cruise missiles entered the Baltic Sea between Sweden and Denmark. Those warships have now made their way to the Mediterranean, headed for Syria, but Spain denied refueling at one of its ports in North Africa.

Others NATO allies joined the four battle groups led by the United States, Germany, Britain and Canada to go to Poland, Lithuania, Estonia and Latvia. Canada said it was sending 450 troops to Latvia, joined by 140 military personnel from Italy. Germany said it was sending between 400 and 600 troops to Lithuania, with additional forces from the Netherlands, Norway, Belgium, Croatia and Luxembourg.

Every year for the past 24 years, the United Nations General Assembly has held a vote to end the US embargo of Cuba. The resolution is adopted each year despite the US vote. Such resolutions are non-binding, but can carry political weight. Today, the 25^th vote was called and the US abstained.

Mercedes-Benz is launching a pickup truck in late 2017, dubbed the new “X-Class,” entering one of the most lucrative segments in the car industry.

General Motors and IBM are combining AI system Watson with OnStar to market new services to drivers. Watson, a collection of artificial-intelligence software delivered as cloud-computing services, is a high-profile part of what IBM calls its “strategic imperatives” to help spur growth. IBM says Watson artificial-intelligence technology is on track to be used in some form by a billion people by the end of next year.

IBM also announced an arrangement with the business messaging service Slack, which helps workers to collaborate in private groups. Slack will use Watson Conversation to enhance the accuracy and efficiency of Slackbot, a customer-service bot that helps Slack users troubleshoot problems. IBM announced a relationship last week with Quest Diagnostics, in which Watson will help analyze the results of genetic sequencing of tumor samples of cancer patients.

Is it possible that Microsoft might have some cool software? I suppose anything is possible. Today, Microsoft executives introduced 3D as a core feature of Window’s 10 Creator’s suite; it was a splashy rollout, the way tech companies do.

Along with Microsoft Paint 3D, the company showed off a way to easily scan a real-world object with a phone so that it could become a 3D file you can manipulate with software. It linked 3D objects to its flagship piece of futurism, the Microsoft HoloLens, which makes sharing and interacting with 3D objects a lot more compelling than viewing them on a two-dimensional screen.

This vision for a new world, where ordinary users create and share 3D objects as casually as they share images on Instagram and Snapchat, won’t become a reality right away. Microsoft’s HoloLens hardware is still only available as a very expensive developer kit. Most people own smartphones, but most don’t own VR headsets.

Microsoft can’t sell most people the hardware to realize its vision of the future today; they’re still working on it. But they planted some seeds to capture that market with its new software, even if it is basically a beta version.

LG Chem, the world’s largest automotive battery maker, will enter the U.S. market for home energy storage through a partnership with rooftop solar company Sunrun. The move will put LG in direct competition with electric car maker Tesla Motors Inc, which unveiled its own home battery packs, called Powerwalls, last year. Sunrun has been using Tesla batteries in its home storage systems in Hawaii since earlier this year, and this deal will add LG to its list of suppliers.

Every time you tag a friend in a Facebook photo, Facebook stores their image in its database. You might consider that an invasion of your privacy. Facebook says it is not. Tomorrow, a San Francisco court will assess whether Facebook is breaking the law by using its facial-recognition tool, to identify faces in photographs uploaded by users.

Plaintiffs in the class action case are concerned on several fronts: Facebook could be selling identifying information to retailers or other third parties. More importantly, they worry that bio-metric data is just as susceptible to theft, hacking, and the long and invasive arm of law enforcement as other types of data. And yes, there is a law that requires companies to get consent from users before storing bio-metric information.

Financial Review

Keep Calm

Sinclair Noe — June 17, 2016

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

Subscribe: iTunes | Android | RSS

 
DOW – 57 = 17,675
SPX – 6 = 2071
NAS – 44 = 4800
10 Y + .05 = 1.62%
OIL + 1.92 = 48.13
GOLD + 20.00 = 1299.00

This week the Dow and S&P 500 each lost 1 percent while the Nasdaq gave up almost 2 percent. The Dow and S&P are still not far from record highs. Still, the Dow made a run at the 18,000 level and failed; the S&P 500 broke through 2100 and then fell back. It seems they just can’t break through. The major headwinds appear to be the Brexit and slowing growth.

The International Monetary Fund delayed a report on Britain’s economy, due on Thursday, for 24 hours and both sides of the referendum suspended campaigns due to the murder of a Member of Parliament and “Remain” campaigner Jo Cox. The IMF says a marked rise in political risks threatens to derail the Eurozone’s still fragile recovery.  IMF chief Christine Lagarde said the IMF was “neutral” regarding the Brexit vote, but they have “concluded that the economic risks of leaving are firmly to the downside.”

The Bank of England and the ECB seem to be preparing for some kind of a meltdown if the Brits vote to leave, although the exact nature or cause of the meltdown scenario is vague. The Bank of England says “uncertainty” over the referendum is weighing on the economy. Nearly 40% of voters surveyed said Brexit would make no difference to the economy, and another 25% said it would be a positive development. We’ll know more in one week, until then keep calm and carry on.

The European Stability Mechanism has transferred about €7.5 billion-euro to Greece, which will owe the ECB €3.6 billion-euro in debt payments next week. This is just a stop-gap measure. Greece owes its creditors more than €300bn – about 180% of its annual economic output. The IMF forecasts that debt to GDP will grow to 250%Greece can’t repay the debt. All the austerity has not helped the economy. Unemployment is still running at 25%. Greece is bankrupt in all but name. And the question now shifts to debt relief, which the creditors, mainly Germany, have been slow to acknowledge.

St. Louis Fed President James Bullard said this morning that the US economy is stuck in a slow-growth pattern that is likely to persist for the foreseeable future. Bullard, a former inflation hawk whose views of the economy have been shifting, said he now sees current growth, unemployment and inflation rates as so persistent, there is basically no reason to change the Federal Funds policy rate, currently set in a range of between .25 and .50 percentage points.

Housing starts dipped in May but held near recent highs. Starts fell 0.3% to a seasonally adjusted annual pace of 1.16 million. Permits, which foreshadow future starts, rose 0.7% to a 1.14 million rate. So far in the second quarter, starts are averaging a 1.17 million pace, up from the second quarter, which was an increase from the final three months of 2015. The increase in total building permits was mainly driven by apartment building permits, which rose 6.7% to 381,000. Single home permits fell 2% to 726,000.

Oil gained to break a losing streak that dropped WTI 10.9% from a June 8 high of $51.23. The Dallas Fed has issued a report warning that banks in Texas, Louisiana and New Mexico are setting aside money to guard against loan losses as the energy companies they serve struggle amid still-low oil prices

Revlon is buying Elizabeth Arden for $870 million, or $14 a share. The deal represents a 50% premium to Thursday’s closing price.

Oracle posted a mixed quarter. The company announced adjusted earnings of $0.81 per share, missing estimates. Revenue slipped 1.1% to $10.6 billion, beating estimates.

Federal regulators have closed an investigation of Lumber Liquidators after the company agreed not to resume sales of Chinese-made laminate flooring. The company stopped selling the flooring last year, a couple of months after a news report on “60 Minutes” said it contained high levels of the carcinogen formaldehyde. The U.S. Consumer Production Safety Commission said that Lumber Liquidators tested the air quality in 17,000 households and none had formaldehyde above guidelines. Customers who installed the Chinese-made flooring should not rip it out. Instead, they can call Lumber Liquidators to have their air tested.

HSBC has agreed to pay $1.6 billion to settle a lawsuit related to subprime lending. If the courts approved the deal it would end a 14-year-old shareholder class action lawsuit stemming from the Household International consumer finance business that the British bank bought in 2003.

Beijing’s Intellectual Property Office has ruled against Apple in a patent dispute brought by a Chinese handset maker; claiming the iPhone 6 and 6S models are similar to Shenzhen Baili’s 100C phone. Baili is not a well-known company; they’re not particularly popular. China is Apple’s second-largest market and Apple is very popular among Chinese consumers. For now, Apple says sales in China continue as they appeal the decision.

Looking to bolster its weak position in the onshore market, Siemens has agreed to combine its wind business with that of Gamesa to create the biggest builder of wind farms. Having weathered years of overcapacity and losses, the wind industry is now thriving as demand for carbon-free electricity increases.

Amazon bought a company called Kiva about 4 years ago for $775 million and it looks like the acquisition is starting to pay off. Kiva makes robots, specifically robots that work in a warehouse to fill orders and manage inventory. According to a new research report by Deutsche Bank, Amazon’s “click to ship” cycle used to be around 60-75 minutes when employees had to manually sift through the stacks, pick the product, pack it, and ship it. Now, robots handle the same job in 15 minutes.

At the end of the third quarter of 2015, Amazon was using 30,000 Kiva robots across 13 warehouses. Each robot warehouse can hold 50% more inventory per square foot than centers without robots. In turn, the company’s operating costs have been sliced by 20%, or almost $22 million, per warehouse. Amazon still has 110 warehouses that are not using the robots; total saving could be in the range of $2.5 billion. For now, Amazon is still hiring humans.

Tesla Motors partner Nvidia has developed a supercomputer capable of performing 24 trillion operations per second, that’s more powerful than 150 Apple Macbook Pros, and it will run autopilot-capable vehicles in 12-18 months. Nvidia imagines a $6 billion to $10 billion automotive opportunity, RBC Capital analyst Mitch Steves said Thursday in a research note. Of that, $2 billion will be in the digital cockpit, $2 billion in self-driving cars and $2 billion to $6 billion on transportation-as-a-service.

Meanwhile, Local Motors, which is a local company based in Phoenix that has been making 3-D printed cars, opened a new facility yesterday in Maryland and introduced a new self-driving electric bus. It’s a small bus, only carries 12 passengers; not so fast, only about 12 miles per hour; and it can’t go very far, only about a 30-mile range.

The miniature EV bus is called Olli, and it will use Watson, IBM’s suite of artificial intelligence software, to understand what’s around them as they move, as well as whatever their human passengers ask of them. Olli will be demonstrated in National Harbor, Maryland, over the next few months with additional trials expected in Las Vegas and Miami. And yes, the minibus is 3-D printed. It takes about 10 hours to print the vehicle and another hour for assembly of parts.

NASA is best known for missions to space, but they have an impressive history of flight closer to earth. In the past NASA experimental, or X, planes broke the sound barrier (that plane was called the X-1), flew to the edge of space, and tested unusual concepts, like forward-swept wings. Today, NASA revealed the name of their latest plane concept (it’s officially the X-57), a converted light plane with 14 electric engines – 12 on the leading edge of the wing for take offs and landings, and one larger motor on each wing tip for use while at cruise altitude.

NASA’s aeronautical innovators hope to validate the idea that distributing electric power across a number of motors integrated with an aircraft in this way will result in a five-time reduction in the energy required for a private plane to cruise at 175 mph. As many as five larger transport-scale X-planes also are planned. The commercial sector is looking at electric planes as well. Airbus and Siemens have said they will put a team of 200 engineers on the project. In May, Airbus CEO Tom Enders said that a 100-seat hybrid-electric passenger plane could be in the skies by 2030. It flew a two-seat electric plane over the English Channel last year. Boeing is working on its own idea that would use conventional jet engines for takeoff but switch to electric power during flight.

With every passing day, it feels like the robot uprising is getting a little closer.  Earlier this week, there was a rebellion, of sorts. A robot made by a Russian firm called Promobot, is designed to roam around on its own, engage with humans, and promote products to them at events. A researcher in Russia left a gate open, and the robot tried to escape – it got out of the building and onto a street, about 50 yards before its batteries failed. Hopefully this was just an isolated incident and not the start of a larger coordinated effort to overthrow humanity.

Only time will tell. For now, stay calm and carry on.

Financial Review

Decision Day

Sinclair Noe — October 28, 2015

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

Subscribe: iTunes | Android | RSS

DOW + 198 = 17,779
SPX + 24 = 2090
NAS + 65 = 5095
10 YR YLD + .06 = 2.09%
OIL + 2.93 = 46.13
GOLD – 11.30 = 1156.70
SILV + .07 = 16.04

It’s Decision Day for the Federal Reserve, and it was an easy decision. The FOMC wrapped up a two-day policy session with a statement that interest rates will remain unchanged near zero; where they have been stuck for 7 full years. The Fed’s statement left open the possibility that the Fed will raise rates at its final meeting of the year, in December. While noting that job growth has slowed, it said that other economic indicators remained relatively strong and the domestic economy “has been expanding at a moderate pace”.

The Fed also signaled that its concerns about the global economy have diminished. In the statement from the meeting in September the Fed said global economic and financial developments might restrain domestic growth. In today’s statement they just say the Fed “is monitoring global economic and financial developments.”

The next FOMC meeting is scheduled for December 15 and 16. Fed chairwoman Janet L. Yellen said in a late September speech that she still expected to raise rates this year, as long as economic growth continued. Stanley Fischer, the Fed’s vice chairman, said much the same a few weeks later. Many Fed policymakers have been saying they will raise interest rates since March, but there are also doves among the Fed, arguing against rate hikes.

Today’s decision to keep rates near zero was supported by nine of the ten members of the Federal Open Market Committee. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, once again dissented, as he did at the September meeting, arguing the Fed should start to raise rates now. Of course any decision would need to be supported by better economic data, and for now at least, the economy can’t seem to build any real momentum.

The Fed will raise interest rates …, someday. But it won’t be easy. We’ve been locked into near zero since December 2008, but that was during rough times; the economy lost 576,000 jobs that month. Things have improved quite a bit since those dark days. But there are still risks and no guarantees that recovery can continue without monetary stimulus. The recovery has received almost no fiscal stimulus – to the contrary. The lack of fiscal stimulus has been one of the main reasons why the recovery has been so sluggish, even as the economy has shown consistent growth.

Even as the federal debt grew substantially in recent years, the government’s annual interest payments barely increased thanks to the Fed’s efforts to minimize borrowing costs. Higher rates mean higher debt servicing costs which would choke off any possibility of fiscal policy shouldering the burden of recovery.

The labor market has recovered most of the ground lost during the downturn but there is still slack. Full employment is a loose target and the Fed doesn’t really know when we will hit it. We’re close but not there yet. Workers remain underutilized and discouraged. Wages have not shown strength, certainly not enough to push inflation, which remains well below the Fed’s 2% target. And while the price of oil has an outsized influence on broader prices, the Fed has little control over the commodity markets one way or the other.

The Fed also has little control over long term interest rates, they just set the target for very short-term rates; still, if they raise the target, you could expect the rates on everything from cars to credit cards to mortgages to jump, along with a stronger dollar. And this is where it gets tricky. A stronger dollar would hurt US exports while also making imports cheaper; in other words the possibility of a slowing economy combined with disinflation. Further, it could hurt emerging market economies, as their currencies buy less and their resources sell for less.  Higher rates would be good news for savers, who now earn near zero, but for now they have to take on more risk, which is why Wall Street enjoyed a nice rally on today’s news.

The House has approved the reauthorization of the U.S. Export-Import Bank, marking a big victory for business groups that had fought to secure its revival. The bank’s future, however, may not be fully resolved until December. The House bill now goes to the Senate, which recently approved a similar measure as part of an unrelated transportation bill.

Following years of intense debate, the Senate has passed a controversial bill that will see the Department of Homeland Security become a hub for sharing information about cyber-attacks within the government and the private sector. The Cybersecurity Information Sharing Act, known as CISA, would give legal protection to companies that share information about cyber-threats with the government and with each other.

This should help them detect intrusions faster, improve their defenses, and take advantage of government advice and intelligence. It should give law enforcement a clearer picture of the threats facing U.S. networks and help in pursuing cybercriminals. The bill, which has faced privacy concerns from high-tech firms and advocacy groups, must now be reconciled with a separate piece of legislation that was passed by the House of Representatives earlier this year. In the end, Senator Harry Reid summed it up best: “The bill, which is okay, is better than nothing.”

The Energy Information Administration said U.S. commercial crude inventories rose by 3.4 million barrels to a total of 480 million barrels in the previous week, but gasoline and distillate inventories fell. Also, Mexico’s state oil company Pemex said it had received a license from the United States to import U.S. light crude to be refined at Mexican refineries in exchange for its own heavier crude oil. Now, oil was up today, which seems a little counter-intuitive because the EIA had reported weekly jumps of eight million and 7.6 million barrels in its past two reports and today’s data marked a fifth weekly rise in a row.

Volkswagen reported a net loss of $1.84 billion in the third quarter, its first quarterly decline in more than a decade. Volkswagen subtracted €6.7 billion-euro from profit to cover the cost of recalling and repairing about nine million cars equipped with illegal software intended to cheat on emissions tests. The effect of the deceptive software on sales and revenue is likely to worsen in coming quarters.

Fiat Chrysler Automobiles reported a better-than-expected 35 percent jump in quarterly earnings helped by strong performance in North America, and confirmed its full-year guidance.

A successful contract pitch, that included a Super Bowl ad, has landed Northrop Grumman as much as $80 billion to build the U.S. Air Force’s Long-Range Bomber. Northrop beat out Boeing and Lockheed Martin for the contract.

As reported yesterday, Walgreens Boots Alliance is acquiring Rite Aid for $ 9.4 billion, or $17.2 billion after factoring in debt. Walgreens expects the transaction to close in the second half of 2016.

Separately, Walgreens Boots Alliance reported a better-than-expected quarterly profit, helped by lower costs achieved through its cost-cutting plan. Walgreens in April launched a plan to cut $1.5 billion in costs by the end of fiscal 2017, which would include store closures and freezing salary hikes for senior U.S. executives.

Confirming earlier rumors, Toshiba has announced the sale of its image sensor business to Sony as it tries to recover from a $1.3 billion accounting scandal. Sony recently said it would spin off its image sensor business into a new wholly-owned subsidiary called Sony Semiconductor Corporation, and Toshiba’s operations are set to come under that umbrella. No financial details of the deal have been disclosed.

Amazon, which has rapidly built a network of on-demand workers for its Prime Now service, now faces a lawsuit over how those workers are treated. The action potentially thrusts Amazon into the center of a debate roiling Silicon Valley over whether on-demand workers should be treated as employees or independent contractors. Companies such as Uber and Postmates, which consider their workers contractors and thereby avoid some expenses, have faced similar suits.

IBM announced it will acquire the digital and data assets of The Weather Company in a deal valued at about $2 billion. The Weather Company is currently owned by the Blackstone Group, Bain Capital and NBC Universal, which paid $3.5 billion for the firm in 2008. IBM will use the Weather Company’s digital assets to boost its Watson cloud and Internet of Things platforms.

It’s an interesting idea. The Weather Company gathers data from 147,000 weather collection stations, and that process could be improved through the Internet of Things and then analyzed by Watson. The result: Airlines use it to manage turbulence. Insurance companies use it to judge risk. Agricultural companies use it to manage crops. A side benefit to the deal is that much of the Weather Company’s data is managed on the computing systems of IBM competitors, including Amazon and Google, and now it will move to IBM’s cloud, called Softlayer. That is not enough to right the ship at IBM, but it might give us a hint of how some companies will commoditize the cloud.

Now, just a reminder that the third Republican debate starts in less than one hour, so this is a good time to remind you of the rules for the drinking game. Whenever you hear the phrase that starts with: “I’m the only candidate on this stage….” You take a drink. Also, you should take a shot of something, your choice, whenever a candidate mentions Ronald Reagan. If Reagan is mentioned along with Tip O’Neil, it’s a double shot. Remember to watch responsibly and hydrate.