Financial Review

Watch and Wait

Sinclair Noe — March 8, 2017

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DOW – 69 = 20,855
SPX – 5 = 2362
NAS + 3 = 5837
RUT – 8 = 1366
10Y + .04 = 2.55%
OIL – 2.95 = 50.19
GOLD – 7.70 = 1208.90

The S&P and Dow are down for 3 straight sessions. Oil closed at a 3-month low. Eight years ago, the Dow Industrial average was barely holding on at the 6,500 level. The S&P 500 index had dropped to 666. Since those dark days in the Spring of 2009, the Dow has climbed over 320%. The S&P is up 354%.

If you had purchased Apple 8 years ago, you would have a 1,000% gain. Home Depot delivered a 608% gain. Not very likely you were buying stocks 10 years ago, this week; a lottery ticket would have been an easier play.

Payrolls processor ADP reports the US economy added 298,000 private-sector jobs in February, the most since April 2014. ADP’s report wasn’t just strong at the headline—it also suggested growth in well-paying fields, as construction and professional & business sectors each added 66,000 jobs.

While the relatively lower-paid education & health and leisure & hospitality each added another 40,000 jobs, manufacturers added 32,000 jobs. The ADP report suggests the official non-farm payrolls report from the Labor Department, which also covers government jobs, might come in well ahead of the current 200,000 consensus estimate.

Productivity increased 1.3% in the fourth quarter. Even with a healthy fourth-quarter boost, productivity only rose 0.2% in 2016. That’s the smallest gain since 2011 and maintains a post-recession trend of extremely weak increases in productivity.

The government’s first revision of fourth-quarter productivity showed little change in output, hours worked or labor costs. Productivity has averaged 1% growth per year since 2007, compared to a 2.6% rate from 2000 to 2007.

The European Central Bank meets tomorrow to announce its latest call on rates and stimulus measures. Eurozone Inflation is finally back at the ECB’s target of around 2% for the first time since 2013. Inflation is one of the key measures the central bank uses to decide on interest rates and other stimulus measures.

And the Eurozone purchasing managers’ index jump to a 70-month high and gross domestic product growth is outpacing that of the US. But that doesn’t mean the ECB will raise rates; most analysts think they will only make adjustments to forward guidance.

The Federal Reserve meets next week to announce monetary policy. Yesterday, Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said he expects the Federal Reserve to begin a campaign this month of “old school” sequential interest rate hikes until “something breaks,” such as a US recession.

Japan’s economy gets an upgrade. The Final GDP reading for the fourth quarter showed the Japanese economy grew at a 0.3% clip, ahead of the 0.2% that was previously recorded. Private business investment grew by 2% in the quarter, making for the fastest growth since the first quarter of 2014.

China reported a rare trade deficit in February equal to about $9 billion. However, the country’s trade data are frequently distorted this time of year, because of the celebration of the Chinese New Year. Still, it’s the first monthly trade deficit China has reported in three years.

An indicator of the health of the global economy grew at its fastest pace in 6 years. Data released by the International Air Transport Association showed that revenue passenger kilometers grew by 9.6% compared with a year earlier, making for the fastest growth since April 2011.

OPEC and non-OPEC producing countries have reiterated their pledge to uphold the terms of the production cut agreement reached late last year; top energy ministers said they were committed to removing 1.8 million barrels from the market. So far, it hasn’t happened.

This morning, the American Petroleum Institute reported oil stocks rose by 11.6 million barrels last week. US crude production is projected to surge to a record 9.7 million barrels a day next year, per the EIA’s monthly Short-Term Energy Outlook released Tuesday.

The US Energy Information Administration on Wednesday reported an 8.2 million-barrel climb in domestic crude supplies for last week, lifting total commercial inventories to a new record weekly level of 528.4 million. That marked a ninth straight weekly increase.

Mexico has canceled existing sugar export permits to the United States in a dispute over the pace of shipments. Reuters report a letter sent by Mexico’s sugar chamber to mills partly blamed the situation on unfilled positions at the US Department of Commerce, which it said has led to a “legalistic” interpretation of rules with no US counterparts in place in Washington for Mexican officials to negotiate with. Mexico is the top foreign supplier of sugar to the US.

A new report commissioned by the federal government accuses Caterpillar of using tax and accounting fraud to prop up its stock price. The New York Times reports no charges have been filed, and it is not clear whether investigators agree with the findings or intend to act on them.

The report, which has not been made public or made available to Caterpillar, outlines a company strategy for bringing home billions of dollars from offshore affiliates while avoiding federal income taxes on those earnings. Last week, federal agents raided three Caterpillar buildings near its headquarters in Peoria, Ill., as part of the investigation.

The company’s tax practices have been a focus of government investigators since a 2014 Senate hearing found that the company cut its tax bill by $2.4 billion over 13 years, moving earnings out of the United States and into a Swiss subsidiary, despite internal company warnings that the strategy lacked a business purpose, other than tax avoidance.

The CIA faces what could potentially be the biggest ever leak of its secrets, after Wikileaks published thousands of documents claiming to show how the agency uses cyber espionage tactics to hack into smartphones and other devices. The leak, named “Vault 7” by WikiLeaks, will once again raise questions about the inability of US spy agencies to protect secret documents in the digital age.

The methods could reportedly capture text and voice messages on iOS, Android and Whatsapp before they were encrypted, and could hack Microsoft software and Samsung TVs. Apple released a statement saying they have already dealt with some of the issues raised in the leaks. Microsoft is reportedly considering the issue.

Microsoft says it is committing to use chips based on ARM Holdings technology in the machines that run its cloud services, potentially imperiling Intel’s longtime dominance in the profitable market for data-center processors. Microsoft has developed a version of its Windows operating system for servers using ARM processors, working with Qualcomm and Cavium.

In Hawaii, the Kauai Island Utility Cooperative is now drawing energy from 272 Tesla power packs to provide electricity after dark. While the island previously relied on solar and other renewable energy during the day, it had no way to store the sun’s power after it went down.

Using stored energy from Tesla’s power packs is expected to save KIUC 1.6 million gallons of diesel fuel annually, which has traditionally been the way the utility generates power after dark. Tesla says the power packs will cut KIUC costs per kilowatt hour from 15.5 cents down to 13.9 cents. The 13.9 cents is a fixed price for the next 20 years.

The West Virginia Gazette-Mail obtained previously confidential drug shipping sales records sent by the US Drug Enforcement Administration to West Virginia Attorney General’s office. The records disclose the number of pills sold to every pharmacy in the state and the drug companies’ shipments to all 55 counties in West Virginia between 2007 and 2012.

In six years, drug wholesalers showered the state with 780 million hydrocodone and oxycodone pills, while 1,728 West Virginians fatally overdosed on those two painkillers. The unfettered shipments amount to 433 pain pills for every man, woman and child in West Virginia.

The nation’s three largest prescription drug wholesalers -McKesson, Cardinal Health and AmerisourceBergen – supplied more than half of all pain pills statewide.

Urban Outfitters CEO Richard Hayne does not have comforting words for the retail industry. Hayne said on the company’s earnings conference call on Tuesday: “Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s,” “Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst. We are seeing the results, doors shuttering and rents retreating. This trend will continue for the foreseeable future, and may even accelerate.”

Shares in H&R Block were higher after the company reported results that beat Wall Street expectations.

German sportswear giant Adidas reported its 2016 full-year earnings on Tuesday, and its revenue of 19.3 billion euros was slightly below analyst expectations, but they raised guidance for 2017 and beyond. Adidas’s overall sneaker sales jumped 80% in 2016; a substantially larger spike than any major competitor saw.

Wall Street firm, State Street Corp., has put up a statue of a girl in front of Lower Manhattan’s well-known bronze charging bull, as if to fearlessly stare it down. Placing the diminutive, grade school-aged girl in front of the massive bull on the eve of International Women’s Day was a way of calling attention to the lack of gender diversity on corporate boards and the pay gap of women working in financial services.

State Street said one out of four of the companies that make up the Russell 3000 Index still have no female representation on their boards.

Financial Review

To Be Fair

Sinclair Noe — April 16, 2015

 

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DOW – 6 = 18,105
SPX – 1 = 2104
NAS – 3 = 5007
10 YR YLD – .02 = 1.88%
OIL + 12 = 56.51
GOLD – 3.70 = 1198.90
SILV – .04 – 16.37

Yesterday the ECB pledged to fulfill its €1 trillion-euro bond-buying program; today Eurozone government borrowing costs slid to new lows. Germany’s 10-year yield fell almost a basis point to 0.087% in early trade, while yields on all German government debt out to January 2024 were negative. Other notable levels include France’s 30-year yield, which fell below 1%, and the yield on two-year Portuguese bonds, which is on its way below zero.

The price of Greece’s three-year notes dropped the most since February and Greek corporate bonds also slumped. Credit-default swaps suggested there was a 79 percent chance of the country being unable to repay its debt in five years. Greece’s three-year yield is at a multiyear high, up 359 basis points at 27.7%. Expectations are low that Greece can reach a deal with its creditors at next week’s Eurogroup meeting. Standard & Poor’s has downgraded Greece’s credit rating to CCC+ with a negative outlook, citing a substantial risk of a default due to the country’s drawn out negotiations with its creditors.

Greece has been pushed a step closer to default and potential exit from the euro after one of its main lenders, the International Monetary Fund, all but ruled out allowing the cash-strapped country to delay repaying the €1 billion-euro due next month. Today, the head of the IMF, Christine Lagarde, said delaying the payments would be an unprecedented action that would only make the situation worse. Her comments followed a report that the Greek finance minister, Yanis Varoufakis, had sounded out the IMF over whether Athens could ask for a delay on the payments it is struggling to afford. Varoufakis denied asking for leniency. So Greece might default, that’s nothing new, but there are still plenty of options; some more realistic than others; we might not expect an enlightened solution to the Greek problem, but with any luck there will be something creative.

The Labor Department reports jobless claims increased by 12,000 to 294,000 in the week ended April 11. Fewer than 300,000 American workers filed applications for unemployment benefits for the sixth consecutive week. The total number of people currently receiving benefits was the lowest since 2000.

The pace of home construction rebounded slightly last month after being snowed out in February. Construction starts on new homes increased 2% in March at an annualized rate of 926,000.

Congressional leaders unveiled a bipartisan bill today that gives president Obama fast track authority to negotiate a trade deal with 11 other Pacific nations. The bill gives Congress the power to vote on the Trans-Pacific Partnership once it’s completed, but they could not amend the deal. It would essentially be an up or down vote. The legislation would also make any final trade agreement public for 60 days before the president signs it, and up to four months before Congress votes. If the agreement fails to meet the objectives laid out by Congress – on labor, environmental and human rights standards – a 60-vote majority in the Senate could shut off fast track trade rules and open the deal to amendments.

Former Fed Chairman Ben Bernanke has accepted an adviser role at a hedge fund. Bernanke will join Citadel Investment Group as a senior adviser.  Bernanke reportedly chose Citadel because it is not regulated by the Federal Reserve and he won’t be doing lobbying. So, in a way he’s gone from one hedge fund to another. And this is just another example of the revolving door between government and business, but in fairness, when Bernanke was Chairman of the Fed he couldn’t even refinance his mortgage.

Netflix  announced first quarter earnings late yesterday; net income fell to $24 million, or 38 cents a share, from $53.1 million, or 86 cents, as the strong dollar contributed to losses outside the U.S. But Wall Street isn’t paying attention to that, rather the focus is on subscriber growth; and Netflix added 4.8 million new subscribers worldwide.

Goldman Sachs posted the highest earnings per share in more than five years as all of its major businesses topped analysts’ estimates and the firm paid out a smaller portion of revenue to compensate employees. Net income surged 40 percent to $2.8 billion, and trading accounted for much of the increase. That means the improved returns come at a higher risk.

Citigroup reported its highest quarterly profit in nearly eight years. Citi has been slowly getting its house in order by cutting costs and shedding assets that are not critical to its main businesses. It has sold retail operations in many countries and shrunk its US branch network. Adjusted net income rose 16% to $4.8 billion, or $1.52 per share, beating average analyst estimates of $1.39 per share. Adjusted revenue fell 2% to $19.81 billion.

American Express reported a 6.3% rise in quarterly profit, helped by higher spending by card holders and an increase in net interest income.

UnitedHealth reported earnings and revenue that beat expectations. The company also raised its 2015 earnings forecast.

McDonald’s Japan forecast sharp losses. The 49%-owned subsidiary expects an operating loss of $210 million this year after a damaging series of food safety scandals, a costly french fry shortage, and fierce competition in the coffee sector. The operator of McDonald’s in Japan announced it would close 131 restaurants and renovate 2,000 more as part of its restructuring plan.

Yesterday more than 60,000 workers in 200 cities joined in what organizers claimed was the largest protest by low-wage workers in US history. The demonstrations, calling for a $15 per hour minimum wage, were the latest in a series of strikes that began with fast-food workers in New York in November 2012. The movement has since attracted groups outside the restaurant industry: Wednesday’s protesters included home-care assistants, Walmart workers, child-care aides, airport workers, adjunct professors and other low-wage workers. It also sparked international support, with people protesting low wages in Brazil, New Zealand and the UK.

Despite a slow start to IPO debuts so far this year, three big companies went public today. Etsy, the Brooklyn-based online marketplace for artisanal goods, opened for trading at $31 a share on the Nasdaq stock market. That is nearly double its initial offering price of $16 a share. Not bad for an e-commerce platform that so far hasn’t posted a profit and sells handmade items. Etsy is all about potential; it boasts more than 1 million active sellers, with access to 19.8 million active buyers on the site. And the company says it has achieved just shy of $2 billion in gross sales last year, with buyers or sellers in nearly every country.

Meanwhile, Virtu Financial, the big high-frequency trading firm, opened at $23 a share, about 21 percent higher than its $19 offering price. This is the second effort at going public in two years for Virtu. It postponed the stock sale last spring because of controversy about high-frequency trading prompted by the publication of Michael Lewis’s book “Flash Boys.” Virtu doesn’t help its case when they publish a chart showing one single day of losses in six years of trading activity; which is impossible unless you are gaming the trade.

The retailer Party City opened for trading at $20.40, above its offering price of $17 a share. Party City is going public three years after the private equity firm Thomas H. Lee Partners bought control of the nearly 70-year-old seller of party goods. So far this year, 38 companies have gone public in the US, about 60% fewer than at the same time last year.

Bombardier has hired UBS and Citigroup to advise on a potential IPO or sale of its rail unit, which could be valued at about $5 billion. Splitting off the rail unit would allow management to focus on turning around Bombardier’s aerospace division, which posted a 2014 loss of $995 million.

A New York federal bankruptcy judge has blocked most lawsuits against General Motors related to defective ignition switches. The judge ruled that plaintiffs could not sue the company for at least 84 deaths caused by an ignition fault because they predate GM’s 2009 bankruptcy.  The liability shield included in the 2009 agreement that lifted GM from bankruptcy should be allowed to remain in place, even though the company has acknowledged that many employees knew about the defective switch at the time but failed to alert owners of the cars that they might have a potential claim against the company.

The ruling shuts down not only lawsuits stemming from accidents that took place before July 10, 2009, but also most of the suits seeking economic damages for the loss in value of the defective cars. Lawyers had estimated that the economic loss claims potentially totaled $7 billion to $10 billion. Economic loss cases will be allowed to go forward, the judge ruled, only if they can be tied solely to actions by the post-bankruptcy company, known as New GM.

Last year the auto industry issued more recalls involving old models than ever before; more than 60 million vehicles have been recalled in the United States, double the previous annual record in 2004. In all, there were about 700 recall announcements last year, an average of two a day, affecting the equivalent of one in five vehicles on the road.

WikiLeaks has published 30,287 documents and 173,132 emails stemming from last winter’s cyber-attack on Sony Pictures Entertainment. The hack was reportedly initiated by North Korea in response to the studio’s decision to release “The Interview,” a comedy that centered on an assassination attempt on North Korean leader Kim Jong-un. That resulted in a series of embarrassing revelations, exposing correspondence between top executives and producers that ultimately led to the ouster of studio chief Amy Pascal. The correspondence released today exposes Sony’s political fundraising and its lobbying activities on behalf of anti-piracy. In particular, WikiLeaks cites emails detailing how members of the studio set up a “collective” in order to get around campaign donation limits and send money to New York Governor Andrew Cuomo, because of his support for state film and television tax incentives and work cracking down on piracy.