Financial Review

Meet the Press

Sinclair Noe — January 11, 2017

Podcast: Play in new window | Download (Duration: 12:16 — 5.6MB)

Subscribe: iTunes | Android | RSS

DOW + 98 = 19,954
SPX + 6 = 2275
NAS + 11 = 5563
RUT + 2 = 1373
10 Y – .01 = 2.37%
OIL + 1.57 = 52.39
GOLD + 4.20 = 1192.50

The Nasdaq pushed to fresh record highs again. The S&P and Dow are very close to records. The S&P 500 index was unchanged yesterday – not a small move – unchanged.

So, we did a little digging. The last time the index ended a trading day flat was Jan. 3, 2008. Before 2008, the benchmark index had gone nearly 11 years without posting an unchanged day. Since 1980, the S&P has recorded just 10 unchanged sessions.

There were no top-tier U.S. economic reports, nor any Fed speeches. President-elect Trump held his first press conference since the election, and yes, it moved the markets.

The healthcare sector dropped after Trump said the country needs more competitive drug bidding. He said pharmaceutical companies are “getting away with murder” by charging high drug prices. Health care dropped more than 1.5 percent as the worst performer in the S&P 500, with the pharmaceuticals sub-sector down more than 1.5 percent and the biotechnology sub-sector off nearly 3 percent.

Lockheed Martin dropped about 1 percent after Trump said the F-35 fighter jet project “is way behind schedule and billions over budget.” Mexico’s peso weakened to a historic low of 22 per dollar, then bounced higher. Gold gained and the Dow dropped.

The dollar dropped as Trump talked about trade but then rebounded when Trump said: “There will be a major border tax on these companies that are leaving and getting away with murder and if our politicians had what it takes they would’ve done it years ago.”

Trump insisted he will not divest himself of his businesses as he assumes the presidency; he will turn over operations to his two oldest sons and will not be involved in operations. The Trump Organization will not enter into any new deals with foreign partners.

Prior to the press conference a Trump lawyer said any profits from foreign government payments to his hotels will be donated to the US treasury. The press conference probably raised as many questions as it answered regarding conflicts of interest.

Trump first said he thinks Russia directed cyberattacks on Democratic Party targets, but later made his view less clear. He said the hacking activity “could be others” and repeatedly deflected attention to attacks by China and other foreign countries and institutions.

He contended that Russia will no longer hack the U.S. when he is president but did not answer questions about whether he will uphold Obama administration sanctions in response to suspected interference in the 2016 election.

Trump blasted BuzzFeed for reporting on unverified allegations that Russia put together compromising information on him. Trump called BuzzFeed a “failing pile of garbage,” arguing the online media outlet “will suffer the consequences.” He also took CNN to task for “going out of their way to build it up,” before refusing to take a question from CNN’s Jim Acosta; saying, “Your organization is terrible. I am not going to give you a question, you’re fake news.”

This story about a possible Russian dossier of compromising info about Trump also raises more questions than it answers, not just about Trump, or the media, but also about the intelligence community. Strange days indeed.

So, it was an interesting and unique press conference. It also shifted focus off the confirmation hearings, which continue on Capitol Hill.

The World Bank says global growth will pick up slightly in 2017. The World Bank has lowered its 2017 global growth forecast to 2.7% from its June outlook of 2.8%, but that would still be ahead of the 2.3% growth that was experienced in 2016.

The World Economic Forum told us what to worry about. WEF’s Global Risks Report, which sets the agenda for the annual confab of global heavyweights in Davos next week, identified rising nationalist sentiment, economic inequality, technological disruption (i.e., jobs becoming obsolete), and climate change as the biggest risks in 2017.

The environment is now considered not just more likely to cause global disruption, but also more capable of generating the biggest impact. The report concludes that the biggest risk for 2017 is “extreme weather events.” It’s not as if the economic risks have just magically melted away. It’s just that environmental problems are considered more urgent than before. Solutions will be discussed by world leaders and corporate bigwigs in Davos next week.

Some of those ideas were echoed in research from Wells Fargo Investment Institute which says we are in the “age of discontent” and we should invest accordingly. The report says households across the country have felt economic recovery to very different and uneven degrees post-financial crisis, according to the report, which attributes such “discontent” for market participants to frustration across economic classes, along with increased political uncertainty on the horizon.

The stark differences in economic recovery might be found in the employed versus the unemployed, savers versus consumers, and small business versus large corporations. What’s more is economic growth is not improving quickly enough for many, the report added, citing wage and real income stagnation as forces “fueling protectionism and geopolitical unrest.”

US oil output is expected to rise in 2017 and 2018. A report released by the US Energy Information Administration on Tuesday showed US crude-oil production was expected to increase by 110,00 barrels a day in 2017 to 9 million and by another 300,000 barrels a day in 2018.

Bill Gross of Janus Capital, who was once referred to as the “Bond King,” says the 2.60% level on the 10-year Treasury yield is what everyone should be watching, as a breakout above that level would mark the end of the 30-year bull market in bonds.

Gross says the 2.6% level is “much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.”

Jeff Gundlach, CEO of Doubleline Funds (sometimes called the NEW “Bond King”) says the bond bull market is dead if the 10-year hits 3.00%. During the presentation of his 2017 outlook, Gundlach said a move to 3.00% and above would have “a real impact on market liquidity in corporate bonds and junk bonds.”  If the 10-year moves back above 3% it will be the end of lower-highs in the recent trend and signal, finally, the end of an era.

Gundlach also covered high yield or junk bonds; the major points from his presentation: defaults are high, the rally is entirely predicated upon rising oil prices but seems overdone because the last time spreads were this tight oil was at $80.

Gundlach said: “Many people seem to think that because junk bonds had a great 2016 that they’re somehow not vulnerable to interest rate hikes. Nothing could be further from the truth. The junk bond market has decent interest rate risk on it, it’s just that they were depressed with commodities so low.”

As for stocks, Gundlach says they are overvalued on almost every metric. Looking at forward price/earnings ratios Gundlach says we would need a combination of buybacks funded by repatriated cash, plus lower taxes and some pro forma magic to justify valuations.

Looking to stoke demand for electric cars, BMW, VW, Ford and Daimler are aiming to build a network of ultra-fast charging stations across Europe. The 400 next-generation 350 kilowatt chargers would be nearly three times as powerful as Tesla’s, reloading an electric car in minutes instead of hours.

Airbus’s productivity surged in December, allowing it to record a full year delivery of 688 planes, but it still fell short of rival Boeing, which rolled out 748 jets to customers. But in the race for new business, Airbus recorded 731 net orders in 2016, compared with the 668 of Boeing. Still, the combined book-to-bill ratio of the two giants dipped below 1 for the first time since 2009, placing a dent in record industry order backlogs.

Canada’s largest alternative-asset manager has submitted proposals regarding its interest in buying the yieldcos of bankrupt solar company SunEdison. Brookfield Asset Management would purchase all of TerraForm Power for $11.50 per share in cash, or a total consideration of $1.6B, and may even raise its offer to $12.50 per share if it can also buy TerraForm Global.

Financial Review

Hack Attack

Sinclair Noe — December 29, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 13 = 19,819
SPX – 0.66 = 2249
NAS – 6 = 5432
RUT + 2 = 1363
10 Y – .03 = 2.48%
OIL – .29 = 53.77
GOLD + 16.70 = 1159.40

As expected, the Obama administration is fighting back against Russia for its hacking efforts to influence the election. The operation was broad, involving not only hacking the Democratic National Committee but scanning and intruding into state voter databases. The hackers leaked the pilfered e-mails in a bid to damage Clinton’s campaign, per U.S. intelligence agencies.

The administration sanctioned 2 Russian intelligence services, ejecting 35 Russian intelligence operatives from the US. The FBI and Homeland Security Department also released a report with technical evidence intended to prove Russia’s military and civilian intelligence services were behind the hacking to expose some of their most sensitive hacking infrastructure; a more detailed report will be released in 3 weeks, including malware and computer addresses.

Members of both parties in Congress have expressed alarm about the campaign hacking and vowed to conduct hearings into Russia’s role.

The number of Americans who applied for unemployment benefits in the week before Christmas fell by 10,000 to 265,000 – the lowest levels since last summer. Initial claims have been under 300,000 for 95 straight weeks, the longest streak since 1970. Just a reminder, the December Non-Farm Payroll report from the Department of Labor will be published on Friday, January 6; with early estimates running around 170,000 net new jobs in December.

Jobs are the lifeblood of the economy, and will give direction to the Federal Reserve moving into the New Year. We remember that last year the Fed was predicting 4 rate hikes for 2016; we ultimately got one increase in December. Now the Fed is predicting 3 rate hikes for 2017 as the economy inches toward full employment. So, the jobs reports are crucial data.

The trade deficit increased 5.5% in November to a seasonally adjusted annual $65 billion. Exports rose 1.0% to $121 billion, while imports totaled $187 billion, up 1.2% from October. Wholesale inventories edged up 0.9% to a level of $594 billion; that was 1.2% higher than a year ago. A bigger trade deficit is negative for GDP growth.

Sprint confirmed it would “create or bring back to America” 5,000 jobs, mostly in customer care and sales. President-elect Trump campaigned on bringing jobs back to the US but the 5,000 Sprint jobs confirmed Wednesday aren’t exactly new — they are part of a previously announced initiative led by Japan’s Softbank to create 50,000 jobs in the US.

Splitting from an earlier ruling, a federal appeals court has found that in-house courts at the Securities and Exchange Commission are unconstitutional. That marks a heavy setback for the agency’s enforcement efforts as it uses five administrative-law judges to handle most routine cases. A spokesman said the SEC is reviewing the decision and wouldn’t immediately have further comment.

The Food and Drug Administration released cybersecurity recommendations today for companies that manufacture internet-connected medical devices. The FDA says unsecured devices are subject to hacking and could prove fatal.

Alere is appealing a decision by the Centers for Medicare and Medicaid Services to revoke Medicare billing privileges for the health-care provider’s Arriva Medical diabetes business. CMS had alleged that Arriva submitted Medicare claims for patients who had died. Alere has denied an impropriety.

Sears just announced a fresh round of store closures. The company told employees on Tuesday that it will close 30 Sears and Kmart stores in early 2017. Most of the stores will start liquidation sales on January 6 and go out of business between late March and mid-April. This latest round of closures will bring the total number of stores that Sears has closed this fiscal year to more than 200.

That means the retailer will have fewer than 1,500 stores left by early 2017. That’s down nearly 60% from 2011, when Sears had more than 3,500 stores. The unofficial list of new store closures does not include Arizona stores. CEO Eddie Lampert, a hedge fund manager and Sears’s biggest investor, will offer a $200 million letter of credit to the department-store chain through affiliates of his firm, ESL Investments Inc. The amount could be expanded to as much as $500 million with the consent of lenders.

Apple and Samsung dominated Christmas wish lists this year but both had a luckluster holiday season. Yahoo’s Flurry Analytics looked at new phone and tablet “activations” between Dec 19 and Dec 25. Both Apple and Samsung still dominated but Apple saw a fall in share while Samsung saw a slight increase.

This year, 44 percent of activations globally were Apple devices, a decline from the 49 percent seen in a similar period in 2015, and 51 percent in 2014. Meanwhile, 21 percent of activations were Samsung devices, a tiny rise from 19.8 percent last year.

AirPods remain in short supply. If you want to buy a pair of the wireless earbuds from Apple, you won’t find them in the local Apple store; there is a 6-week waiting list. That’s what happens when you eliminate the headphone jack on the iPhone. During a visit to the New York Stock Exchange yesterday, CEO Tim Cook called the wireless earbuds “a runaway success,” and said Apple was “making them just as fast as we can.”

Meanwhile, Indian officials are meeting early next week to evaluate the incentives sought by Apple to manufacture its products in the country. The government is trying to promote local manufacturing under Prime Minister Narendra Modi’s “Make in India” campaign, but it remains to be seen whether they would agree to more concessions for Apple.

Toshiba shares dropped another 17% in Tokyo on worries about the company’s financial stability. The stock has fallen by more than 40% after the firm warned this week it’s expecting billions of dollars in losses from its takeover of a US-based nuclear construction business.

Toshiba cannot raise cash by issuing shares because of restrictions imposed by the stock exchange after last year’s accounting scandal. It looks more and more likely that the only solution is to sell off the core of the company. Meanwhile, share price is in a death spiral.

German pharmaceutical company Boehringer Ingelheim agreed to divest five types of animal health products to settle charges that a proposed asset swap with Sanofi would harm competition. The proposed asset swap involved Boehringer Ingelheim’s acquisition of Sanofi’s $13.5 billion animal care subsidiary and Sanofi’s obtaining the Germany company’s consumer health care business unit, valued at nearly $8 billion, plus $5.5 billion in cash.

The City of Madrid says all privately-owned cars with even-numbered registration plates will be banned from the Spanish capital’s roads today to curb rising air pollution. The move follows a dry, sunny stretch of weather which sent levels of nitrogen oxide, a poisonous gas which can cause respiratory problems such as asthma, soaring above European-Union-set limits. The restriction could alternate between odd and even number plates if high levels of contamination persist.

The World Economic Forum (WEF) has determined that in many parts of the world, solar energy is now the same price or even cheaper than fossil fuels for the first time. While the average global LCOE [levelized cost of electricity] for coal and natural gas is around $100 per megawatt-hour, the price for solar has plummeted from $600 a decade ago to $300 only five years later, and now close to or below $100 for utility-scale photovoltaic. For wind, the LCOE is around $50.

According to the WEF, more than 30 countries have already reached grid parity—even without subsidies. (“Grid parity” is the point when an alternative energy source, say solar, can generate power at a LCOE that’s equal or even less than the price of traditional grid power.)

The WEF highlighted how the unsubsidized LCOE for utility-scale solar photovoltaic—which was not competitive even five years ago—has declined at a 20 percent compounded annual rate, making it not only viable but also more attractive than coal in a wide range of countries.

Countries that have already reached grid parity include Chile, Mexico, Brazil and Australia with many more countries also on the same track. The WEF projects that two thirds of the world will reach grid parity in the next couple of years, and by 2020, solar photovoltaic energy is projected to have a lower LCOE than coal or natural gas-fired generation throughout the world.

This means that we have reached a tipping point for renewable energy, which is reflected in new installations. Through the end of September, solar accounted for 39 percent of all new electric generating capacity brought on-line in the U.S. Both utility-scale installations and residential installations grew strongly.

The United States solar market shattered all previous quarterly solar photovoltaic (PV) installation records. One megawatt of solar power was installed every 32 minutes in the U.S. from July to September, for a record total of 4,143 megawatts. That brings total installed solar capacity in the U.S. to 35.8 gigawatts, enough to power 6.5 million homes.

FINANCIAL REVIEW

Say Cheese

Sinclair Noe — January 15, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW – 106 = 17,320
SPX – 18 = 1992
NAS – 68 = 4570
10 YR YLD – .06 = 1.77%
OIL – 2.28 = 46.20
GOLD + 33.50 = 1263.60
SILV + .11 = 17.06

After going through all of 2014 without a losing streak of more than three days, the S&P 500 today completed its second slide of five straight days. The benchmark gauge is down 3.4 percent over the past five days.

For the past 3 years the Swiss have kept their currency, the Swiss franc, from getting too strong; they imposed a cap to keep the euro from trading below 1.20 francs. In early 2010 one franc was less than 0.7 euro. By the middle of 2011 the franc was nearly at parity against the euro, a massive move in a very short period. As the Eurozone experienced economic strife, Switzerland was calm and offered a safe haven. As money poured in, the franc became more and more expensive; which means that things made in Switzerland became more expensive when the Swiss exported. So, they capped the franc. That basically involved printing more francs and buying more euros.

Fast forward to 2015, and the Eurozone is once again experiencing economic strife; money is once again pouring into Switzerland as a safe haven, and after 3 years the Swiss just threw up their hands and said they had enough; it didn’t make sense for the Swiss National Bank to keep on an endless path of buying more and more euros just to keep the currency down, and there was probably some concern that they had too many euros, which might be a liability. So, they removed the cap, without warning. It was quite the surprise.

What does it mean? Well the Swiss franc spiked a whopping 30 percent against the euro. So, it you were planning a vacation to Zurich, it just got more expensive; for many people in Europe who have mortgages with Swiss banks, their mortgage payments just went up; if you were planning to buy a Swiss watch it just got more expensive; same for Swiss chocolates; and if you need a corkscrew that can also work as a screwdriver, pliers, wrench, and knife – that will cost you more. The Swiss stock market fell about 11%. And if you were invested in a company such as Swatch, Nestle, Novartis, or Roche – you just got hammered. Sorry. And if you were trading in the currency markets and you were short the franc and long the euro – please step away from the ledge.

Thursday’s decision to call time on its efforts to keep the euro from trading below 1.20 francs came amid mounting speculation that the European Central Bank will next week back a big government bond-buying program that will put more euros in circulation, diluting their value. That expectation has seen the euro face intense selling pressure in currency markets, particularly against the dollar. The euro has fallen to nine-year lows against the dollar and below its launch rate in 1999. As a result, the cost for the Swiss central bank of constantly defending the peg by buying euros or selling francs has been rising.

The SNB clearly expected to see a huge surge of inflows in the week ahead and saw little reason to provide these buyers of francs with an artificially cheap rate. Switzerland’s immediate neighbors are countries in the Eurozone. The franc’s contiguous boundaries are with the euro. Switzerland’s central bank worried about inflows of hot money from Russia, either directly or via the euro. Think of it this way: yesterday a Moscow-based oligarch could move money from ruble to euro. Then he could move it from euro to Swiss franc, and the Swiss government and Swiss National Bank would maintain a 1.2 currency peg. That is now over.

In addition to making Swiss exports more expensive, a stronger currency makes imports into Switzerland cheaper, further dampening prices already-subdued by big drops in oil prices and other commodities.

In an effort to contain the franc’s appreciation and limit any damage to the Swiss economy, the central bank on Thursday also lowered a key interest rate — what it charges commercial banks to deposit at the bank — to minus 0.75 percent from minus 0.25 percent. That’s right, banks have to pay the Swiss central bank to park reserves. The hope is that it dissuades banks from parking their cash at the national bank and instead possibly invest it. That might not work; the Swiss franc is still considered a safe haven for investors. The franc’s value will remain sensitive to developments around the world, including the crisis in Russia and the oil market slump.

Switzerland is a small country. For most people, the Swiss surprise really is not a huge event, but today’s move confirms that deflation is a clear and present threat to the global economy.

If you were planning a trip to Davos Switzerland for the World Economic Forum, we can save you some money. The WEF 2015 Global Risks Report was published today; geopolitical issues are considered to be the biggest threat to global stability over the coming decade. According to the WEF’s lead economist, “Twenty-five years after the fall of the Berlin Wall, the world again faces the risk of major conflict between states,” and the means to wage such conflict are broader than ever, whether through cyberattack, competition for resources or sanctions and other economic tools. “Addressing all these possible triggers and seeking to return the world to a path of partnership, rather than competition, should be a priority for leaders as we enter 2015.” When asked to assess risks in terms of their potential impact, the nearly 900 experts surveyed by WEF found water crises as the greatest threat to the world.

US producer prices in December recorded their biggest fall in more than three years on tumbling energy costs while underlying inflation pressures were muted. The Labor Department said its producer price index for final demand declined 0.3 percent, the biggest drop since October 2011, after falling 0.2 percent in November. A sustained plunge in energy prices is keeping a lid on inflation throughout the pipeline, from bills for businesses to the consumer’s cost of living.

The number of Americans filing claims for unemployment benefits increased to a four-month high last week.

Consumer confidence increased last week to the highest level since mid-2007 as steady declines in gasoline prices and more hiring boosted Americans’ attitudes about the economy. The Bloomberg Consumer Comfort Index rose to 45.4 in the period ended January 11, from 43.6 the week before.

Bank of America, the second-largest US bank by assets, reported a 14 percent fall in quarterly profit as a decline in sales and trading revenue more than offset a big drop in operating expenses. Revenue from bond trading, which is part of the bank’s sales and trading business, plunged 30 percent to $1.46 billion.

Citigroup reported its fourth-quarter profit plunged as the bank was hit by large legal charges. The bank reported a profit of $350 million–which includes $3.5 billion in previously disclosed legal and repositioning charges–compared with a year-earlier profit of $2.46 billion. On a per-share basis, Citigroup reported a profit of six cents. Analysts had expected earnings of nine cents a share including the charges. On Wednesday, a provision — drafted by Citigroup — to repeal part of the Dodd-Frank financial reforms (Section 716) was added by House Republicans to their spending bill. On Thursday, Citigroup led the charge to persuade enough Democrats to vote for that bill. The repeal of Section 716 stayed in the spending bill only because Wall Street brought so much pressure and influence to bear. Apparently buying politicians is cheaper than paying fines and settlements for violating the law. Of course, I still maintain that not breaking the law is the best solution, but clearly that is not under consideration.

Bank of America slipped 5.2 percent to the lowest since August and Citigroup dropped 3.7 percent.

After the close, Intel reported fourth quarter net income rose to $3.66 billion, or 74 cents per share, for the quarter ended Dec. 27, from $2.6 billion, or 51 cents per share, a year earlier. Revenue rose to $14.7 billion from $13.8 billion. Intel forecast first-quarter sales that may fall short of analysts’ estimates because PC sales are down.
We’re starting to see some oil companies respond to lower oil prices. Schlumberger, the oilfield services provider, announced it will cut 9,000 jobs, even as they reported a 6 percent rise in quarterly revenue. Revenue rose to $12.64 billion from $11.91 billion. Net income attributable to the Houston, Texas-based company fell to $302 million, or 23 cents per share, in the fourth quarter ended Dec. 31, from $1.66 billion, or $1.26 per share, a year earlier.

Apache says it will also lay off several hundred employees, cutting 5% of its workforce this week. The move signals one of the first major workforce cuts at an American oil producer after the recent drop in crude prices. Apache had been profitable until the third quarter of last year, when it reported a $1.2 billion loss.

BP is planning to cut 300 jobs from its 4,000-strong North Sea business following a review of its operations. The U.K.-based oil major, which has been downsizing since the Deepwater Horizon oil spill in 2010, said it had long planned the cuts, but was speeding up the process due to falling oil prices.

This afternoon, there was more news on BP. A US District judge has ruled that the company dumped 3.19 million barrels of oil into the Gulf of Mexico in 2010. Today’s ruling on the spill’s size sets the stage for a trial next week at which the judge will determine the amount of the fines, based on the law’s provision for as much as $4,300 per barrel released and factors such as what BP did to minimize or mitigate the effects of the disaster. The court rejected the government’s 4.2 million barrel estimate of the spill size, decreasing the potential maximum fine from $18 billion to a maximum fine of $13.7 billion.