Financial Review

Big Earnings Week

Sinclair Noe — July 24, 2017

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

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DOW – 66 = 21,513
SPX – 2 = 2469
NAS + 23 = 6410
RUT + 2 = 1438
10 Y + .02 = 2.25%
OIL + .66 = 46.43
GOLD + .50 = 1256.00
BITCOIN – 0.40% = 2767.87 USD
ETHEREUM – 0.66% = 223.18

Stocks were mixed, with tech shares leading the way and the Nasdaq Composite closed at another record high.

Commodities Futures Trading Commission data show that bets against the dollar are at their highest since early 2013, while bullish wagers on the 30-year Treasury bond are about the highest since mid-2016. The dollar dropped to 15-month lows and then rebounded slightly. The yield on the 10-year Treasury note moved up to 2.25%.

You probably would not expect to see such extreme positioning if investors were confident in the outlook for the economy and the prospect for much higher interest rates. The Federal Open Market Committee is slated to begin its two-day meeting on Tuesday. Fed watchers are not expecting a change in interest rates.

The Fed will likely be as vague and flexible as possible. The Federal Reserve doesn’t want to get specific about timing but they also don’t want to leave any doubt: The central bank still plans to raise interest rates again this year and start to sell off its vast holdings of Treasuries and mortgage-related bonds.

But the Fed has a problem – inflation, or the lack thereof. The Federal Reserve thinks modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent. The problem is that the Fed is on track to fail for the sixth straight year. And it might be a sign the economy just isn’t as strong as everybody hopes.

This week the government is expected to report a nearly 3% advance in second-quarter gross domestic product, the official scorecard for the economy. While that would mark a big improvement on 1.4% growth in the first quarter, it would leave the U.S. on the same 2% trajectory it’s been on since the end of the Great Recession. That’s less than two-thirds the nation’s historic rate of growth.

The IMF just cut its 2017 economic growth forecast for the U.S. to 2.1 percent from the 2.3 percent it estimated in April.

The National Association of Realtors reports existing home sales dropped 1.8 percent to a seasonally adjusted annual rate of 5.52 million units last month. Even as sales slipped, demand was strong, inventory was tight, and prices moved higher.

There were 1.96 million houses on the market last month, down 7.1 percent from a year ago. Housing inventory has dropped for 25 straight months on a year-on-year basis. The median house price jumped 6.5 percent from a year ago to an all-time high of $263,800 in June. It was the 64th straight month of year-on-year price increases.

A reading of U.S. manufacturing output reached a four-month high in July. The IHS Markit flash U.S. manufacturing purchasing managers index rose to 53.2 from 52 in June, as there was acceleration in readings for output, new orders, employment and stocks of input.

Nearly 200 S&P 500 companies are scheduled to report quarterly results this week. The second-quarter earnings season has been generally positive, 68% of companies beat on [earnings per share], 75% beat [Wall Street average estimates] on sales and 53% beat on both—the highest proportion of top and bottom-line beats at this point during earnings season in over five years.

With more than one-fifth of the S&P 500 having reported results, earnings are now expected to have climbed 8.8 percent in the second quarter, up from a projection of an 8-percent rise at the start of the month. Those that disappoint have been swiftly punished by investors, as General Electric found out on Friday.

Big earnings news after the bell. Alphabet topped $1,000 per share intraday, but in after-hours trade the stock dropped after reporting a drop in second-quarter profit – thanks to a $2.74 billion fine by European antitrust regulators, slapped on its Google unit.

Here are the numbers: The company’s net income fell to $3.5 billion, or $5.01 per Class A and B share and Class C capital stock, in the second quarter from $4.8 billion, or $7 per share, a year earlier. That was still enough to beat estimates of $4.49 per share.

Revenue rose about 21 percent to $26 billion in second quarter, beating the analysts’ average estimate of $25.6 billion. Google sites revenue: $18.3 billion. Google network revenue: $4.0 billion. Cost per click: (+14.6%) from last year. Paid clicks: +35.2% from last year.

Revenue from its Google Other unit, which includes Pixel smartphone, Play Store and cloud business, rose 42.3 percent to $3.09 billion. Alphabet has been adding new content as it races Facebook and traditional TV networks for a share of the market for digital video ads.

YouTube said in June that it had reached 1.5 billion monthly users and would add 12 new TV shows to the 37 it already has on its YouTube Red service. The company is also updating its core search product as more consumers use its service via smartphones.

Still, its drive to innovate has run into a regulatory wall in Europe, where regulators ruled Google used its monopoly position in search advertising to hurt rivals by favoring its online shopping service over competitors, and fined the company $2.7 billion.

Facebook and Amazon reported quarterly results later this week.

In other earnings news, Halliburton shares fell 4.2 percent after the oilfield services provider warned about flattening growth in North American rig count.

Johnson & Johnson shares ended down 1.7 percent, the biggest weight on the S&P 500 and the Dow. J&J faces discounted competition to its big-selling rheumatoid arthritis drug.

Hasbro shares slumped 9.4 percent after the toy-maker’s quarterly results.

Arconic lifted its forecasts for full-year earnings and said its profit and revenue for the three months ending June 30 were higher than predicted. Arconic is the American company that gained notoriety for selling combustible material used in paneling at Grenfell Tower, the 24-story London public housing block, that caught fire and left 80 people dead. The company faces a class-action complaint that accuses it of making false and misleading statements related to its sales of the panels.

Private equity firm KKR has agreed to buy WebMD Health Corp in a deal valued at about $2.8 billion. KKR will fold WebMD’s websites, including WebMD.com and Medscape.com, into its Internet Brands unit, which houses sites such as DentalPlans.com and AllAboutCounseling.com.

Founded in 1996, WebMD has grown into one of the most popular health websites for consumers and medical professionals, attracting more than 70 million monthly unique visitors in 2016.

President Trump made a last-ditch plea to Senate Republicans on Monday to repeal and replace Obamacare, or maybe just repeal it – nobody knows the specific plan. It doesn’t look like there are enough votes for either a repeal and replacement of Obamacare or a straight repeal, so the Senate will vote on Tuesday on whether to open debate on an overhaul of the law. If that procedural vote succeeds, the House bill would then be open for amendment on the Senate floor.

Jared Kushner, Trump’s son-in-law and a senior White House adviser, told Senate investigators today he had met with Russian officials four times last year but said he did not collude with Moscow to influence the 2016 U.S. election. The Senate Intelligence Committee is one of several congressional panels investigating the Russia matter, along with a criminal probe led by special counsel Robert Mueller.

Congressional Democrats are rolling out their economic agenda, calling it the Better Deal. The first phase of the agenda includes more and better-paying jobs, lowering health care costs by cutting prescription drug prices, and cracking down on abuses by big business. Democratic bills from earlier this year, including a $15 federal minimum wage and a $1 trillion infrastructure proposal, are also being folded into their “Better Deal” agenda.

Also, Democrats say they want to double federal support for apprenticeship programs to help train young people and put out-of-work adults back in the work force. They also want tax incentives for companies to retrain workers, as well as new standards aimed at limiting corporate mergers that throw people out of work.

NASA has a way to cut your flight time in half. For almost a half-century there’s been a clear speed limit on most commercial air travel: 660 miles per hour, the rate at which a typical-size plane traveling at 30,000 feet breaks the sound barrier and creates a 30-mile-wide, continuous sonic boom.

That may be changing. In August, NASA says, it will begin taking bids for construction of a demo model of a plane able to reduce the sonic boom to something like a mild hum. The space agency’s supersonic plane could be quiet enough to lift the longstanding ban on overland travel, if it makes it to production.

Lockheed helped create NASA’s design, using fluid dynamics modeling made possible in the past decade or so by increasingly powerful computers. Together, Lockheed and NASA tested and mapped how subtle differences in aircraft shapes affect the supersonic shock waves they create. The design they’ve settled on keeps sound waves from merging into the pattern of a sonic boom.

NASA plans to share the technology resulting from the tests with U.S. plane makers, meaning a head start for the likes of Lockheed Martin, General Dynamics, Boeing, and startups such as Boom Technology.

Now if they can just figure out a way to get us through the TSA lines.

Financial Review

Scotch and Cigarettes

Sinclair Noe — March 24, 2017

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

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DOW – 59 = 20,596
SPX – 1 = 2343
NAS + 11 = 5828
RUT + 1 = 1354
10 Y – .02 = 2.40%
OIL + .31 = 48.01
GOLD – 1.70 = 1243.90

House Speaker Paul Ryan pulled his Obamacare repeal bill from the floor this afternoon, a day after President Donald Trump had threatened to walk away from health care reform if he didn’t get a vote. Ryan reportedly met with Trump, presented the expected vote totals and recommended the President pull the bill.

The decision was ultimately Trump’s. Trump had gambled big by presenting holdout House conservatives with a take-it-or-leave it ultimatum on Thursday night and put his own credibility on the line. It also puts Ryan in a much-weakened political position, after being defied by his own conference.

And somewhere John Boehner is puffing on a cigarette and enjoying a Friday afternoon Scotch.

So, what now? The GOP effort to repeal Obamacare is dead. The House meltdown on Obamacare repeal has serious implications for the American health care system, with Republicans apparently unable to repeal the law but also unwilling to fix the deficiencies that the White House says will collapse the law.

Ryan told fellow Republicans they are “moving on” from health care; which means the next issue will likely be tax reform, another complex and divisive issue, made even more complicated because health care represents nearly 20% of the economy.

Still, shifting focus to tax reform from the quagmire that is health care reform might be a positive in the eyes of Wall Street.

Stocks rose from session lows to end little changed. Investors now have a weekend to consider implications. Treasuries rose. The dollar slipped for a second week. The S&P 500 Index capped its worst week since the election as political wrangling in Washington dominated sentiment. Banks sank 3.8 percent in the week. Shares of hospital operators finished sharply higher.

New orders for key US-made capital goods fell in February, but shipments surged. The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dipped 0.1 percent last month after rising 0.1 percent in January. A recovery in oil prices from multi-year lows is driving demand for equipment in the energy sector, helping to lift the manufacturing sector after a prolonged slump.

Separately, orders for durable goods advanced 1.7% while the increase in January was raised several notches to 2.3%, reflecting a pickup in manufacturing that kicked in toward the end of last year. The increase in bookings last month was spearheaded by commercial aircraft, whose orders jumped almost 48%. That offset a nearly 1% drop in orders for new cars and trucks.

US auto sales in March will increase almost 1.9 percent from a year earlier, even as consumer discounts continue to remain at record levels. Per industry consultants J.D. Power and LMC Automotive, March U.S. new vehicle sales are expected to be about 1.62 million units.

Oil posted its third weekly drop ahead of this weekend’s meeting in Kuwait, at which OPEC and its production-cutting allies will assess the effectiveness of their actions to date. Talks will also be overshadowed by the question of whether the persisting glut requires curbs to be extended beyond the summer.

US shale producers are drilling at the highest rate in 18 months but have left a record number of wells unfinished in the Permian Basin in Texas, the largest oilfield in the country – a sign that output may not rise as swiftly as drilling activity would indicate. A record 1,764 wells were left unfinished in the Permian in February. In February alone, 395 wells were drilled and only 300 completed. That was the highest drilling rate in the Permian in two years.

President Trump announced this morning the granting of a permit for construction of the controversial Keystone XL pipeline, calling it “the first of many infrastructure projects” that he would approve in order to put more Americans to work.  The $8 billion project would span 1,200 miles, connecting Alberta’s massive tar sands crude with pipelines and refineries on the Texas gulf coast that are particularly well-suited to handling the thick oil.

TransCanada, the Calgary-based firm that has been trying to win approval for the pipeline for nearly 10 years, announced that the State Department has signed and issued a construction permit for the project. Because of the approval, TransCanada will drop an arbitration claim it filed for $15 billion in damages under the North American Free Trade Agreement. And Trump made no mention of using US steel, as he earlier said would be required of any new pipeline.

That doesn’t necessarily mean the pipeline will be built – at least not any time soon – but it will result in many new jobs…, for attorneys. Since Obama had nixed the pipeline based on an environmental assessment commissioned by the State Department in early 2014, opponents will likely argue in court that Trump can’t reverse the decision without conducting a new assessment.

The Presidential Permit is only one part of a web of federal, state, and local permits that must be obtained prior to starting construction. TransCanada may still need to reach deals with hundreds of potentially affected landowners, plus state and local regulators on the pipeline’s route.

Dallas Fed President Robert Kaplan sees three interest rate rises in 2017 as “a reasonable baseline.”  Kaplan said he is not looking for a pause in rate hikes if US employment and inflation figures continue to improve, adding that it would be right for the Fed to begin trimming its balance sheet in the future. Kaplan is a voting member on the FOMC.

New York Fed President William Dudley said today that the economy will cope “just fine” with gradual policy tightening. Meanwhile, St. Louis Fed President James Bullard does not share that confidence, and believes 2 more hikes might potentially be overkill. Bullard told reporters, “It’s not necessary to raise rates that quickly if the goal is to keep inflation near target and keep unemployment between 4.5 and 5 percent.”

US financial regulators are telling four foreign banks to improve their living wills. Barclays, Credit Suisse, Deutsche Bank and UBS were each given until July 2018 to improve their resolution plans, which are intended to map out a strategy so their US operations could be closed under bankruptcy law without taxpayer assistance in the event of an unexpected crisis.

At the same time, the Federal Reserve and the Federal Deposit Insurance Corporation said livings wills presented by 16 large US banks would be functional. Only Northern Trust’s living will have shortcomings that must be addressed.

Germany’s state-owned development bank KfW mistakenly transferred more than $5.4 billion to four banks because of a technical glitch that repeated single payments multiple times. We don’t know how that could happen but the money has been recovered. Maybe the “send” key got stuck or something.

Apparently, this kind of glitch is not uncommon. In June 2015, Deutsche Bank’s foreign exchange unit mistakenly sent $6 billion to a hedge fund client and recovered the sum a day later. And of course, there have been multiple hacks on multiple banks, including the Federal Reserve Bank of New York.

Still, the KfW blunder is distinctive because KfW’s own website touts it’s been awarded the title of the world’s safest bank by Global Finance magazine. You’ve probably never heard of KfW, but if it does register it might be because of an ill-timed payment of more than 300 million euros KfW made to Lehman Brothers in September 2008, just as the U.S. investment bank filed for bankruptcy.

At the time, the German lender failed to refresh its counter-party check that would have prevented it from processing the regular transaction. The transfer turned into a political scandal in Germany, with newspaper Bild calling KfW “Germany’s dumbest bank.”

Passengers on some flights to the US and UK must check in most types of electronic devices starting at 3 a.m. ET on Saturday. The ban includes laptops, cameras, gaming devices and tablets such as iPads. Some airlines flying to the U.S. have already started enforcing the new rules. Officials said the move is a response to fears that terrorist groups may target commercial aircraft by smuggling explosive devices in electronic devices.

On a party-line vote of 50-48, the Senate has approved overturning regulations from last October that put strict requirements on consumer privacy protection. The FCC, then led by Tom Wheeler, voted to require ISPs to get consumer consent before using data like health and financial information, as well as precise geolocation in ads and internal marketing. Major providers opposed the restrictions at the time.

The YouTube advertising exodus continues as Johnson & Johnson, JPMorgan and LYFT join other major advertisers in the US and the UK to pull ads from the platform, due to concerns they may have appeared on channels that broadcast offensive videos. Whether the recent events are a harbinger of bigger problems may depend on whether Google can give businesses more control over ad placement.

Japan’s Toshiba Corp has informed its main lenders it is planning for US nuclear unit Westinghouse Electric to file for bankruptcy on March 31. Reuters reports Toshiba expects a Chapter 11 filing for Westinghouse would expand charges related to the US unit in the current financial year to around $9 billion, about 30% higher than earlier estimates.

The decision comes only three months after Toshiba first warned of multi-billion dollar charges for Westinghouse. The ensuing financial meltdown has already caused Toshiba to put up its prized memory chip unit for sale, consider a sale of a majority stake in Westinghouse and miss deadlines to file earnings that have put it at risk of a delisting.

Financial Review

Waiting

Sinclair Noe — March 23, 2017

Podcast: Play in new window | Download (Duration: 11:31 — 6.6MB)

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DOW – 4 = 20,656
SPX – 2 = 2345
NAS – 3 = 5817
RUT + 7 = 1353
10 Y + 2 – 2.41%
OIL – .37 = 47.67
GOLD – 3.60 = 1245.60

Wall Street was closely watching developments on the bill to repeal and replace the Affordable Care Act. The White House said it was confident the bill will pass and warned there was no “Plan B”.

Those backing the plan continue to work toward securing the votes needed to pass the health care bill led by House Speaker Paul Ryan. President Donald Trump met this morning with the House Freedom Caucus as GOP leaders offered a late tweak to their health-care bill to try to get the conservative group on board, including repealing the so-called essential benefits requirements in Obamacare for the individual market only, not for employer-based plans.

The essential health benefits mandate included in ObamaCare was intended to require insurance companies to provide coverage in 10 areas, including mental health, pediatric services, ambulance services, substance abuse treatment, and vision care, maternity care, and prescription drugs.

The idea behind the move was to prevent insurers from offering skimpy plans that would leave people on the hook for thousands of dollars in costs if their plan doesn’t cover certain services. Republicans argue the requirements drive up premium costs by preventing insurers from offering less-generous plans. They say consumers should be allowed to pick cheaper plans and that a single man, for example, has little need for maternity coverage.

Getting rid of the essential health benefits would almost certainly lower premium costs, though it could also leave many consumers holding health insurance that might not cover various maladies. With no required benefits, some (like mental health or maternity) would be very expensive because only people who need them would buy them.

 Republicans want to deregulate, but they also feel they must offer some refundable tax credit to sell the bill to moderates and the public. If they deregulate through law, though, the policy analyzers will show that more people might use the tax credit and the Congressional Budget Office spending score would blow up.

But apparently, repealing the essential benefits requirement was not good enough – the vote, scheduled for today, has been postponed, until probably tomorrow. The obvious explanation is that there were not enough votes to pass the repeal legislation. The big question is whether they can whip up a few more votes by tomorrow, and if so, what other tweaks will be required to buy those votes.

Yet as Trump and Ryan pick up conservative members with some of the potential changes, they risk losing moderates. Freedom Caucus members said White House officials made the pitch that conservatives should pass the bill so that the Senate can amend it and address their concerns, but several lawmakers said they weren’t buying it.

And even if they do get the votes tomorrow, or in the not-so-distant future, that still might not be enough. Does it matter if they vote on this tomorrow or next week? They have until the Easter recess to vote on this. If this doesn’t happen by then, this gets to be an issue.

The plan to repeal essential health benefits will almost certainly not be permissible under Senate reconciliation rules. It will require 60 votes to repeal these protections, and the votes just aren’t there in the Senate.

And if bill is dead on arrival in the Senate, then that opens the door for House members to take a firm stand against it – if only for political posturing, or to rake in a few more campaign dollars from groups opposed to the new plan.

Of course, there could still be a deal and there could still be a successful vote, but postponed vote means that right now, President Trump’s first major legislative priority is on thin ice. And Trump has stated that this needs to get done before moving on to other issues such as tax reform and infrastructure spending; also, not simple issues.

And so, the financial markets were just kind of frozen today. Waiting to pop up or break down. Light volume; uncertainty; waiting. Waiting.

New US single-family home sales jumped to a seven-month high in February, suggesting the housing market recovery continued to gain momentum despite the challenges of high prices and tight inventories.

The Commerce Department said new home sales increased 6.1% to a seasonally adjusted annual rate of 592,000 units last month, the highest level since July 2016. Sales were up 12.8% compared to February 2016. The median price for a new home fell 4.9% to $296,200 in February from a year ago.

The number of Americans filing for unemployment benefits rose last week, but remained below a level associated with a strengthening labor market. Initial claims for state unemployment benefits increased 15,000 to a seasonally adjusted 258,000 for the week ended March 18. Claims have now been below 300,000, for 80 straight weeks. That is the longest stretch since 1970.

Data from the Energy Information Administration showed US gasoline stocks fell by 2.8 million barrels in the week ended March 17, marking a fifth straight drawdown. Gasoline demand is expected to increase as we get closer to the summer driving season.

Even with the small dip in stocks, crude oversupply continues. Late today Saudi Arabia’s energy ministry said crude exports to the United States in March will fall by around 300,000 barrels per day from February, in line with OPEC’s agreement to reduce supply. The Saudis currently supply about 1.3 million bpd.

The European Central Bank offers its last Targeted Longer-Term Refinancing Operation, which gives banks four-year loans at zero percent interest. The size of the uptake by banks vary hugely, from 30 billion euros to as high as 750 billion euros. The size of the update will be viewed as a gauge of lenders’ thinking as pressure mounts on the central bank to reduce its accommodative monetary stance.

US relations with North Korea, which had already been under pressure, may be about to take another turn for the worse. Investigators looking into the theft of $81 million from the Bangladesh central bank account at the New York Fed are checking for links to North Korea as the hack used to access the funds was similar to one used previously by North Korea.

Failed brokerage MF Global Holdings and accounting firm PricewaterhouseCoopers announced they have settled their high-profile lawsuit in which the brokerage contended bad accounting advice from PwC was a factor in its 2011 collapse. Terms of the settlement weren’t disclosed. MF Global’s bankruptcy administrator had sought $3 billion in damages and interest from PwC in the case, which was in its third week of trial in federal court in New York.

Beginning next week, Wells Fargo depositors can withdraw money using a smartphone at any branded ATM, the first U.S. bank to roll out cardless machines across its entire network.

AT&T and Verizon joined a growing number of companies pulling much of their advertising from Alphabet over placements on websites and YouTube videos containing objectionable content.

Meanwhile, Google unveiled a new set of features for its popular Maps app that lets users share their locations with friends and contacts in real time. Thanks to this update, Google Maps users will now be able to quickly let friends know if they’re running late to a meeting or stuck in traffic. It’s a compelling idea.

And if you’re wondering why Google hadn’t thought of this earlier, the answer is: It did. In 2009, when smartphones were still in their infancy, Google introduced something called Latitude; which had almost the exact same feature Google is now touting as the hot new thing.

Apple has acquired a company named Workflow, a small company that develops an app under the same name. Workflow is available for iOS devices, including the iPhone and iPad, and allows you to automate certain actions. Workflow first caught the eye of Apple first in 2015. In a rare move, the company is keeping the app alive in the App Store and setting its price to free. It previously cost $2.99.

Apple’s year-and-half old iPhone 6s was the best-selling smartphone globally last year.  Apple shipped around 60 million iPhone 6s units in 2016, IHS Markit data showed, but the company declined to provide the exact figure.

The iPhone 7 was the second most-shipped smartphone model with just over 50 million units, while the iPhone 7 Plus was next with just over 25 million. Samsung’s flagship model, the Galaxy S7 Edge was in fifth place with around 25 million units shipped.

Suppliers to Sears Holdings are reportedly taking defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances.

Sears, whose roots date back to 1886, said on Tuesday that “substantial doubt exists related to the company’s ability to continue as a going concern.” The company’s disclosure turned the focus to its vendors as tension is expected to mount ahead of the key fourth-quarter selling season and rising concern about a potential bankruptcy.

Financial Review

Harbingers

Sinclair Noe — March 22, 2017

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

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DOW – 6 = 20,661
SPX + 4 = 2348
NAS + 27 = 5821
RUT – 0.95 = 1345
10 Y – .04 = 2.39%
OIL – .09 = 48.15
GOLD + 4.00 = 1249.20

London was shaken today by the first major terrorist attack since the 2005 subway bombings. Witnesses told of hearing multiple gunshots after a policeman was attacked outside Parliament. On Westminster Bridge, a car mowed down pedestrians. Two pedestrians and a police officer were killed, and at least 20 people injured, some very seriously.

A vehicle ran over pedestrians before crashing into a fence outside Parliament. A man wielding a knife then ran into the grounds and stabbed a police officer before being shot. Police believe the man, who died from his injuries, was the only attacker and are treating the attack as terrorism.

Global stocks were in retreat mode, but losses were relatively minor. Investors were taking some money out of equities and they’re putting their cash into government bonds.  European markets declined with many indexes down by about 1%. Asian markets ended the day with losses.

Japan’s Nikkei notched the biggest drop of 2.1%. The moves follow a sizable drop for US stocks yesterday. The Dow Industrials fell 1.1%, the S&P 500 dropped 1.2% and the Nasdaq was down 1.8%.

It was the worst day for stocks since October, but it was the first day in which the S&P 500 index traded in a 1 percent range since Dec. 14. In that time, the market did see one other one-day move of 1 percent or greater, when the S&P rose nearly 1.4 percent on March 1 — but since stocks opened sharply higher that day, the S&P did not manage a 1 percent intraday move.

Consequently, the index went 64 days without such a move, which is easily the longest-ever streak according to data that dates back to 1962. The second-place streak, of 34 days in 1995. In the past, after periods of calm, the market tends to continue moving in the direction of the trend – which is up, but calm is not the normal state for the market, so we can expect a period of increased volatility.

So, watch out for some big dips ahead.

That’s the historical tendency, however we also need to watch out for other markets – notably bonds, as we discussed yesterday; where we see a flattening yield curve, and it flattened even more today. A flattening curve means the economic outlook is dampening. When it grows steeper, like it did after the election, the economic outlook is brightening. But a flattening yield curve also influences the stock market negatively.

And if you are waiting for more volatility, you might not have to wait long. Healthcare legislation is schedule for a vote in the House of Representatives tomorrow. This is the first big piece of legislation for the Trump administration, and could serve as a harbinger.

After the health care legislation, Trump’s budget proposal will take front and center and he may face resistance from members of his own party for cuts to environmental programs. That’s due to an Obama administration practice that spread billions of dollars in contracts to Republican as well as Democratic congressional districts. Members of Congress typically resist efforts to cut spending that brings projects and jobs to their district.

A Bloomberg analysis of federal contract data shows that spending related to the environment reached 423 congressional districts in fiscal year 2016 and totaled $5.9 billion. Almost half that spending—47 percent—went to districts represented by Republicans.

Federal contract spending isn’t just spread across congressional districts. It’s also spread across contractors: Last year, 4,462 vendors got contracts categorized as related to the environment, climate, sustainability or similar fields.

Twenty-five publicly traded companies earned more than $10 million each from those contracts. Distributing federal largesse has been standard practice for the Department of Defense for many years, a lesson not lost on the Department of Energy.

President Trump’s second choice to lead the Labor Department is about to get a hearing. Alexander Acosta, a Florida law school dean, testified today. He follows Andrew Puzder, who withdrew his candidacy in February.

The National Association of Realtors says existing home sales declined 3.7% to a seasonally adjusted annual rate of 5.48 million units last month. The NAR says a persistent shortage of houses on the market is pushing up prices and sidelining potential buyers.

Housing inventory has dropped for 21 straight months on a year-on-year basis. With supply remaining tight, the median house price surged 7.7% from a year ago, to $228,400 in February. That marked the 60th consecutive month of year-on-year price gains.

The Mortgage Bankers Association reports mortgage application activity fell from a nearly four-month peak as borrowing costs on 30-year home loans held at their highest level almost three years. Mortgage apps fell 2.7% for the week ended March 18. Average interest rates on 30-year, fixed-rate conforming mortgages, the most widely held type of U.S. home loan, held for a second week at 4.46%, a level last seen in April 2014.

According to a new study from Spectrem Group, the number of millionaire households in America increased by 400,000 in 2016, reaching a new record of 10.8 million. Since the 2008 financial crisis, the number of millionaire households has grown every year, adding a total of 4 million millionaire households.

The number of multimillionaire households has also grown. There are now 1.4 million households worth $5 million or more and 156,000 households worth $25 million or more.

Nike reported earnings that beat estimates but total revenue was up just 5% in the last quarter. The company’s outlook wasn’t that great either. Nike said it expects sales growth to slow a bit this quarter. And future orders, a measure investors look at as a proxy for sales during the next few quarters, were down 4%. Nike is still growing rapidly in emerging markets as well as Asia. Nike was the worst performing stock in the Dow last year, falling nearly 20%.

FedEx said some of its largest retail customers shipped fewer packages during the holiday season than forecast, after the delivery giant had ramped up spending and staffing in anticipation of a crush of deliveries. The outcome hurt FedEx’s bottom line during the fiscal third quarter ended Feb 28. While revenue surged 18%, helped by higher rates and more packages shipped, overall margins fell because of a 30% rise in fuel costs and investments to keep up with e-commerce growth.

Fiat Chrysler is the latest automaker to be named in a growing French investigation into diesel emissions cheating. The Paris prosecutor has opened an investigation into potential aggravated fraud at Fiat Chrysler.

Fiat Chrysler acknowledged it was under investigation for “alleged consumer protection violations” but denied wrongdoing. French prosecutors were already investigating Renault and might open an investigation into PSA Group. This follows the $19 billion settlement between US regulators and Volkswagen.  Last week, German prosecutors raided VW headquarters as part of an ongoing investigation.

ING has confirmed a Dutch criminal investigation, but wouldn’t comment beyond the information presented in the bank’s annual report. The investigation relates to the “on-boarding of clients, money laundering, and corrupt practices,” per the 10-K filing, and can result in “significant” penalties.

Just days after finance chiefs of the world’s top 20 economies dropped their pledge for open trade, the European Central Bank has published a study claiming protectionist trade policies may increase, rather than reduce, a country’s trade deficit.

 Separately, Italy is calling for unambiguous support for an open global economy at a G7 finance ministers summit in May, saying they hope the upcoming G7 meeting yield a strong and clear message… against any temptation of protectionist closure.

T+ 3 is history. The SEC voted unanimously on rules to shorten the amount of time it takes for a securities trade to settle from three to two business days. Wall Street and consumer groups are largely supportive of the effort, as it reduces credit and market risk exposure.

Modern technology lets investors make trades in a matter of milliseconds. But since 1993, the SEC’s rules have required brokers to wait for three business days between the time an investor’s order is executed, to when the cash and ownership of the security are exchanged.

Dutch paints and coatings maker Akzo Nobel rejected a second takeover proposal from US rival PPG Industries, saying an improved $24.1 billion offer was still too low and too risky.

AT&T, Verizon, Enterprise Holdings, GSK and other major US advertisers are pulling hundreds of millions of dollars in business from Google and YouTube, following similar moves by advertisers in the UK. The problem is offensive and extremist content. For example, an ad on YouTube for the new Mercedes E-Class ran next to an ISIL video praising jihad that has been viewed more than 115,000 times.

Google pledged this week to keep offensive and extremist content away from ads, but the cleanup can’t happen fast enough. AT&T said that it is halting all ad spending on Google except for search ads. That means AT&T ads will not run on Google’s video service YouTube and on a couple million websites that take part in Google’s ad network.

AT&T emailed a statement saying: “We are deeply concerned that our ads may have appeared alongside YouTube content promoting terrorism and hate. Until Google can ensure this won’t happen again, we are removing our ads from Google’s non-search platforms.”

Financial Review

The Streak Ends

Sinclair Noe — February 28, 2017

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

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DOW – 25 = 20,812
SPX – 6 = 2362
NAS – 36 = 5825
RUT – 21 = 1386
10 Y – .01 – 2.36%
OIL – .13 = 53.92
GOLD – 4.30 = 1248.80

After 12 straight record high closes, the Dow Industrials finally posted a losing session. No milk and cookies today. It was the best run of record highs since 1987.

After topping out at 103.82 on January 3, the US dollar has weakened against a basket of its peers, pulling back into the 100 area. Dollar weakness is good news for the multinationals that dominate the S&P 500. Stocks rallied right after the election, bonds sold off for roughly the same reasons.

Yields on the benchmark 10-year Treasury note rose to a high of 2.64% in the middle of December (yields move opposite to prices) – reflecting expectations for faster growth, but in the past month buyers returned to bonds, pushing yields down as low as 2.32% and today finishing at 2.36%.

The rally in bonds might be explained by recent headlines that Trump’s proposed stimulus plans will take longer to implement than previously expected and that the stimulus will be less expansionary than first thought. Today, the market paused ahead of President Trump’s address before Congress; and the markets will be looking for specifics with specific timelines.

President Trump speaks to a joint session of Congress tonight, where investors hope for more details on the administration’s plans for tax reform, deregulation and infrastructure spending. The future of the Affordable Care Act could also be a subject, as well as updates on the Border Tax Adjustment.

Trump said he believes the extra $54 billion dollars he has proposed spending on the US military will be offset by a stronger economy as well as cuts in discretionary spending. Still to be answered – what will be cut, and how will the military spend an extra $54 billion, and how will it be accounted for.

Today, Trump signed an executive order that asks new EPA Administrator Scott Pruitt to begin the long process of repealing the Clean Water Rule (also known as the “Waters of the US rule”) and replacing it with… something else. Here’s the catch: Rolling back this rule won’t be easy to do.

By law, Pruitt must go through the years-long federal rulemaking process and replace the Obama-era regulation with his own version – and then defend it in court as legally superior. And, as Pruitt’s about to find out, figuring out which bodies of water deserve protection is a maddeningly complex task that could take years and years.

Gross domestic product increased at a 1.9 percent annual rate, per the Commerce Department’s second estimate for the fourth quarter, confirming the estimate published last month. Output increased at a 3.5 percent rate in the third quarter. The economy grew 1.6 percent for all of 2016, its worst performance since 2011, after expanding 2.6 percent in 2015.

Consumer spending was revised from 2.5 percent to 3.0 percent. Economic data early in the first quarter has been mixed, with retail sales rising in January but home-building and business spending on capital goods easing.

The US trade deficit for goods widened in January, as Americans snapped up consumer goods made abroad. The advance look at the trade deficit widened 7.6% to $69 billion. Imports widened by $4.4 billion while exports fell by $400 million. Imports of consumer goods jumped 4.8% in January and climbed 7.8% over 12 months.

The S&P/Case-Shiller 20-city index rose 5.6% in the three-month period ending in December compared to a year ago, up from a 5.2% annual gain in November. The broader national index rose 5.8% for the year in the December period, the strongest gain in 30 months.

In December, the hottest markets were again in the West. Seattle prices rose 10.8% compared to a year ago. In Phoenix, home prices rose 0.2% in December, and 4.9% compared to a year ago.

The Conference Board’s survey of consumer confidence rose to 114.8 in February from 111.6 in January. That’s the highest level since July 2001. Only 20% of survey respondents said jobs are “hard to get,” that is an 8-year low. In February, the present situation index rose to 133.4 from 130.0. The index measures how Americans feel now. The expectations index that looks six months ahead increased to 102.4 from 99.3 last month.

The Senate has confirmed billionaire investor Wilbur Ross as Commerce secretary, clearing another one of Trump’s economic team members. Ross has agreed to divest from much of his business empire.

Dallas Fed President Rob Kaplan says the financial market is pricing in the probability of an interest-rate hike by the Federal Reserve in either March, May or June and that is “likely in the neighborhood of where we are heading.” Kaplan said, “I don’t think the exact timing is the most important thing. I think the path of rates is.”

Kaplan, who is a rate-policy voter this year, said the economy is making good progress toward the Fed’s goals of full employment and a stable 2% rate of inflation. Meanwhile, Philadelphia Fed President Patrick Harker, another rate-policy voter said today, “I see three hikes as appropriate for 2017, assuming things stay on track.”

Well, if the Fed does raise rates in 2 weeks, we have been warned. Those comments helped push the 2-year yield to its highest since December. Interest rate futures implied traders saw a nearly 57 percent chance the Fed will raise rates at its next meeting on March 14-15, up from roughly 31 percent late on Monday, per Reuters data.

Morgan Stanley gave some wealth management clients incorrect tax information that caused some to underpay and others to overpay. The bank is setting aside $70 million to cover the costs and is in discussions with the IRS over the errors that occurred in tax years 2011 through 2016.

South Korean authorities have formally charged the heir of Samsung – Jay Y. Lee – with bribery and embezzlement in the corruption scandal that has rocked the country’s political establishment. Samsung Electronics President Park Sang-Jin has also resigned, as well as Vice Chair Choi Gee-Sung.

YouTube viewers worldwide are now watching more than 1 billion hours of videos a day, threatening to eclipse US television viewership, which is estimated at 1.25 billion hours. YouTube surpassed the figure, which represents a 10-fold increase since 2012, late last year. By comparison, Facebook and Netflix, as of January 2016, counted 100 million and 116 million hours of daily video views, respectively.

It goes to show… Comcast has announced a deal that will allow customers with the latest gear to search for and watch YouTube videos through their cable boxes. The deal follows a similar tie-up with Netflix unveiled last July. YouTube apps are available through many smart TVs and internet-connected boxes like Roku, but those don’t allow for an integrated search across traditional TV networks and Netflix.

YouTube is getting ready to take on traditional cable companies, today unveiling Unplugged, a live TV service streamed over the internet. Unplugged will be similar to Dish’s Sling TV and AT&T’s DirecTV Now, allowing you to subscribe to a so-called “skinny bundle” of popular pay TV channels at a cost of around $30 to $40 per month.

A large swath of the internet went down today when Amazon’s cloud-based Simple Storage Service, or S3, went offline. Amazon’s service provides website and image hosting and storage capabilities for a variety of companies including Imgur, Dropbox, Slack, Snapchat’s Bitmoji, parts of Amazon itself and a slew of others.

UBS published a research report on Apple, writing: “the company may have over 1,000 engineers working on a project in Israel that could be related to AR [augmented reality]. Augmented reality is an area where Apple could leapfrog competition in providing a superior user experience. This could result in sustained iPhone retention rates and more switchers.”

However, if you really want the skinny on Apple, they were holding their annual shareholder meeting today, and Apple CEO Tim Cook predicts tons of revenue from “future stuff I can’t talk about.”

Target forecast a drop in full-year sales at established stores and reported a steeper-than-expected fall in holiday-quarter sales due to “unexpected softness” at its stores. Target’s net sales have now declined for six quarters in a row as shoppers increasingly gravitate to online retailers. Target said it expects sales at stores open for at least a year to decline in the low-single digit percentage range, and they cut earnings guidance 16% to 24%.  Target shares down about 13% at a 2-year low.

Valeant Pharmaceuticals  posted better-than-expected earnings and revenue for the fourth quarter as it cut costs and saw strength in its Bausch & Lomb eye care business. However, revenue fell 13% from a year ago. The company has been struggling to regain investor confidence after it came under investigation over its accounting and drug pricing practices last year.

Priceline Group hit a 52-week high after reporting a beat on both its top and bottom lines for the fourth quarter. Revenue was up 17% thanks to a jump in hotel reservations.

Saudi Aramco will buy a 50% equity stake in Malaysian firm Petronas’ major refining and petrochemical project for $7 billion. The deal will boost Aramco’s downstream business ahead of a planned initial public offering next year.

OneWeb Ltd, a US satellite startup backed by Japan’s SoftBank Group, and debt-laden satellite operator Intelsat SA agreed to merge in a share-for-share deal.  SoftBank will buy voting and non-voting shares in the combined company for $1.7 billion in cash.

Starbucks will locate one of its ultra-luxurious coffee “roasteries” in Milan, Italy, marking the chain’s first entry into the Italian coffee market where founder and CEO Howard Schultz originally drew inspiration for the company. Starbucks plans to open 20 to 30 Roastery locations worldwide, where customers are treated to personalized small-batch brews of Starbucks Reserve coffee.