Financial Review

When Issued

Sinclair Noe — May 2, 2017

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DOW + 36 = 20,949
SPX + 2 = 2391
NAS + 3 = 6095 (record)
RUT – 8 = 1399
10 Y – .03 = 2.29%
OIL – .76 = 48.08
GOLD + .80 = 1257.90

Markets have been a bit squirrely of late. Stocks and bonds have been rising in tandem. Oil is lower, even as the dollar has been weaker since the start of the year. And the VIX, the volatility index has been hugging the 10 range, which represents a state of somnambulance.

Typically, assets considered risky like stocks shouldn’t climb at the same time as havens like Treasuries are being bid higher. But that is exactly what has happened in recent trade.  And this is happening as the Fed is in the process of raising rates.

The Federal Reserve’s policy-making committee holds a meeting today and tomorrow. While trading on Fed funds futures contracts implies less than 5% probability of a rate hike tomorrow, the language in the FOMC statement could be crucial for investors in assessing the June meeting.

The tweaking of words by the Fed will hold even more weight since Fed Chair Janet Yellen is not scheduled to hold a press conference following the two-day meeting. So far, it looks like the Fed is still on track to hike rates 2 more times this year.

Today’s big earnings news came from Apple, after the closing bell. Apple reported iPhone sales dropped in the quarter, indicating that customers had held back purchases in anticipation of the 10th-anniversary edition launch this fall. Apple sold 50.7 million iPhones in its fiscal second quarter ended April 1, down from 51.2 million a year earlier. However, revenue from the smartphones rose 1.2 percent in the quarter.

The company’s net income rose to $11 billion, or $2.10 per share, in the second quarter, from $10.5 billion, or $1.90 per share, a year earlier. They beat estimates by about 8 cents per share. Revenue rose 4.6 percent to $52.90 billion in the quarter, missing estimates. Apple boosted its capital return program by $50 billion, increasing its share repurchase authorization by $35 billion and raising its quarterly dividend by 10.5 percent.

Apple shares dropped about 2% in after-hours trade.

Microsoft just unveiled the Surface Laptop, aimed squarely at stealing customers away from Apple’s newest MacBooks. The one thing to know is that the Surface Laptop is the poster child for Windows 10 S, a new version of the operating system that Microsoft says is more streamlined and secure.

In other earnings news:

Mondelez International reported first-quarter net income of $630 million. The Deerfield, Illinois-based company said it had profit of 41 cents per share. Earnings, adjusted for non-recurring costs, were 53 cents per share. The results exceeded Wall Street expectations. The maker of Oreo cookies, Cadbury chocolate and Trident gum posted revenue of $6.4 billion in the period, also beating estimates.

Etsy, the arts and crafts online retailer posted revenues of $96.9 million, missing estimates. First-quarter earnings per share was $0. CEO Chad Dickerson will step down from the role tomorrow. John Allspaw, the chief technology officer, is leaving the company. Etsy also announced that it expects to eliminate about 80 jobs, or 8% of its workforce. Etsy shares slammed by 14% today.

Gilead Sciences reported first-quarter profit of $2.7 billion, or $2.05 per share. The HIV and hepatitis C drug-maker posted revenue of $6.5 billion; missing top and bottom line estimates.

Archer Daniels Midland cautioned that massive global grain stocks are making it difficult to turn a profit trading grain internationally, sending its shares plummeting despite reporting a higher first-quarter profit. The outlook for its agricultural services segment, its largest in terms of revenue, appeared weaker than it did at the beginning of the year.

The segment makes money buying, selling, storing, shipping and trading grains and oilseeds. It includes ADM’s global trading desk, which turned in another weak quarter with lower year-on-year earnings. Net profit attributable to ADM rose to $339 million, or 59 cents per share, in the quarter ended March 31, from $230 million, or 39 cents a share, a year earlier.

ADM missed estimates. Shares dropped 7.5%.

ConocoPhillips reported a quarterly loss as operating costs came in higher than expected. However, the largest U.S. independent oil producer’s results reflected a slow but steady improvement across the industry bolstered by improved pricing for its oil and natural gas. Crude prices are up more than 50 percent from a year ago. Net profit was $800 million, or 62 cents per share, in the first quarter ended March 31, compared with a net loss of $1.5 billion, or $1.18 per share, a year earlier.

Conoco beat earnings estimates.

Home prices nationwide, including distressed sales, increased year over year by 7.1 percent in March 2017 compared with March 2016 and increased month over month by 1.6 percent in March 2017 compared with February 2017, according to the CoreLogic Home Price Index.

Corelogic forecasts national home prices for single family homes will rise by 0.6 percent in April. Year-over-year, national home prices are forecasted to rise by 4.9 percent by March 2018. Arizona home prices were up 0.8 percent month-over-month and up 7.3% year-over-year. Arizona home prices remained 19.4% below peak values.

Major automakers posted declines in U.S. new vehicle sales for April in a sign the long boom cycle that lifted the American auto industry to record sales last year is losing steam, sending carmaker stocks down. The drop in sales versus April 2016 came on the heels of a disappointing March, which automakers had shrugged off as just a bad month.

Auto sales were a drag on U.S. first-quarter gross domestic product, with the economy growing at an annual rate of just 0.7 percent. Excluding the auto sector the GDP growth rate would have been 1.2 percent. GM said April sales fell 6 percent, but crossovers and trucks continued to see strong growth. Sales at Ford, the No. 2 U.S. automaker by sales after GM, fell 7.2 percent in April, while Toyota recorded a drop of 4.4 percent and FCA sales were off 7 percent.

New vehicle sales hit a record 17.55 million units in 2016. But as the consumer appetite for new cars has waned, automakers have leaned more heavily on discounts. GM said its consumer discounts were equivalent to 11.7 percent of the transaction price.

The automaker also said its inventory level rose to 100 days of supply at the end of April versus around 70 days at the end of 2016. Kelley Blue Book’s forecast for 2017 calls for auto sales in the range of 16.8-17.3 million units, which represents a 1% to 4% decline from last year.

The House of Representatives transportation committee held a hearing for top airline executives to testify, and to determine how Congress might respond to policies that can adversely affect passengers. At the hearing, United Chief Executive Oscar Munoz repeatedly apologized for the removal of a passenger who was dragged off an overbooked plane last month. We have all seen the video of the bloodied and barley conscious man.

Munoz was joined at the hearing by United President Scott Kirby and executives from American Airlines, Southwest and Alaska Airlines. American Airlines experienced its own public relations fiasco last month when a passenger video went viral, showing a woman on a plane in tears holding a child in her arms and another at her side after an encounter with a flight attendant over a baby stroller.

Federal prosecutors have subpoenaed several banks as part of a criminal investigation into possible manipulation of the US Treasuries market. UBS Group, BNP Paribas, Royal Bank of Scotland and Morgan Stanley received subpoenas last month seeking information on the $14 trillion market.

The Justice Department has been examining the U.S. Treasuries market for roughly two years. The Justice Department in late 2015 asked about when-issued securities as part of broader requests for documents it sent to most or all the roughly two dozen primary dealers in US Treasuries. The banks have not been accused of wrongdoing by the DOJ.

When-issued securities have been a government-debt market fixture since the U.S. Treasury Department effectively authorized their use in 1975. Investors can buy them from a Wall Street bond dealer to guarantee they will be able to get their hands on a bond, bill or note once it’s auctioned by the government.

Because they give a preview of auction demand, when-issued securities are an important indicator for primary dealers, which are essentially required to backstop U.S. government debt auctions by making “reasonable” bids for their share of each sale.

Trading of these when-issued securities is also the subject of several lawsuits against primary dealers filed since July 2015. In them investors allege that traders at global banks colluded to artificially inflate the price of the when-issued securities, which allow the banks to sell US debt before they own it. Then they bought the debt at auctions for an artificially suppressed price, unfairly profiting at investors’ expense.

Trader-to-trader communication is at the heart of recent federal antitrust probes into whether banks coordinated to manipulate interbank interest rates and align foreign-exchange trades. Those cases have resulted in billions of dollars in penalties, and in some cases guilty pleas. The investigation of the Treasuries market grew out those cases.

As always, the banksters remain innocent until proven guilty, but I think we are seeing a pattern of wrongdoing.

Financial Review

Hat Trick

Sinclair Noe — February 9, 2017

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DOW + 118 = 20,172
SPX + 13 = 2307
NAS + 32 = 5715
RUT + 19 = 1378
10 Y + .05 = 2.40%
OIL + .71 = 53.05
GOLD – 12.40 = 1229.60

We have new record high closes for the Dow, S&P, and Nasdaq. It’s a hat trick.

The chief executives of several airlines, as well as executives from air cargo companies, were invited to a breakfast meeting at the White House this morning. Trump called the air-traffic control system “outdated” and he told the execs: “We have an obsolete plane system, we have obsolete trains, we have obsolete airports, we have bad roads. And we’re going to change all that.”

Trump also said: “We’re going to be announcing something I would say over the two or three weeks that will be phenomenal in terms of tax and developing our aviation infrastructure.” He gave no indication of what the announcement might entail. Presumably the “phenomenal” tax and infrastructure plan does not apply solely to the airline industry, and Wall Street lapped it up. He went on to say: “Lowering the overall tax burden on American business is big league.”

The rally had stagnated in recent days as investors sought details about Trump’s policy agenda. Financials, which have soared since the election, were the best-performing group, up 1.4 percent after three sessions of declines, while energy shares gained 0.9 percent. Those sectors stand to benefit should lower taxes spur economic activity as interest rates and the demand for energy would presumably rise.

After 18 months of courtship and court cases, two massive deals that would have reshaped the U.S. health insurance industry have both been declared dead. Anthem’s $48 billion deal to buy Cigna was blocked by a federal judge late Wednesday, weeks after another judge halted Aetna’s bid for Humana. Reasons given: The mergers would have led to less competition and higher prices for Americans.

Applications for unemployment benefits in the U.S. unexpectedly declined last week to an almost three-month low. Jobless claims fell by 12,000 to 234,000 in the week ended Feb. 4. The latest results extend a trend of historically low claims, with applications staying below 300,000 in the longest streak since 1970. A shortage of skilled workers is prompting companies to hold on to existing employees while continuing to add more workers to help fulfill demand.

The Senate has confirmed Jeff Sessions as attorney general largely along party lines. The 52-47 vote capped weeks of divisive battles over Sessions, an early supporter of President Trump. Next up is Representative Tom Price, Trump’s pick for health secretary and a staunch advocate of repealing Obamacare. A vote come could come later tonight.

Secretary of State Rex Tillerson met his Canadian counterpart for the first time on Wednesday for talks that touched on NAFTA, the trade agreement President Trump has pledged to renegotiate. The top US diplomat also met with Mexico’s foreign minister to discuss collaboration on law enforcement, migration and security, and agreed to visit the country in the coming weeks.

A US court of appeals is reviewing arguments on whether to reinstate the Trump administration’s temporary ban on immigration, with the outcome likely to be appealed to the Supreme Court.

Meanwhile, Trump’s first executive order, signed January 25, entitled: “Border Security and Immigration Enforcement Improvements” resurrects some of the most controversial immigration enforcement programs of recent years, seeks to deputize state and local law enforcement as immigration officials across the country, and threatens major cuts to federal funding for cities that fail to fall in line with the administration’s vision.

Trump has called for the construction of new immigrant detention facilities along the U.S. border with Mexico – including through private contracts – as quickly as possible, and there have been requests for additional asylum officers at 2 for-profit Detention Centers in Arizona.

A Dallas federal judge has upheld the Labor Department’s fiduciary rule, dealing a setback to the financial industry’s attempts to kill the measure. But the legal move may not mean much for the regulation’s fate. Last Friday, President Trump issued a memorandum to study the rule’s impact and rescind or revise it if it isn’t consistent with his administration’s regulatory principles. A status report will be published on March 10.

Boeing won orders for 39 wide-body aircraft from Singapore Airlines; a deal worth about $14 billion, as Southeast Asia’s biggest long-distance carrier upgrades its fleet over the next decade with more fuel-efficient models to cut costs.  The airline agreed to buy 20 777-9s, which are set to debut at the decade’s end, and 19 787-10s, the longest Dreamliner model.

There’s a good chance you can’t get there from here. More than 2,700 flights were canceled and all public schools in New York City, Boston and Philadelphia will be closed today as the region braced for a winter storm that could dump a foot of snow or more.

President Trump has written a letter to China’s President Xi Jinping in his first direct communication with the leader of the world’s second-biggest economy since he took office. With currency wars threatening to raise their head again, China has managed to get the yuan exactly where it wants it.

The nation’s authorities have let the currency rise against the dollar, making it harder for the U.S. administration to accuse it of undervaluing the exchange rate, while at the same letting the yuan weaken against a trade-weighted basket of currencies.

Greece’s two-year bond yield climbed above 10 percent as negotiations to release further IMF funds remained deadlocked. The International Monetary Fund weighed in this week, publishing a long-awaited analysis of the challenges the Greek economy still faces. The report has been the focal point of heated disagreement between the fund and Europe in terms of what Greece needs to do to get back on track.

The fund has argued that, in addition to needed reforms, European governments must provide debt relief to Greece for the country’s economy to recover fully. Meanwhile, Astellon Capital, a hedge fund based in London, published analysis saying that some form of restructuring is essential for Italy, given the inability of the country’s economy to grow.

The Astellon report also notes that the E.C.B. and sickly Italian banks have been the main buyers of Italian government bonds over the past three years. Also, Mediobanca, the Italian investment bank published a report which highlights just how little Italy has benefited from being in the euro: Growth has been literally zero, and the economy’s competitiveness as an exporter has deteriorated.

Twitter reported fourth-quarter revenue was $717 million, missing the $740 million average analyst estimate. Sales growth of 1 percent slowed dramatically in the period from the 48 percent gain a year earlier. Twitter added 2 million new users, bringing the total number of people who log in monthly to 319 million. Twitter has had trouble persuading advertisers to spend more money on its social-media platform as fewer people join.

Coca-Cola offered up a flat earnings report. Excluding items, the company earned 37 cents per share, in line with estimates. Net operating revenue fell about 6 percent to $9.41 billion, the seventh straight drop, but slightly ahead of estimates. The company forecast 2017 adjusted earnings to fall 1-4 percent from 2016. Coca-Cola has been offloading much of its bottling business to cope with falling demand for carbonated beverages in North America. Coke said it was on track to complete re-franchising of its US bottling operations by the end of this year.

Whole Foods is shrinking its store count for the first time since the recession. After reporting disappointing earnings, the upscale grocer says it will close 9 stores; including one in Prescott.

With about 70 percent of the S&P 500 having reported results, fourth-quarter earnings are on track to have climbed 8.5 percent, which would be the best performance since the third quarter of 2014, according to Thomson Reuters.

Thursday, July 24, 2014 - Bankster Logic

Financial Review with Sinclair Noe

DOW – 2 = 17,083
SPX + 0.97 = 1987
NAS – 1 = 4472
10 YR YLD + .05 = 2.51%
OIL - .03 = 102.04
GOLD – 10.10 = 1294.90
SILV - .54 = 20.47

An extremely flat day on Wall Street but good enough for another S&P 500 record high close.

In economic news: Initial claims for state unemployment benefits declined 19,000 to a seasonally adjusted 284,000 for the week ended July 19, the lowest level since February 2006. In the past six months, unemployment has fallen much faster than expected, from 6.7 to 6.1%. The labor market is still struggling with long-term unemployment and part-time jobs instead of full-time work, but it seems to be making progress.

One area not showing progress is wages. The Labor Department released its latest report on median wages; on a year-over-year basis, median earnings were up just 0.8% in the second quarter, to $780 per week, not enough to keep pace with inflation. The median wage data is a bit different from the weekly earnings data that comes out of the Labor Department’s payrolls report. That one is the average earnings, and what is likely happening is the growth for top earners is pulling that series up more. Average earnings are up 2.1% year-on-year. The report also showed that women earned 83.5% of what men did.

The Commerce Department said new home sales dropped 8.1% to a seasonally adjusted annual rate of 406,000 units in June. It was the biggest decline since July of last year. May and April sales were revised lower. Therefore, this was a very weak new home sales report, but earlier in the week, we saw a strong report on existing home sales.

Let’s move over to earnings reports:

Amazon.com can sell stuff, they just have not figured out how make a profit. Amazon is expanding grocery service, they introduced a new smartphone, and a set-top box for TV streaming, and they managed to increase revenue 23% to $19.34 billion from $15.7 billion in the earlier period. They also reported a loss of $126 million or 27 cents per share.

Caterpillar has the exact opposite problem; revenue fell but they posted a higher profit. Caterpillar’s revenue numbers have now fallen in six of its past eight quarters, with the quarterly year-over-year decline averaging 8.3%. In the last quarter, sales fell 3% from a year ago to $14.1 billion, while profit increased 4.1%.

Starbucks posted fiscal third-quarter profit of $512 million, or 67 cents a share, up from $417 million, or 55 cents a share a year ago. Revenue for the three months ended June 29 rose 11% to $4.1 billion from $3.7 billion.

Signaling a major turnaround in the airline industry’s fortunes, the nation’s three major legacy carriers; American Airlines, United Airlines and Delta Air Lines — all posted record profits in the past quarter. Delta reported net income for the second quarter of $801 million, up 17 percent from the year-earlier period. United Airlines, which had a loss in the first quarter and has struggled with its merger with Continental Airlines, posted a $919 million second-quarter profit. Douglas Parker, the chief executive of American Airlines, said today that the airline’s second-quarter profit, excluding special charges, of $1.5 billion was its best quarterly earnings performance ever.

General Motors posted second quarter earnings of $190 million on revenue of $39.6 billion, up from $39.1 billion in the same period a year ago. The problem for GM has been recalls for safety issues, which have killed 13 people. GM set up a compensation fund with $400 million; they have also paid $2 billion this year for the recalls, and they announced pretax charges of $874 million to cover future product recalls. GM is likely to feel the financial repercussions of the millions of cars it has recalled for years to come. The company has recalled 29 million vehicles this year, many of which have not yet been repaired. To give a sense of the pace, GM recalled around 15 million vehicles for ignition switch related issues so far this year, and repaired around 560,000 in the second quarter. It announced a recall of more than 700,000 vehicles for a separate issue just yesterday. The surprising part is the increase in revenue, which comes in part from pricing, but also the bad press has not deterred buyers.

Businesses and individuals in the US have parked about $2.6 trillion in money market funds. It is generally considered a safe place to leave money short term, or that was the thinking until 2008, when money market funds broke the buck, dropping below par value of $1 per share. Turns out, the funds were not guaranteed. There is no government insurance on the safety of deposits, no regulator-required capital buffer to protect against losses, no central bank ready to stand as “lender of last resort” to keep a money market fund from suffering a short-term cash crunch. Of course, the Treasury and the Fed stepped in to bail out the funds and avoid a run on the funds, which would have been catastrophic.

Therefore, a mere 6 years later, the government has finally managed a few reforms, but they are not real reforms because the bankers fought reform tooth and nail.  The new reforms do not include capital buffers, but they will allow for a floating NAV, or net asset value. Therefore, your share in a money market fund may or may not be worth one dollar. Moreover, if you try to cash out, the funds can impose extra fees to slow down a potential run. That’s about it. After 6 years, I hope you feel safe and secure in the knowledge that nothing of any substance has changed in the last 6 years.

An examination by the Federal Reserve Bank of New York found that Deutsche Bank AG’s giant U.S. operations suffer from a litany of serious problems, including shoddy financial reporting, inadequate auditing and oversight and weak technology systems. In a letter to Deutsche Bank executives last December, a senior official with the New York Fed wrote that, financial reports produced by some of the bank’s US arms “are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm’s entire U.S. regulatory reporting structure requires wide-ranging remedial action.”

Deutsche Bank, one of Europe’s largest banks, was a forceful opponent of the Fed’s push to force foreign banks to comply with the same capital requirements as domestic banks. Officials from Deutsche Bank argued that the Fed’s requirement was too restrictive.  This year, the Fed went ahead with those tougher capital requirements for foreign banks. However, it gave most of them until the middle of 2016 to comply. Yes, of course it is theoretically possible that management could go through and fix everything that is wrong with the firm’s US operations but, really, this is more of a tear down job.

Dark pools are where institutional investors can place large buy and sell orders without alerting the broader market. Prices and transactions are not reported; it is the furthest thing from a free and open marketplace.  Different financial institutions run a variety of dark pools. Barclays runs one of the biggest dark pools called Barclays LX. They have been sued by the state of New York for fraud; the suit alleges Barclays favored high frequency traders over other investors in the dark pool and they falsified marketing materials, inaccurately portraying the concentration of high-frequency traders in the market, and misrepresenting a service that purported to protect investors from predatory trading behavior.

Today, Barclays filed a motion to dismiss the lawsuit, and this is classic bankster logic; they argued that Barclays’ customers were sophisticated enough to understand that “glossy marketing brochures” about the dark pool, did not reflect its actual composition; their customers knew better than to rely solely on the marketing materials. So, they basically admitted they were lying in their marketing material, but their clients were smart enough to know that banks are liars.

President Obama called today for Congress to end a tax loophole that allows big corporations to designate a foreign country as their official address, in order to avoid US taxes. The corporation does not have to move their actual headquarters, just set up an address overseas. Obama called on members of Congress to close the loophole even if they disagree with his broader calls for changes to the tax system that would lower corporate rates and close several loopholes, including that one. The legislative effort is unlikely to succeed in Congress.

Companies ranging from banana distributor Chiquita Brands to Medtronic have reached nine inversion deals this year. The whole idea is to pay fewer taxes while still enjoying the benefits of doing business in the US. Of course, the legal change of corporate headquarters is essentially a process of renouncing citizenship, and it just seems corporations should face the loss of citizenship the same way people do, which means they should pay an exit tax. There are other ways to put an end to this inversion tax evasion scheme. Moreover, if we do not, you can count on executives whose companies were born of American ingenuity and which make their profits from American customers (including the government) will troll international waters for opportunities in low-cost tax havens. It’s a race to the bottom.