Financial Review

Go Figure

Sinclair Noe — February 8, 2017

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DOW – 35 = 20,054
SPX + 1 = 2294
NAS + 8 = 5682
RUT – 2 = 1358
10 Y – .04 = 2.35%
OIL + .19 = 52.97
GOLD + 8.10 = 1242.50

Another record high for the Nasdaq Composite, its 12th all-time close of 2017.

The American Petroleum Institute reported crude supplies rose by 14.2 million barrels last week, undermining OPEC’s efforts to re-balance global markets. The Energy Information Administration said that the U.S. will pump the most crude next year since 1970, as OPEC cuts lift prices and benefit domestic producers.

And in its weekly report this morning, the EIA reported a larger-than-expected increase in crude-oil supplies—their fifth weekly rise in a row and the second-biggest on record, based on EIA data going back to 1982.

Crude inventories climbed by 13.8 million barrels in domestic crude-oil supplies for the week ended Feb. 3. Weekly crude stockpiles haven’t climbed by this much since the week ended Oct. 28. Crude oil prices reversed an earlier loss and eked out a gain on the day. Go figure. Best guess is that the report also showed gasoline supplies fell by 900,000 barrels. Sorry, but that’s about the best excuse I can come up with.

Intel will invest $7 billion to build a new chip factory in Arizona. Brian Krzanich (pronounced Krah-ZAN-nitch – you're welcome) the CEO of Intel says that tax cuts and deregulatory policies pushed by President Trump prompted the company to move forward with its plans to complete the Fab 42 plant.

The completion of Fab 42 in 3 to 4 years will directly create approximately 3,000 high-tech, high-wage Intel jobs for process engineers, equipment technicians, and facilities-support engineers and technicians who will work at the site. Combined with the indirect impact on businesses that will help support the factory’s operations, Fab 42 is expected to create more than 10,000 total long-term jobs in Arizona.

The 7-nanometer semiconductor manufacturing process targeted for Fab 42 will be the most advanced semiconductor process technology used in the world.

Japanese display maker Sharp Corp may start building a $7 billion plant in the United States in the first half of 2017, taking the lead on a project initially outlined by its Taiwanese parent Foxconn. Japanese Prime Minister Shinzo Abe is scheduled to meet President Trump in Florida this weekend. Abe will reportedly unveil a package of investments to create as many as 700,000 US jobs. The investment will be by a Japanese consortium that will also include manufacturing equipment makers.

Britain’s House of Commons gave its final approval Wednesday to a bill authorizing the government to start exit talks with the European Union, despite fears by opposition lawmakers that the U.K. is setting out on the rocky path to Brexit with a sketchy road map. The bill now goes to the House of Lords, which has the power to delay — but not to derail — the legislation; it should become law within weeks.

Volkswagen has launched a U.S. subsidiary designed to oversee $2 billion in investments to promote zero-emission vehicles, a commitment the German auto giant made in the wake of Dieselgate. The Electrify America unit will open more than 500 EV charging stations as it works toward building out a national network. VW will also launch a “Green City” initiative in a yet-to-be-identified California city to pilot future concepts.

According to a court filing, Takata will plead guilty on Feb. 27 to a single felony count of wire fraud to resolve a DOJ investigation into ruptures of its air bag inflators linked to at least 16 deaths worldwide. Last month, the auto parts firm agreed to the guilty plea as part of a $1 billion settlement in the world’s largest-ever recall.

Time Warner reported higher-than-expected fourth-quarter results, largely due to box office hits such as the “Harry Potter” spinoff “Fantastic Beasts.” Time Warner reported an 11.5% rise in quarterly revenue and said the planned $84 billion merger with AT&T remained on track to close later this year.

Swiss pesticides and seeds group Syngenta pushed back the expected closure of its agreed $43 billion takeover by ChemChina to the second quarter of 2017, but said it was making progress in winning regulatory approval for the deal.

Humana earned an adjusted $2.09 per share for its latest quarter, while revenue was slightly below projections. Humana said that it added members in its Medicare Advantage business, and that it would give an update on its transaction to be bought by Aetna by February 16. That deal was blocked in a court ruling last month.

Allergan earned an adjusted $3.90 per share for its latest quarter, beating estimates of $3.76 a share. Its revenue also came in above forecasts on increased sales of Botox and other therapeutic treatments.

Shares of Microchip Technology are up, continuing last night’s gains, after the chip maker yesterday afternoon beat fiscal Q3 expectations and topped consensus as well.

Shares of Panera Bread surged to a record high and the biggest one-day move in almost two years after the company gave an upbeat forecast and said technology investments at its restaurants were paying off.

Whole Foods Market reported revenues and comparable sales that fell short of Wall Street’s expectations. Whole Foods also lowered full-year sales and earnings guidance in wake of the weak results.

Alaska Air, the fifth-largest U.S. carrier, beat estimates by 16 cents a share, with adjusted quarterly profit of $1.56 per share. Revenue beat forecasts and the company also increased its quarterly dividend.

Canada’s government will provide $282 million in support for Bombardier to help fund two jet programs, including the C Series, the single-aisle plane that competes with Boeing and Airbus Group SE products. After landmark sales of the jetliner to Air Canada and Delta Air Lines in 2016, the company is now seeking new orders while also targeting the first delivery of the Global 7000, its largest business aircraft.

Bank of America is opening robo branches. The bank has opened three automated branches over the past month and has plans to roll out more over the next year. Customers can use ATMs and have video conferences with employees at other offices. BofA is set to open 50 to 60 new branches over the next year, but will also be closing some in certain markets, so they will not represent a net increase.

At its height, back in 2000, the US cash equities trading desk at Goldman Sachs’ New York headquarters employed 600 traders, buying and selling stock on the orders of the investment bank’s large clients. Today there are just two equity traders left. Automated trading programs have taken over the rest of the work, supported by 200 computer engineers.

The experience of its New York traders is just one early example of a transformation of Goldman Sachs, and increasingly other Wall Street firms, that began with the rise in computerized trading, but has accelerated over the past five years, moving into more fields of finance that humans once dominated.  Some areas of trading, like currencies and even parts of business lines like investment banking are moving in the same automated direction that equities have already traveled.

Today, nearly 45 percent of trading is done electronically, per Coalition, a UK firm that tracks the industry. Complex trading algorithms, some with machine-learning capabilities, first replaced trades where the price of what’s being sold was easy to determine on the market, including the stocks traded by Goldman’s old 600.

Now areas of trading like currencies and futures, which are not traded on a stock exchange like the New York Stock Exchange, are coming in for more automation as well. To execute these trades, algorithms are being designed to emulate as closely as possible what a human trader would do.

Goldman Sachs has already begun to automate currency trading, and has found consistently that four traders can be replaced by one computer engineer. Some 9,000 people, about one-third of Goldman’s staff, are computer engineers.

Goldman’s new consumer lending platform, Marcus, aimed at consolidation of credit card balances, is entirely run by software, with no human intervention. Next, will be the automation of investment banking tasks, work that traditionally has been focused on human skills like salesmanship and building relationships.

Though those “rainmakers” won’t be replaced entirely, Goldman has already mapped 146 distinct steps taken in any initial public offering of stock, and many can – and will – be automated. Reducing the number of investment bankers would be a great cost savings for the firm. Investment bankers working on corporate mergers and acquisitions at large banks like Goldman make on average $700,000 a year, per Coalition, and in a good year they can earn far more.

Financial Review

Sheepish Algorithms

Sinclair Noe — July 14, 2015

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DOW + 75 = 18,053
SPX + 9 = 2108
NAS + 33 = 5104
10 YR YLD – .03 = 2.40%
OIL + .84 = 53.04
GOLD – 2.70 = 1155.80
SILV – .13 = 15.48

The stock market posted its first 4-day winning streak since January. The S&P 500 last week fell as much as 4 percent from its all-time high, and has since recovered to trade within 1 percent of its record set in May. The S&P 500 and the Dow are up 3 percent over four sessions, while the Nasdaq Composite has added 4 percent.

The United States and other world powers reached an agreement with Iran that calls for limits on Tehran’s nuclear program in return for lifting economic sanctions that have crippled Iran’s economy, enabling the oil-rich nation to ramp up its energy exports, access international finance and open the doors to global investors. Full implementation of the agreement will likely take months and is contingent on the pace at which Iran meets its obligations. The deal will keep Iran from producing enough material for an atomic weapon for at least 10 years and impose provisions for inspections of Iranian facilities, including military sites.

Oil prices initially dropped when the Iran deal was announced, but then prices climbed higher. The oil markets were not surprised by the news announcement, and a deal was clearly already priced in; and it will take some time before Iran has a big impact on supplies. Iran doesn’t have great reserves of crude oil supplies to throw on the market. Tehran has stored around 25 million barrels of oil mainly consisting of condensate.  Iran will have to invest heavily in infrastructure; they will need to attract investment, sign commercial contracts and figure out the other logistics needed with producing and exporting oil. If the deal holds, look for Iran to deliver more supplies by 2016, possibly pushing prices lower. Even so, this represents opportunities for the Big Oil firms like ExxonMobil, Total, Royal Dutch Shell; also, oilfield service companies like Schlumberger, Halliburton, and Weatherford; also tanker companies; also big banks should do well with financing deals, but only the biggest banks such as JPMorgan, Goldman Sachs, and Morgan Stanley.

The director of international affairs at National Iranian Oil Company, said, “We will try to maximize our crude export capacity to Europe and restore 42 to 43 percent share in the European market before the sanctions were imposed.” This is an interesting sidebar. Since the Russian invasion into eastern Ukraine, Europe has been dealing with the threat of Russia cutting oil and nat gas. Iran now steps up as an alternate energy source. Iran holds the world’s fourth-largest proved crude reserves and the second-largest natural gas reserves. So, Europe might be a winner in today’s announcement. The bottom line is that today’s announcement means the oil market will be over-supplied for a long time.

Prime Minister Alexis Tsipras appears to be facing open rebellion in his coalition as he attempts to push creditor reforms through Greece’s parliament ahead of Wednesday’s deadline. With dozens of MPs in Syriza threatening to defect, Tsipras will need the support of the opposition to pass the €86 billion-euro package, putting the future of his government in doubt. Meanwhile, Athens missed another payment due to the IMF late Monday. The Greek deal does not include debt relief, and this might be its fatal flaw. The other flaw is continued insistence on austerity, which has not worked. Austerity measures are primarily aimed at shrinking debt as a proportion of a country’s economic output, a measure known as the debt-to-GDP ratio. Even if total debt is reduced, the debt-to-GDP ratio can rise because gross domestic product shrinks in tandem. So, Greece still faces the same problems they faced a month ago – their debt burden is unsustainable.

In the first meeting with investors since calling its $72 billion debt pile “not payable”, Puerto Rico said it was still premature to discuss how creditors would be affected, but made the case for a restructuring. Puerto Rico bonds are held by many U.S. investors, who bought the securities because they’re tax-exempt nationwide and offered higher yields than comparable debt.

After a month-long rollercoaster ride, China’s stock market is showing some signs of stabilizing, suggesting Beijing’s bundle of support efforts are having the intended impact. Last week, Chinese officials allowed more than half of all listed companies to suspend their shares from trading and prohibited major stakeholders from selling at all, pushing the Shanghai market up 13% Thursday and Monday.  Chinese stocks are down 24% from their mid-June peak.

China accounted for 38 percent of the global growth last year, up from 23 percent in 2010. It’s the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for countries from Brazil to South Africa. If China slows down, the demand for industrial commodities goes down. That can have a huge impact on the global economy.

Retail sales fell an unexpected 0.3% in June as consumers pulled back on car, home and clothing purchases. It was the first drop in monthly retail sales since February and comes after an uptick in May initially pointed to a stronger spring. May retail sales were revised lower, however, to an increase of 1% from an initial 1.2% estimate.

Households cut spending on a variety of goods and services, including cars, clothes, home furnishings, and dining out. Americans also spent less online and shelled out less cash at do-it-yourself and building-materials suppliers. The decline in auto sales was expected because dealers had already posted lower sales after a huge month in May, but the rest of the report was disappointing. Only department stores, consumer-electronics outlets and gasoline stations posted sold sales gains; and the improvement at gas dealers owed mostly to higher fuel prices last month. If gas stations are stripped out, retail sales fell an even sharper 0.4%.

The prices the U.S. paid for imported goods fell a seasonally adjusted 0.1% in June, marking the 11th decline in the past 12 months. Excluding fuel, import prices declined by 0.2%.  In the past 12 months import prices have dropped 10%, mostly because of a lower oil costs. Import prices are down a smaller 2.3% excluding fuel in the same span.

U.S. homes are today less likely to be in the foreclosure process than at any time since the Great Recession started. According to Corelogic, about 1.3% of all mortgaged homes were in the foreclosure process in May — the smallest share since the end of 2007, when the downturn started.

Small-business owners weren’t cheerful about economic conditions in June. The National Federation of Independent Business’s monthly small-business optimism index dropped 4.2 points to 94.1, the lowest point of the year so far. Small-business owners said they planned to spend less and had weak expectations for sales and business conditions. Small-business owners were less optimistic about the prospect of making new hires, investing in their business or expecting growth in June. The report concludes that, “While this is not a recession signal, it is a clear sign that economic growth on Main Street is not set for a strong second half.”

Earnings reporting season kicks into high gear this week. This morning JPMorgan Chase reported earnings that beat estimates. Wells Fargo reported profits that matched estimates, but revenues that missed. Johnson & Johnson posted better-than-expected second quarter profit and adjusted its full year outlook higher. CSX reported profit rose 4.5% during its latest quarter, though falling coal volume weighed on revenue, which retreated 5.5%. Yum Brands posted better than expected results, mainly on the strength of international sales.

Also this week, look for reports from Intel, Google, Netflix, GE, Bank of America, Goldman Sachs, and Citigroup – just to name a few.

China’s Tsinghua Unigroup has submitted a $23 billion bid to buy out U.S. memory-chip maker Micron Technology; it works out to a 19% premium over Micron’s closing price on Monday. Tsinghua Unigroup, China’s largest state-owned chip-design company, already has several links to major U.S. companies. It acquired a controlling stake in Hewlett-Packard’s China networking-equipment unit in May. Intel bought a 20% stake in Tsinghua Unigroup last year for $1.5 billion. Micron, based in Boise, Idaho, is the last remaining U.S. maker of the widely used chips known as dynamic random access memory, or DRAMs. It is No. 2 behind Samsung Electronics in that market, and makes flash memory used to store data in mobile devices such as smartphones. Look for the Department of Justice to intervene in this deal.

Remember the flash crash in the Treasury market back on October 15^th? Actually, it was a melt-up in prices that sent the yield on the 10-year Treasury from 2.19% down to 1.86% in a matter of minutes. The US government released its report on the day’s dramatic swings. The main culprit – algorithms. Primary trading firms accounted for more than 50 percent of the total trading volume in both cash and futures markets for US Treasuries on Oct. 15. That proportion is not unusual, according to the report, but what is remarkable is their level of activity on the day. Most of their trading is done almost automatically by computers running algorithms. As trading began to heat up, these algorithms essentially fed on each other, causing the amount of “self-trading” undertaken between different arms of the same PTF firms to increase. The computers performed like so many sheep, just following the herd. The problem might have been worse, if humans hadn’t stepped in, some simply pulled the plugs on their trading machines and order was restored.