Financial Review

Sparring

Sinclair Noe — July 20, 2017

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DOW – 28 = 21,611
SPX – 0.38 = 2473
NAS + 4 = 6390 (record)
RUT + 0.58 = 1442 (record)
10 Y – .01 = 2.27%
OIL – .39 = 46.73
GOLD + 3.00 = 1245.00
BITCOIN – 1.93% = 2821.99 USD
ETHEREUM – 0.26% = 227.99

Sen. John McCain tweeted a message of gratitude for the outpouring of support that greeted news Wednesday of his brain-cancer diagnosis. He tweeted: “I greatly appreciate the outpouring of support – unfortunately for my sparring partners in Congress, I’ll be back soon, so stand-by!”

The Dow and the S&P fell slightly from record highs, while the Nasdaq and Russell 2000 squeaked out new record highs. It was close, but the MSCI Emerging Markets Index of stocks managed to eke out its ninth straight increase. That’s the longest rally since April 2015. The 0.02 percent rise in the index was the smallest of the current streak. Still, that brought the index’s gain for the year to 23 percent.

Europe’s economy is experiencing a pickup in both current and forward indicators of growth. Improvements in household and corporate sentiment and activity have been reinforced by a decline in perceptions of political risk following the victory of Emmanuel Macron in the presidential and legislative elections in France.

The European Central Bank may not make a decision on the future of its bond-buying program until October. Policy makers are currently committed to spending 60 billion euros ($70 billion) a month on debt until at least December, and have repeatedly said any winding down must be gradual.

The ECB Governing Council met in Frankfurt today, ECB President Mario Draghi told reporters that policy makers unanimously agreed to put off a formal debate until the fall, but that they opted not to set a precise date for talks.

If you missed out on the euro’s rally because you thought European Central Bank President Mario Draghi was leaning dovish at today’s news conference after policy makers decided to keep interest rates unchanged, you’re forgiven. After all, Draghi emphasized several times the need for patience and evidence that wages and inflation are on the rise before winding down stimulus measures.

All that would normally weigh on a currency. But what Draghi didn’t do was dwell on the recent strength of the euro, other than to say it had received “some attention.” For traders, that was a green light to push it above $1.16 for the first time since May 2016. The euro is spiking because Draghi has not been able to put ‘FX’ and ‘policy’ into the same sentence.

The Fed is on a course of gradual rate increases. Bond guru Bill Gross is warning about looming interest rate increases and the damage they can do to a debt-laden global economy. In his monthly investor outlook, the Janus Henderson Advisors fund manager said the course of global central banks toward tightening policy could be perilous for the economic recovery. Raising interest rates will increase the cost of short-term debt that corporations and individuals hold.

In the U.S. alone, households have $14.9 trillion in debt while businesses owe $13.7 trillion. Gross said, “While governments and the U.S. Treasury can afford the additional expense, levered corporations and individuals in many cases cannot. ”

A broad measure of how well the U.S. economy is performing surged in June after a strong gain in May, suggesting growth could speed up in the months ahead. The leading economic index jumped 0.6% last month after a revised 0.4% increase in May.

The improvement in the index was spearheaded by strong housing permits after several months of weakness. Home builders plan to step up construction to meet rising demand as the economy enters is ninth year of expansion.

The U.S. got off to a slow start in 2017, and although growth accelerated in the spring, the economy is still not expanding full bore despite the strongest labor market in more than a decade.

The Congressional Budget Office has release its analysis of the latest version of Senate Republicans’ legislation to repeal and replace the Affordable Care Act. CBO says it would leave 22 million Americans without health insurance coverage by 2026. Yesterday, the CBO said that a repeal-only version would result in 32 million uninsured by 2026.

The number of Americans who applied for unemployment benefits sank in mid-July and hovered near a 44-year low, reflecting the healthiest jobs market in more than a decade. Initial jobless claims in the period running from July 9 to July 15 fell by 15,000 to a seasonally adjusted 233,000.  That matches the second-lowest level since the 2007-09 recession.

Arizona’s seasonally adjusted unemployment rate remained the same at 5.1% in June. The US unemployment rate was 4.4% in June. A year ago, the Arizona seasonally adjusted rate was 5.3% and the US rate was 4.9%. Arizona lost 42,800 Non-farm jobs in June. The Private Sector lost 5,700 jobs. Government lost 37,100 jobs. Arizona Non-farm employment grew by 2.4% (62,700 jobs) over the year in June.

With tech stocks at a record high — and stalwarts like Microsoft having doubled their market cap in just about three and a half years — some may worry that we’re setting up for a repeat of the tech bubble. Others may point to research that shows tech earnings are rising in-line with the index’s overall march higher.

Sometimes, things are different. And, on cue, Microsoft reported a better-than-expected quarterly profit and revenue. Microsoft said revenue from its cloud unit, which includes the flagship Azure platform and server products, rose about 11 percent to $7.4 billion in the quarter.

The company’s net income more than doubled to $6.5 billion, or 83 cents per share, from $3.1 billion, or 39 cents per share, a year earlier. Excluding one-time items, Microsoft earned 98 cents per share beating estimates of 71 cents. On an adjusted basis, revenue rose 9 percent to $24.7 billion – also beating estimates.

Microsoft shares hit an intraday record price of $74.30 and closed at an all-time high of $74.22. Microsoft reported after the closing bell, and share were up about 1.5% in after-hours trade.

Visa reported a better-than-expected quarterly profit and raised its full-year earnings forecast. Consumer spending has been on the rise in the United States, and shoppers pay with plastic. Visa’s payment volumes in the US rose 12.1 percent on a constant dollar basis to $840 billion in the quarter.

More than half of the company’s total volume of transactions comes from the United States. Net income rose to $2.06 billion, or 86 cents per share – beating estimates of 81 cents, and up from $412 million, or 17 cents a year ago. Visa also raised its forecast for full-year profit.

EBay reported a nearly 94 percent fall in quarterly profit. Net income fell to $27 million, or 2 cents per share, in the second quarter, from $435 million, or 38 cents per share, a year earlier. They did have about $400 million in income tax provisions that dented profits… still, not good.

As part of its review of Amazon’s agreement to buy Whole Foods, the Federal Trade Commission is considering allegations that Amazon misleads customers about its pricing discounts. The FTC is probing a complaint brought by the advocacy group Consumer Watchdog, which looked at some 1,000 products on Amazon’s website in June and found that Amazon put reference prices, or list prices, on about 46 percent of them.

And for 61 percent of products with reference prices, Amazon’s reference prices were higher than it had sold the same product in the previous 90 days.

Retailers and appliance makers fell after Sears said it would sell its Kenmore home appliances on Amazon and integrate the brand’s smart gadgets with the Alexa digital assistant. Sears was up 10.6 percent at $9.60 and Amazon shares rose 0.2 percent.

Once a dominant force, Sears Holdings appliance sales account for about 15 percent of its total sales of $3.3 billion in fiscal 2016. So, you no longer need to go to Sears for Kenmore appliances or Craftsman tools – so, why would you go to Sears?

Home Depot fell 4.1 percent, shaving off 40 points from the Dow and weighing the most on the S&P 500. Retailers Lowes and Best Buy, as well as appliance maker Whirlpool, were down between 3.9 and 5.6 percent. The market cap loss in Home Depot, Lowe’s, Whirlpool and Best Buy was about $12.5 billion by the end of the day.

Financial Review

No Small Feat

Sinclair Noe — March 27, 2017

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

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DOW – 45 = 20,550
SPX – 2 = 2341
NAS + 11 = 5840
RUT + 2 = 1357
10 Y – .03 = 2.37%
OIL – .12 = 47.85
GOLD + 10.90 = 1254.80

Stocks pared losses, and recovered from session lows; enough to push the Nasdaq into positive territory; enough to turn a 184-point loss on the Dow into just a 45-point loss at the close.

The Dow Jones industrial average is now down for 8 straight sessions – the longest losing streak since August 2011; you may recall that the instigation for that loss was concern about the credit worthiness of some of the largest economies in Europe.

Additionally, the only other times since 1990 that we have seen 8 down days for the Dow were in October 2008 and September 2001. Prior to 1990, it happened three times in the 1980s and much more frequently in the 1960s and 1970s. Still, the current losing streak only saw the Dow drop 400 points or 1.9%.

The overall trend is still up and the recent weakness doesn’t look like anything more than the markets taking a pause after a sharp and fast run-up, but it bears watching.

After a week that began with the FBI disclosing that it’s investigating President Donald Trump’s campaign team for possibly colluding with Russia to tilt the 2016 election, and ended with a failure to rustle up enough votes to repeal the Affordable Care Act, the president is moving on. The administration plans to take a lead role in crafting major legislation to cut taxes with an eye toward meeting an August target date.

Getting a broad tax bill passed by Congress and on Trump’s desk for signature into law looks to be no easy feat, especially after intra-party differences last week torpedoed the healthcare legislation he had backed. And before tax reform, there is the issue of passing a budget, and dealing with the pending national debt ceiling. Analysts at Bank of America Merrill Lynch said in a research note that a tax bill, “if passed at all, could be a very watered-down version of current proposals.”

It’s tough all over. US states are reducing their tax revenue forecasts due to concerns over a projected slump in economic growth, low oil prices, possible federal tax cuts and other factors. The Rockefeller Institute of Government, the public policy research arm of the State University of New York, said while the revised forecasts varied, states generally anticipate continued sluggish growth for their two biggest revenue sources: income and sales taxes. That will squeeze already-tight state budgets.

For fiscal 2017, which in most states began on July 1, the median income tax growth rate slipped to 3.6 percent from 4 percent, while the rate for sales taxes fell to 3.1 percent from 4.2 percent. In fiscal 2018, states forecasted slight increases over fiscal 2017 with the median growth rate for income taxes at 4.1 percent and sales taxes at 3.5 percent.

Jared Kushner, Trump’s 36-year-old son-in-law, will oversee a new “SWAT team”. Its goal is to reinvent the federal government. The entire federal government. Trump has already tasked Kushner with bringing peace to the Middle East, plus several other significant domestic and foreign policy assignments.

Kushner’s new Office of American Innovation will reportedly showcase several corporate titans, including Apple’s Tim Cook and Microsoft’s Bill Gates, to “modernize the technology and data infrastructure of every federal department and agency.” So, good luck with all that.

And in his spare time, Kushner has been called to testify before a Senate committee investigating whether Russia tried to interfere in the election. Earlier today, a Russian bank under US economic sanctions over Russia’s incursion into Ukraine disclosed that its executives had met Jared Kushner during the 2016 election campaign.

The Trump administration is attempting to crack down on sanctuary cities, announcing that local governments will have to certify they aren’t impeding communication between their police and federal immigration authorities in order to continue receiving Justice Department grants. Attorney General Jeff Sessions said that in one week, about 200 states and localities refused to honor federal requests to turn over undocumented immigrants. He didn’t specify the time period.

Sessions reiterated a policy announced in an executive order Trump signed in his first week in office. That document authorized the Attorney General and Secretary of Homeland Security to withhold federal grants from sanctuary cities that don’t help the US government deport immigrants. Sessions said the federal government could also “claw back” grants to jurisdictions refusing to work with the federal government, in addition to refusing to approve new grants.

Chicago Federal Reserve President Charles Evans says inflation looks “well on its way” to reaching US economic objectives. Yet many uncertainties remain, particularly with the latest failure of the GOP’s proposal to repeal and replace Obamacare. At a speech in Madrid, Spain, Evans said he still worries long-term inflation expectations are running below the Fed’s 2 percent inflation objective.

Evans said he doesn’t have confidence there will be four rate increases in 2017, and three increases are “plausible,” but two rate hikes are “also possible.” This week, eleven speeches are scheduled to take place from nine of the Federal Reserve’s Open Market Committee’s twelve members. Fed Chair Janet Yellen will hold her keynote speech to a conference in D.C. on Thursday morning.

It’s a busy week for competition authorities in Brussels. The $140 billion merger between Dow Chemical and Dupont is expected to win Euro Union approval, while a veto is anticipated for the €29 billion-euro tie-up of LSE and Deutsche Boerse. Antitrust officials are also expected to bless a second agrichemical megamerger – ChemChina’s purchase of Syngenta – next week.

A joint committee of ministers from OPEC and non-OPEC oil producers meeting over the weekend has agreed to review whether a global pact to limit supplies should be extended by six months. Nothing concrete just yet; but they will look revisit production cuts in April.

OPEC and 11 other leading producers including Russia agreed in December to cut their combined output by almost 1.8 million barrels per day in the first half of the year. The original deal was to last six months, with the possibility of a six-month extension. The meeting of energy ministers found generally good compliance with the production cuts so far, although there is little to indicate that it has eased the global oil glut.

Last week, Credit Suisse downgraded the retail sector, saying the outlook had become bleaker than it had anticipated in large part because of events in Washington and through discussion of “whether we think the risks of the border adjustment provision in the House corporate tax reform proposal are fully reflected in apparel and retailing stocks”. Other analysts have shown similar pessimism.

In the past several months, Macy’s has announced it will close 63 stores; Sears, 150; The Limited, 250; Guess, 60; American Apparel, 104; Abercrombie & Fitch, 60; JCPenney, up to 140. The cost in jobs is stark, with Macy’s saying it expects to see 10,000 workers laid off, including 6,200 managers, or 17% of executives.

A recent Synchrony Financial report entitled The Future of Retail predicted that instant gratification coupled with a higher degree of tech-driven personalization would drive consumer behavior and retail industry through to 2030. The report said that the future of bricks-and-mortar will center on authentic brand experiences: more than half of consumers polled said they looked forward to an amalgam of in-store and entertainment experiences.

If you were looking for top performing stocks of the past decade, you would expect to hear about the FANG stocks, Facebook, Apple, Amazon, Netflix, and Google. Don’t forget Domino’s; the pizza company is up some 2,200% in the past decade. Not as good as Netflix, but better than the others.

Bill Gross, who was fired from Pimco four decades after he co-founded the investment firm, has settled his lawsuit against the company for just over $81 million. Gross sued Pimco in 2015, claiming his dismissal from the company was a breach of contract, and a breach of covenant of good faith and fair dealing. Gross said at the time that he suffered damages in excess of $200 million.

A lawyer representing the Pimco co-founder filed a request in California state court to dismiss the fund manager’s suit over his 2014 departure from the company. All proceeds from the settlement will go to charity — to the Sue and Bill Gross foundation.

UPS’s legal fight with New York has gone up in smoke. A federal judge said United Parcel Service ignored “red flags” that its brown trucks were being used to transport millions of untaxed cigarettes from Indian reservations. A similar suit is also pending against UPS rival FedEx.

The US district judge ruled that UPS failed to comply with a 2005 deal it struck with the state to fix the problem without going to court. She said she’d decide on damages later. The state seeks more than $800 million in damages for lost tax revenue.

Following a high-impact crash in Tempe, Arizona, Friday night, Uber suspended its self-driving car program. The accident occurred when the driver of a second vehicle “failed to yield” to the Uber car while making a turn. After checking things out, Uber said it is putting self-driving cars back on the road for passengers to hail in Tempe

NFL owners approved the Oakland Raiders’ move to Las Vegas at the league meetings. Raiders were not satisfied with Oakland’s proposals for a new stadium, and Las Vegas stepped up with $750 million in public money. Bank of America also is giving Raiders owner Mark Davis a $650 million loan. The Raiders likely will play two or three more years in the Bay Area before their $1.7 billion stadium near the Las Vegas strip is ready.

Financial Review

Quiet, Almost Too Quiet

Sinclair Noe — March 9, 2017

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DOW + 2 = 20,858
SPX + 1 = 2364
NAS + 1 = 5838
RUT – 5 = 1360
10 Y + .05 = 2.60%
OIL – .53 = 49.75
GOLD – 7.20 = 1201.80

Stocks dipped in afternoon trade but held on for minor gains, next to nothing really. Another quiet day. The S&P 500 and the Dow Industrials have not suffered a 1% decline in 102 trading sessions, dating back to October 11.

The longest stretch of trading days without a 1% decline since Dec. 18, 1995 for the S&P 500 and the longest since Sept. 20, 1993, for the Dow. It’s quiet, almost too quiet.

Another drop in oil prices weighed on energy shares while financial shares pared some of their early gains. When asked during a briefing whether President Donald Trump still backs his campaign pledge to restore the Glass-Steagall Act, White House spokesman Sean Spicer said that he did.

The law, which separated commercial and investment banking, was repealed in 1999 and, if reinstated, would mainly apply to larger banks, which have been market leaders in the past few months. Much of the gain for financials has been built on the idea of deregulation.

The European Central Bank left interest rates unchanged. The Governing Council left the main refinancing rate at 0%, while the rate on deposits parked overnight at the bank remains at minus 0.4%. The rate on the bank’s marginal lending facility remains at 0.25%.

In a statement, the bank repeated that it expects rates to remain “at present or lower levels for an extended period and well past the horizon” of its bond-buying program, which is scheduled to run through at least December. The ECB also repeated that it stands ready to extend the size or the duration of the bond-buying program if the outlook deteriorates.

The Labor Department reports imports rose 0.2 percent in February, above the expected gain of 0.1 percent, after climbing 0.4 percent a month earlier. Export prices, meanwhile, rose 0.3 percent.

Outplacement consultancy Challenger, Gray & Christmas reported employers announced plans in February to cut 36,957 jobs, a 19 percent decline from January. Per Challenger, employers said they would hire 166,266 workers in the first two months of 2017, the highest January-February on record.

The retail sector once again planned the most cuts as companies closed brick-and-mortar locations and steered business online. Retailers said they would cut 11,889 jobs in February. The energy sector saw a massive year-over-year drop in job cuts, announcing only 5,930 compared with 45,154 in February 2016.

The number of Americans who applied for unemployment benefits jumped by 20,000 to 243,000 in early March, but layoffs remained near a 45-year low. The four-week average of initial claims, meanwhile, rose by 2,250 to 236,500. Continuing jobless claims dropped by 6,000 to 2.06 million. Tomorrow, the government is expected to report a gain of about 210,000 new jobs in February.

Meanwhile, the Arizona Department of Labor published the state jobs report for January and it shows the Arizona unemployment rate unchanged at 5%, however the state lost 53,600 jobs in January. The biggest job losses per sector were in Trade, Transportation, and Utilities (-18,000 jobs); Professional and Business Services (-16,400 jobs); and Government (-13,700 jobs). Arizona Non-farm employment grew by 2.0% (53,700 jobs) over the year in January.

If you are looking for entertaining analysis of the markets, it’s tough to beat Bill Gross’ monthly investment letter. Gross, who runs the Janus Global Unconstrained Bond Fund, characterized the run-up as the “Trump bull market and the current ‘animal spirits’ that encourage risk.”

Details on Trump’s plans remain scarce, however, and equity gains have moderated on growing concerns that stock valuations may be high. The S&P 500 is trading at about 18 times forward earnings estimates against the long-term average of about 15 times.

Gross said the global economy has created more credit relative to GDP than that at the beginning of 2008’s great credit recession. Gross said: “In the U.S., credit of $65 trillion is roughly 350 percent of annual GDP and the ratio is rising,” adding, “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road.

One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.” It happened in 2008, Gross said, noting central banks could drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. “Today, central bank flexibility is not what it was back then.”

You may recall that back in January, Bill Gross said that if the yield on the 10-year Treasury note crossed 2.60%, that would be the critical level both to the bond market and to stock prices. “If 2.6 percent is broken on the upside … a secular bear bond market has begun,” Gross said.

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

Gross said the 10-year yield has been in a downward trend line since 1987. If that channel is broken, look out. Today, the 10-year note closed at 2.60%.

House Democrats on the Energy and Commerce Committee staged a marathon fight to slow down the GOP’s Obamacare replacement, but ultimately failed to stop the bill. After a 27-hour delay, the Energy and Commerce committee approved the American Health Care Act in a party line vote. The bill will next be considered by the House Budget committee. The Congressional Budget Office is expected to score the bill next week.

As part of a plan to reshape its business, Royal Dutch Shell is selling its oil sands interests in Canada in a two-part deal worth $7.25 billion. It will offload stakes and reduce its share in the Athabasca Oil Sands Project for $8.5 billion in shares and cash, while jointly purchasing Marathon Oil Canada Corporation with Canadian Natural Resources for $1.25 billion.

Oil drops below $50. West Texas Intermediate crude oil plunged more than 5% on Wednesday after Department of Energy data showed US inventories swelled to a record-high 528 million barrels. That selling has continued day, with WTI dropping below $50 a barrel, its lowest since the end of November.

PPG’s bid to buy Dutch paints and chemicals rival Akzo Nobel was rejected. A deal would have created a global behemoth in specialty chemicals that would have made ingredients for products including skin creams, car paint and iPhone coatings. Akzo said the unsolicited $22.1 billion cash and stock offer undervalues the company and isn’t in the best interests of shareholders.

The French waste and water company Suez Environnement said it has partnered with a Canadian pension fund manager to acquire General Electric’s water treatment technology business in an all-cash deal that valued the business at about $3.4 billion.

GE put its Water and Process Technologies unit on the sales block in October after it agreed to merge its oil and gas division with a fellow services provider, Baker Hughes. The GE business provides water treatment and process services to industrial clients and reported revenue of $2.1 billion last year, with about half of that in North America.

Sears reported a narrower loss in the fiscal fourth quarter than the period a year earlier, but revenues continued to fall, as they continue to close stores and sales continue to decline at its remaining stores. The company’s long-term debt obligations nearly doubled from the prior year, despite the chain’s efforts to raise cash by selling off assets.

Sears took a $381 million charge during the quarter to write down the value of its trade name. Sears completed the sale of its Craftsman brand to Stanley Black & Decker for an initial upfront cash payment of $525 million with additional payments over time.

The Great Recession and the housing bubble left many homeowners underwater, with negative equity in their homes, they were stuck – under house arrest; they couldn’t sell, they couldn’t move, and many homeowners could not keep up important maintenance, much less upgrades. That’s good news for home flippers.

In 2016, the median age of a flipped home was 37 years, per a report out from Attom Data. That’s the oldest in the nearly two decades, and about double the median age of homes flipped before the downturn. The median size of flipped homes was the smallest on record in 2016, at 1422 square feet.

There were 3.1% more flips in 2016 than 2015, and 0.5% more flippers. And flippers could sell their properties for a median of $189,900 in 2016, offering a median gross profit of $62,624, or 49.2%, the highest on record. So, it looks like flippers still have legs.

Gallup-Healthways has released its  Community Well-Being Index . Researchers analyzed 350,000 interviews to rank 189 communities by physical, emotional, financial, community and social health; basically, a look at the happiest and healthiest cities in America. They found that living near the beach doesn’t guarantee your happiness — but it certainly doesn’t hurt.

Communities in the Southeastern US and industrial Midwest were generally ranked lower in well-being, partly due to health problems including higher smoking and obesity rates. Topping the list: Naples, Florida. Phoenix ranked 47 out of 189.

Financial Review

Uncertain

Sinclair Noe — February 6, 2017

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

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Financial Review by Sinclair Noe for 02-06-2017
DOW – 19 = 20,052
SPX – 4 = 2292
NAS – 3 = 5663
RUT – 11 = 1366
10 Y – .08 = 2.41%
OIL – .72 = 53.11
GOLD + 15.70 = 1236.20

Traders around the world seem uncertain about whether to buy or sell. European markets were mixed. Most Asian markets ended the day with gains. This follows a week where U.S. stocks dropped and then slowly climbed back up. The Dow Jones industrial average ended the week with a 0.1% dip. The S&P 500 and Nasdaq each edged up by 0.1% over the week.

Big business in the UK is starting to feel the pain from Brexit. An Ipsos Mori poll of senior executives at more than 100 of the top 500 companies in the UK found that 58% of businesses believe they are starting to feel the impact of the UK’s decision to leave the European Union.

A decision on a Scottish referendum is coming soon. When the U.K. triggers Article 50 to leave the EU, it might also trigger a fresh independence referendum. Scotland – one of the United Kingdom’s four nations along with England, Wales and Northern Ireland – voted to keep its EU membership last June, but will leave the EU because the UK voted to do so. The British parliament could technically block the move, but to do so would likely provoke a constitutional crisis.

Top Euro Union diplomats have vowed to uphold sanctions against Russia for destabilizing Ukraine, despite US intentions to ease those sanctions. The EU imposed a series of economic and diplomatic sanctions against Russia in 2014. Over the past week, a flare-up in hostilities has erupted between the Ukrainian military and Russia-backed separatists, with each accusing the other of a new wave of shelling. Over the weekend, President Trump committed to meet with NATO leaders in Europe in May.

A federal appeals court rejected early Sunday morning a request from the Justice Department to immediately reinstate an executive order on immigration and refugees, asking for more court filings before it rules on the matter. Airlines in Europe and the Middle East respond to the suspension by allowing passengers from countries that had been blocked to fly.

Ninety-seven tech companies, including Netflix, Twitter, Apple, and Facebook filed an amicus brief on Sunday night against the executive order that places an immigration ban on citizens of seven Muslim-majority countries. The brief states that the executive order “inflicts significant harm on American business, innovation, and growth” and “makes it more difficult and expensive for U.S. companies to recruit, hire, and retain some of the world’s best employees.”

More than any other industry, tech companies hire the lions’ share of the 85,000 foreign workers allowed into the US annually under the H1-B visa program. The H1-B is a temporary visa intended to bring in foreign professionals with college degrees and specialized skills to fill jobs when qualified Americans cannot be found.

A research report from Goldman Sachs estimates that nearly one million H-1B visa holders now reside in the US, and they account for up to 13 percent of American technology jobs. The big tech companies have pressed for increases in the annual quotas, saying there are not enough Americans with the skills they need.

But many tech workers see the H-1B program as a way to pay temporary workers less; or ship their jobs abroad, or at least to bring in workers from abroad, train them, and then ship the jobs offshore.

And it’s not just tech workers. Each year, more than 6,000 medical trainees from foreign countries participate in medical residency programs through J-1 non-immigrant visas, according to the American Association of Medical College.

Once they complete their residency, physicians can either return to their home country for two years before they are eligible to re-enter the U.S. through a different immigration pathway, such as an H1-B worker visa, or they can apply for a Conrad 30 J-1 Visa Waiver. This allows them to extend their stay in the U.S. if they commit to serving in rural and under-served areas for three years.

 The point being, don’t expect a quick resolution to a complex problem.

This past Friday we focused on the January Jobs Report, but there was some other news of note. President Trump signed two executive orders dealing with Wall Street. The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

So, once again the banksters that caused the meltdown of 2008 will oversee policing their industry. What could go wrong?

The second order calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves. The orders don’t do much by themselves to roll back reforms but they do offer details on how the financial industry is likely to receive favored status over the next 4 years.

The order on the fiduciary rule is more like a memo; no extension was granted, and no guidance about seeking a stay to the rule. Nothing in the final version of this memorandum delays the fiduciary rule; still, it was enough for the acting Labor Secretary to state the Department of Labor “will now consider its legal options to delay the applicability date.”

Right now, the date is April 10. And apparently, no matter the administration, government continues to move at a glacial pace.

Over the past month, several Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its quantitative easing during and after the financial crisis. There is some concern the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities.

In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Moody’s Analytics estimates that if the Fed gets out of the bond-buying business as the economy strengthens, it could help lift 30-year mortgage rates past 6 percent within three years.

Bill Gross, in his monthly newsletter says that other central banks have stepped up bond buying as the Fed has cut back, but when those central banks stop buying bonds, there will be a bear market in bonds that will ripple out.

The global central bank balance sheet has surpassed $12 trillion, Gross said. At the same time, Fitch Ratings recently reported that global sovereign debt with negative yields still surpasses $9 trillion.

Even if central banks remain accommodative, it only serves to inflate asset prices without boosting economic growth, creating “an unhealthy capitalistic equilibrium that one day must be reckoned with.”

JPMorgan has received approval and license to underwrite corporate bonds in China’s interbank bond market, making it the first U.S.-headquartered bank to do so. China is the third largest bond market in the world with $6.3 trillion outstanding at the end of 2016, with the interbank bond market accounting for over 90%.

U.S. energy companies added oil rigs for a 13th week in the last 14. Despite OPEC cuts, U.S. crude inventories increased more than expected last week. With output being cut, more investors are betting on rising prices despite indicators such as the Baker Hughes rig count pointing to increased U.S. supply. The Commodity Futures Trading Commission says investors raised their net long U.S. crude futures and options positions in the week to Jan. 31 to a record 412,380 lots.

Canadian department store operator Hudson’s Bay, which also owns the Saks Fifth Avenue stores, has made a takeover approach to U.S. department store chain Macy’s. Hudson’s Bay could raise equity and debt against its real estate portfolio, which could be worth $14 billion, to fund the deal. The company could also bring in a partner.

The economic calendar is a bit light this week, with the JOLTS report serving as the highlight alongside the preliminary reading on consumer confidence from the University of Michigan. But we will stay busy with earnings reports. Analysts will be looking for S&P 500 companies to maintain the 7.5% average profit increase that has marked an encouraging fourth-quarter earnings season so far and will be needed to sustain the market rally.

Tyson Foods reported stronger-than-expected first-quarter earnings and sales and raised its annual outlook, citing strong beef and pork sales.

Toyota Motor reported a sharp decline in net profit for its fiscal third quarter, as the relatively strong yen continued to weigh on earnings. Toyota and other Japanese exporters are being hammered by the yen’s strength. A U.S. dollar bought 109 Yen on average in the third quarter; a year earlier, it bought 121 Yen.

Toyota has a glut of used cars in the U.S.–fueled by years of record sales–which is weighing on new car prices. Toyota said it is ramping up production of more-profitable trucks and sport-utility vehicles to increase profit.

Toyota Motor and Suzuki Motor said they plan to trade expertise in parts supplies and R&D. Any deal could see Toyota benefit from a supply chain that has helped Suzuki dominate India’s massive auto market, while Suzuki could hope to access Toyota’s innovations in automated driving, artificial intelligence and low-emission vehicles.

Hasbro’s revenue was helped in the fourth quarter by surging sales of products in its girls’ category, which include its line of Disney Princess and Frozen dolls. Profit and revenue came in above Wall Street’s expectations.

Tiffany & Co. abruptly replaced Chief Executive Officer Frederic Cumenal after disappointing financial results, just hours before the jewelry chain introduced a new campaign with the first Super Bowl ad in its history. The shake-up follows the departure of the jeweler’s top designer three weeks ago, and weak holiday sales that sent the stock tumbling.

Google used the Super Bowl to plug its Google Home connectivity service, but the TV commercial apparently confused the systems in homes of those who already have it. For them, Google Home went wacko. Apparently, the home systems heard the TV broadcasts calling its name, and it became befuddled. OK Google do not listen to the commercial.

Financial Review

Meet the Press

Sinclair Noe — January 11, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

Pause

Sinclair Noe — November 16, 2016

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DOW – 54 = 18,868
SPX – 3 = 2176
NAS + 18 = 5294
10 Y – .40 = 45.41
OIL – .02 = 2.22%
GOLD – 3.40 = 1225.00

The Dow Jones Industrial Average had posted record closes for four straight sessions, before hitting the pause button today. Still, the Dow is up about 8.25 percent year to date, outperforming the S&P 500 and the Nasdaq composite, which were up 6.6 percent and 5.8 percent for the year, respectively.

The last two times the Dow outperformed the S&P and Nasdaq in a year when all three were higher year to date were in 2006 and 1996. If the Dow can break 19,000 it would likely just keep running higher. Based on market data from the past 30 years, when the Dow has crossed levels like 2,000, 3,000, 4,000 – all the way to 18,000, we can expect traders to push it up even higher.

The trend is true not just for a quick one-week return, but also one-month and one-quarter returns. If nothing else, a move through a thousand-point level attracts attention, encouraging more people to jump on board. Of course, we’re not there yet, and it is a probability, not a guarantee.

The producer price index was unchanged in October. The PPI measures inflation at the wholesale level. Higher costs of natural gas and gasoline were offset last month by declines in prices of food as well as services such as financial advice and hospital outpatient care. Still, some modest inflationary pressure is building.

Wholesale costs have risen 0.8% in the past 12 months. That’s the strongest one-year change since the end of 2014. A separate measure that strips out the volatile food, energy and trade margin categories is rising at an even faster rate. So-called core producer prices have climbed 1.6% in the past 12 months, the fastest pace in two years.

Industrial production was unchanged in October after a big drop in output as warmer-than-normal temperatures reduced the demand for heating; utility output dropped 2.6%. Manufacturing output edged up 0.2%, while mining output jumped 2.1% higher, its best performance since March 2014.

The National Association of Home Builders’ index was steady was unchanged at 63 in November. Any reading over 50 indicates improvement.

A measure of mortgage application activity fell to a 10-month low as 30-year mortgage rates jumped to their highest levels since January. Borrowing costs to buy a home and to refinance posted their steepest weekly increase since June 2013. Interest rates on 30-year fixed-rate mortgages with conforming loan balances of $417,000 or less averaged 3.95 percent, which was up from 3.77 percent the previous week and the highest since January

Federal Reserve Bank of St. Louis President James Bullard said there’s a chance the US economy could get a medium-term boost if President-elect Donald Trump increases infrastructure spending and reforms taxes. Bullard said a “single policy-rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting.” Prices of federal funds futures contracts indicate investors see a more-than 90 percent probability the U.S. central bank will hike when officials meet Dec. 13-14.

Not everybody expects a Trump boost for the economy; Bill Gross, manager of the Janus Global Unconstrained Bond Fund, writes: “There is no new Trump bull market in the offing. Investors must drive with caution, understanding that higher deficits resulting from lower taxes raise interest rates and inflation, which in turn have the potential to produce lower earnings.” Gross writes many of the policies Trump favors represent the status quo – and a Clinton administration would have been no better. “Neither party as they now stand has bold policies beyond the reach of K Street lobbyists.”

So far, the Trump transition team does not seem particularly concerned about a transition team staffed heavily with lobbyists from energy, agriculture, transportation, and banking. Meanwhile, Senate Republicans voted to keep Mitch McConnell of Kentucky as the majority leader. Democratic senators elected Chuck Schumer of New York as minority leader.

Now, it is important to remember that Bill Gross is a bond guy; and while stocks have enjoyed record highs since the election, bond prices have tanked. The bond market largely believes Trump’s policies can lead to economic growth at the expense of deficit spending and inflation. And with bond prices dropping, volatility in the bond market has surged. Fixed income markets and equity markets are following completely different narratives after the election.

So, the question is which one is right. And the answer might be that they are both wrong. Stocks are probably overbought and bonds are probably oversold, and that can continue to play out in the near term. The most like course is a reversion to the mean. But absent equilibrium, Gross makes a good point about inflation and higher rates eventually dragging stocks lower.

But the market has not yet determined a clear direction. On Monday, something very rare happened: more than 300 issues on the New York Stock Exchange advanced to new 52-week highs, and more than the same number of issues fell to new lows. It happened for the first time ever.

The number of stocks setting new 52-week highs should normally outnumber those setting new lows (and vice versa,) reflecting some uniformity and clarity of direction. However, a wide dispersion between new highs and lows is not seen as a good market indicator. The high number of stocks making new highs and lows at the same time show that this is a confused market.

Snapchat, the messaging service, has filed to go public in one of the most eagerly anticipated market debuts of 2017. Snapchat is aiming for a valuation of more than $30 billion, which would make it the third-most-valuable technology company at the time of listing, after Alibaba and Facebook.

Snap, the parent company, aims to have shares trading as soon as March. Its last round of financing came in May to the tune of $1.8 billion, which valued the company at around $17.8 billion. Snapchat accounts for 32 percent of social network users in the United States, it’s only getting 2.3 percent of social network ad dollars.

No one questions Snapchat’s ability to engage its users. But turning that engagement into money is another story.

Amazon for the first time has filed lawsuits against counterfeit sellers, after several businesses voiced concern that knockoffs were killing their sales and endangering consumers. Amazon has increasingly relied on third-party sellers to fuel its growth, but opening its website brought with it a greater chance for fake goods to enter its warehouses.

Twitter has launched a counteroffensive against trolls who have been on the attack for too long. The company is expanding its “mute” function, allowing users to block specific content – like words, phrases or conversations – from appearing in their notifications section. The damage to Twitter’s reputation caused by abuse and harassment was reportedly one of the factors that swayed Salesforce against buying the platform earlier this year.

Seeking to ease concerns over its largest ever deal, Microsoft has offered concessions to EU antitrust regulators over its $26 billion bid for LinkedIn. The European Commission, which will rule on the deal by Dec. 6, did not provide details. It’s expected to seek feedback from rivals and customers before deciding whether to accept the concessions, demand more, or open a full investigation.

EU antitrust regulators are set to fine HSBC, JPMorgan and Credit Agricole by the end of the year for rigging financial benchmarks linked to the euro. Charges were levied in May 2014 against the three banks, which denied wrongdoing. Deutsche Bank, RBS and Societe Generale admitted guilt in December 2013, while Barclays avoided a fine because it alerted the European Commission.

Despite years of delays, the SEC has finally approved a plan to introduce a vast surveillance system to oversee trading on the US stock market, in response to the 2010 “Flash Crash.” The creation of a Consolidated Audit Trail will establish a regulatory central database and monitor every trade order, execution, modification and cancellation in real-time.

Boeing will cut 500 jobs over four years and shut two plants as it revamps its defense and space unit. The company also said it would create a new global operations group that would include its defense units in Australia, Saudi Arabia, and UK. Boeing’s defense, space and security business accounted for 31.4% of the plane maker’s total revenue of $23.9 billion in the latest quarter.

During his campaign Donald Trump singled out Ford by name, calling on the American car manufacturer to stop sending jobs to Mexico and threatening to slap tariffs on any cars imported from south of the border. Ford CEO Mark Fields says Ford still intends to move small car production to Mexico, but he hopes to work openly with the new president and Congress.

The Fiesta Bowl has a new sponsor for this year’s game, and not a moment too soon. Six weeks before the Fiesta serves as one of 2016’s two College Football Playoff semifinals, the game is now the PlayStation Fiesta Bowl.

Financial Review

Chugging Higher

Sinclair Noe — August 3, 2016

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DOW + 41 = 18,355
SPX + 6 = 2163
NAS + 22 = 2159
10 Y + .02 = 1.55%
OIL + 1.64 = 41.15
GOLD – 5.10 = 1358.70

US services companies expanded more gradually in July, with job gains slowing in a key gauge of economic growth. The Institute for Supply Management says its non-manufacturing index fell to 55.5 in July from 56.5 in June, although any reading above 50 signals growth. New orders increased over the past month, while the index’s employment and production measures remained positive but downshifted. The ISM services index has shown growth for 78 straight months.

Friday morning, we will cover the government’s update on non-farm payrolls for July – the monthly jobs report. This morning we saw a preview (of sorts) as ADP reports private-sector hiring held steady in July, and employers added 179,000 jobs in July after a revised 176,000 job gains in the prior month. Most estimates for the Friday Jobs Report are running around 185,000 new jobs. If the labor market is able to build on its recent strength, it could make the case for the Federal Reserve to raise interest rates later this year.

Atlanta Fed President Dennis Lockhart is not ruling out a rate increase at the U.S. central bank’s next meeting in September, saying “at this point… we just have to wait and see how the data comes in.” He also expressed concern about what he called lofty asset valuations in the financial markets.

When the Fed held off hiking rates in July, equity markets surged. However, the credibility of the Fed eroded, due to their verbal chatter signaling a desire for higher rates leading up to their meeting, only to be followed by no action. The economy is not a runaway train; it is a slow moving train that has been very consistent at just chugging along. If the Fed is going to actually raise rates in September, chatter makes no difference; they are going to have to start pounding the table; and they aren’t.

Valuations in financial markets are lofty, but we aren’t seeing frothy markets. For more than two weeks, the S&P 500 has been virtually stuck in an amazing, maddening range of less than 1%. This is an almost unheard-of level of inaction.

The S&P 500 is overbought, which would normally play out in one of two ways: The market continues in a sideways consolidation where the bears balance out the bulls and put the market back into a more normal condition or we get a profit-taking pullback (where traders and investor decide to cash in on some of the profits they’ve made over the past three to four weeks). And while August is a historically volatile month, the consolidation pattern we’ve seen would argue for a breakout to the upside – again, it might be preceded by a slight pullback.

The bull stayed on track today, chugging just a bit higher, once again frustrating naysayers crying “what goes up must come down.” The S&P 500 rose 0.3% to 2163.79 today, which is not exactly a huge move. But markets looked very strong below the surface. The Russell 2000 was up 0.9%, showing pretty solid out-performance. We also saw a major intraday rebound in crude oil prices on today’s E.I.A. inventory report, which in turn pushed up energy stocks. And on the flip side, traders took profits in safety assets like gold, silver, and utilities stocks.

Of course, this market could jump the tracks in an instant. Bill Gross and Jeff Gundlach think so. Gross, a fund manager at Janus Capital once known as the “bond king” of Pimco, wrote in his monthly investment outlook for August, “I don’t like bonds; I don’t like most stocks; I don’t like private equity.” Gundlach, who manages more than $100 billion in assets at DoubleLine Capital, was even more direct in an interview with Reuters at the end of last week: “Sell everything.”

Although stocks have done well, with the S&P 500 recently reaching an all-time record high, Gundlach thinks equity investors are deluded. He says economic growth is weak and corporate earnings are stagnant. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”

The Bank of England meets tomorrow and they are expected to cut interest rates for the first time in seven years this week, in reaction to a string of data pointing to a sharp economic downturn following the U.K.’s vote to leave the European Union. The Bank of England was expected to cut rates at its July meeting, but they did not deliver.

The July minutes referred to “preliminary signs” of a post-Brexit impact on business confidence, the bank pointed out it had no official data on economic activity to warrant a rate cut. Instead, the minutes said “most members of the committee expect monetary policy to be loosened in August,” setting the stage for action this week.

Weekly applications for U.S. home mortgages fell to their lowest level in five months even as borrowing costs declined. The Mortgage Bankers Association said its seasonally adjusted index of mortgage activity for home purchases, a leading indicator of housing sales, fell 2 percent in the week ended on July 29 to its lowest level since late February. The MBA’s seasonally adjusted gauge on refinancing applications fell 4 percent from the prior week. It reached its highest level since June 2013 in the week ended on July 8. Thirty-year loan rates hit a more than three-year low last month.

Nearly 120,000 units of digital currency bitcoin worth about $72 million was stolen from the exchange platform Bitfinex in Hong Kong, in the second-biggest security breach ever of such an exchange. Bitfinex is the world’s largest dollar-based exchange for bitcoin, and is known in the digital currency community for having deep liquidity in the U.S. dollar/bitcoin currency pair. Bitcoin prices fell sharply overnight, sliding as much as 22% to $480.

HSBC  cast doubt over reaching its profitability targets after first half earnings tumbled 29% on year – just shy of expectations – due to a slowdown in its key markets of Britain and Hong Kong.

Societe Generale and Credit Agricole beat estimates, reporting a jump in second quarter net profit helped by a gain from their stake sales in Visa Europe.

Rio Tinto reported its weakest first-half earnings in 12 years, down 47% as iron ore and copper prices fell, but the results beat analyst forecasts. Rio Tinto also cut its interim dividend by 58% to $0.45 a share.

After the closing bell, Tesla Motors reported its 13th straight quarterly loss as a rise in sales of its Model S and Model X electric cars failed to make up for the huge cost of ramping up production. Tesla said its net loss widened to $293 million.

Aetna has become the last of the five major national health insurers to project a loss on Affordable Care Act plans for 2016, underscoring concerns about the stability of insurance marketplaces at the heart of Obamacare. Aetna also said it would re-evaluate its participation in the 15 state exchanges where it currently sells plans and cancel a planned expansion into more.

Wal-Mart is in talks to buy Jet.com, a year-old online rival, as part of a multi-billion-dollar revamp of its e-commerce division aimed at boosting online sales growth. The talks were reported by the Wall Street Journal, which said Jet.com could be worth as much as $3 billion. Wal-Mart is playing catch up with Amazon.com on distribution and technology.

The acquisition could give it access to Jet.com’s innovative pricing software, its network of warehouses and customer data. For the past five years Wal-Mart has been on an acquisition spree, buying 15 startups in an attempt to bring in the talent and technology needed to drive e-commerce growth.

Without giving a reason for the delay, Toyota has postponed the global launch of its plug-in Prius gasoline hybrid model to winter. It had planned to start selling the car in Japan, North America and Europe around autumn. A spokesperson also said it would reduce initial production of the model, although output would eventually pick up according to demand.

Time Warner has purchased a 10% stake in Hulu for about $583 million. Time Warner networks like Turner Classic Movies, Cartoon Network, CNN, TNT, and TBS will be available live and on-demand on Hulu’s new service—a service that will now be even more appealing to consumers looking to give up on their cable bundles.

The opening ceremony isn’t until Friday, but the Olympics officially kicked off at noon on Wednesday with a women’s soccer match between Sweden and South Africa. Every team in the women’s soccer competition is playing today, on what Google’s Olympic calendar refers to as “Day -2.” The men’s soccer competition begins on Thursday. Other than soccer, men’s and women’s archery are the only events that will start before the opening ceremony.

Michael Phelps, the most decorated Olympian of all time with 18 gold medals among his career haul of 22, will carry the U.S. flag in Friday’s opening ceremony of the Rio Olympics. The U.S. Olympic Committee announced that Phelps, who will be the first American male swimmer to compete at five Games, had been chosen in a vote of fellow team members to lead the delegation into the Maracana stadium.

Financial Review

Anticipation of Consequences

Sinclair Noe — October 8, 2015

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

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DOW + 138 = 17,050
SPX + 17 = 2013
NAS + 19 = 4810
10 YR YLD + .05 = 2.11%
OIL + 1.86 = 49.67
GOLD – 6.80 – 1140.00
SILV – .39 = 15.77

This morning was full of anticipation: earnings season scheduled to kick off after the closing bell, the FOMC scheduled to release minutes from their September policy meeting, the House of Representatives scheduled to select a new Speaker of the House. Wisdom consists of the anticipation of consequences.

Earnings season is underway; the unofficial start is when Alcoa reports; ticker symbol AA, they lead the pack alphabetically, and then it just became tradition. The company reported adjusted third-quarter earnings of 7 cents a share on revenue of $5.57 billion. Analysts surveyed by FactSet had estimated earnings of 13 cents a share on revenue of $5.66 billion. Alcoa indicated that China’s industrial economy is slowing more rapidly than expected, as the aluminum producer slashed its production outlook for the country for cars, trucks and construction. And just like that, we have a trend.

Short interest has hit a peak. Short interest on companies listed on the New York Stock Exchange (NYSE) just hit a seven-year high, going back to the 2008 financial crisis. Short interest, or a bet that prices will drop, tends to increase as stocks are falling, and peak when they’ve bottomed; and so a peak in short interest is often seen as a contrarian indicator. Of course, short interest could still increase from these levels.

The Fed published the minutes of its September FOMC meeting. Most Federal Open Market Committee members still think an interest rate hike is possible this year. According to the Minutes from the September meeting, the Fed decided to wait on concerns about sluggish inflation and global economic growth, particularly in China. It also did not want to hike rates with inflation below its 2% target, as this could have hurt its credibility. The Fed remarked that the pullback in equities in August was likely because investors believed stocks were expensive.

Most thought that their goal of healthy labor market had been met or would be met by the end of the year. That view may be different now that the September jobs report, released after the Fed meeting, showed slowing growth. Fed officials decided it would be “prudent” to wait for more data to confirm the economy was growing at a moderate rate and labor market conditions had improved further.

House Republicans were scheduled to gather today to elect a new Speaker after John Boehner abruptly announced two weeks ago that he plans to retire from Congress at the end of October. House Majority Leader Kevin McCarthy was expected to be the front-runner for the Speaker’s job, but before the vote this morning, McCarthy dropped out of the race.

Yesterday  the Freedom Caucus, a group of about 40 of the House’s most conservative members announced it was throwing its support behind Rep. Daniel Webster, a Florida sophomore considered a longshot challenger to McCarthy. That comes three days after Jason Chaffetz, a three-term Utah Republican and Chair of the Oversight Committee announced he, too, was challenging McCarthy. A full House vote is scheduled for the end of the month. House Republicans tweeted that the leadership election would be postponed.

As the politicians sort through the chaos, there is still work to be done.  The Treasury Department has said it will exhaust its authority to borrow money to fund the government on Nov. 5. If Congress does not raise or suspend the government’s statutory borrowing limit, the government would default on its debt days later, risking economic chaos, soaring interest rates and plunging stock prices. Then, on Dec. 11, a stopgap spending bill expires. Without congressional action, much of the government will shut down. And don’t forget an October 29 deadline to replenish the Highway Trust Fund, which funds many construction projects across the country. With leadership elections occupying much attention, the window to get something done grows smaller.

Brazil is facing political and economic crisis; Brazil’s Federal Accounts Court has ruled President Dilma Rousseff manipulated government budget figures in 2014, and the nation’s highest court permitted a lawsuit to annul last year’s presidential election. The move paves the way for a possible impeachment, although any ouster would likely take months and has no guarantee of succeeding.

Jobless claims fell by 13,000 to 263,000 in the week ended Oct. 3, the fewest since July 18. The four-week average of claims, a less-volatile measure than the weekly figure, dropped to 267,500.

Revolving credit continues to show life, up a solid $4.0 billion in August for a sixth straight gain. Gains in this reading, which have been scarce this recovery, perhaps suggest that consumers are growing less reluctant to run up their credit cards.

The United Auto Workers union has reached a tentative deal with Fiat Chrysler Automobiles on a new four-year contract, averting a strike of the automaker’s U.S. operations. Local UAW leaders will gather in Detroit on Friday to hear details of the deal, while Fiat Chrysler’s 40,000 union workers will have to vote again to finalize the agreement. If the pact is ratified, the UAW will likely use it as a template for negotiations with General Motors and Ford.

A Congressional hearing into the Volkswagen emissions cheating scandal continued today. Volkswagen’s top U.S. executive, Michael Horn, repeatedly apologized but didn’t reveal details of who was behind the scam or who knew what, when.  Horn was grilled on questions he claimed to not have answers to and the lawmakers didn’t get the answers they were looking for. In Germany, police and prosecutors swooped in on Volkswagen factories and employees’ private homes in an early morning raid to gather evidence about who was behind the carmaker’s decision to cheat on diesel emissions tests.

Doubts have been raised over the level of Volkswagen reported death and injury claims in the U.S. over the last decade as the numbers have been so good as to make some industry experts question their validity. Already this year, Honda has been fined in the U.S. for underreporting claims and Volkswagen’s reported claims are significantly below the number Honda was fined for.

Dell, the world’s third largest PC maker, and the cloud storage company EMC Corp. are in discussions about a potential merger, for what could be one of the biggest technology deals in history. An agreement could be reached within a week, according to the New York Times. Of course, it’s also possible the talks won’t lead to any deal at all. It remains unclear if the two companies are discussing a full or partial takeover. EMC has a market capitalization of $50 billion, and it owns the software-development company Pivotal and enterprise-security firm RSA, as well as 80% of the virtualization company VMware.

After triggering a buy-sell clause in a deal with Michael Jackson’s estate, Sony appears ready to sell its half of the world’s biggest music publisher – Sony/ATV Music Publishing (a company worth about $2 billion). Sony and Jackson – and after his 2009 death, his estate – have jointly owned the company since 1995, each with a 50% stake. The publisher has a catalog that has copyrights to most of the Beatles’ songs, among many others including those by the Rolling Stones and Taylor Swift.

Just a few days after Google officially became a subsidiary of Alphabet, its new holding company, Alphabet has acquired the domain name abcdefghijklmnopqrstuvwxyz.com. Google announced its restructuring in August. At the time, Google unveiled its website with a URL of abc.xyz. A Google spokesperson said, “We realized we missed a few letters in abc.xyz, so we’re just being thorough.” The purpose of the new domain is unclear given that the page did not load on this morning.

Netflix is raising prices for the second time in two years. The company’s “standard” tier of service will increase by $1, to $9.99 a month, starting November 18. Prices for its “basic” and “premium” tiers remain the same.

Remember Etsy, the online site for handcrafted stuff? Amazon is looking to crush Etsy by announcing its own marketplace specifically targeted at factory free, handmade goods.

Urban Outfitters has asked salaried workers at the company’s home office to “volunteer” for extra weekend shifts at a new fulfillment center. The picking, packing and preparing that’s required of voluntary workers are, in fact, jobs that normally pay wages. Urban Outfitters says many wage employees offered to pitch in, but hourly-wage workers were excluded from the voluntary work because it might violate labor laws.

Bill Gross sued his former employer, Pimco, for improperly firing him. Gross says his ouster was driven by greed. Gross, a billionaire, is demanding a jury trial and damages of no less than $200 million.

Belarusian writer Svetlana Alexievich won the Nobel Prize in literature. Swedish scientist Tomas Lindahl, American Paul Modrich and U.S.-Turkish national Aziz Sancar won the Nobel Prize in chemistry on Wednesday for showing how cells repair damaged DNA, work that can be used to develop new cancer treatments. The Nobel Prize in medicine was awarded to Irish-born William Campbell, Satoshi Omura of Japan and Tu Youyou – the first-ever Chinese medicine laureate for discovering drugs against malaria and other parasitic diseases that affect hundreds of millions of people every year.

Takaaki Kajita of Japan and Arthur McDonald of Canada won the Nobel Prize in physics on Tuesday for discovering that tiny particles called neutrinos change identities as they whiz through the universe, proving that they have mass; by uncovering the “chameleon-like” nature of neutrinos, the laureates had solved a long-standing puzzle in particle physics that could alter our grasp of the cosmos. Tomorrow, the Nobel Peace Prize will be announced. Anticipation builds.