Financial Review

Summer’s End

Sinclair Noe — September 21, 2017

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DOW – 53 = 22,359
SPX – 7 = 2500
NAS – 33 = 6422
RUT – 1 = 1444
10 Y un = 2.28%
OIL + .02 = 50.71
GOLD – 9.90 = 1291.60

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	3,616.0	$60.59B	$1.37B	39.51%	1	+0.35%	12.19%
	Ethereum	ETH	260.11	$24.78B	$613.25M	17.66%	0.0719044	+1.30%	15.66%
	Bitcoin Cash	BCH	420.59	$7.04B	$327.18M	9.42%	0.116637	+1.15%	7.41%
	Ripple	XRP	0.17210	$6.62B	$45.61M	1.31%	0.00004747	+0.64%	-0.56%
	Dash	DASH	344.00	$2.64B	$170.99M	4.92%	0.0960248	+4.56%	39.76%
	Litecoin	LTC	47.100	$2.51B	$230.10M	6.63%	0.0129956	+0.88%	6.33%
	NEM	XEM	0.21598	$1.91B	$3.40M	0.10%	0.00005837	+3.27%	13.40%
	IOTA	MIOTA	0.49721	$1.39B	$17.05M	0.49%	0.00013703	-0.26%	9.29%
	Monero	XMR	87.00	$1.32B	$34.20M	0.99%	0.0240579	+1.49%	-2.39%
	Ethereum Classic	ETC	10.2330	$979.34M	$40.10M	1.15%	0.00281232	+1.44%	2.09%

We knew the record highs on Wall Street wouldn’t last and today, finally, we saw a dip. Not enough to change the trend, not yet anyway. It’s been a good run. The net worth of households climbed by $1.7 trillion in the second quarter.

The Federal Reserve said that the net worth of households and nonprofits rose by 1.7%, to $96.2 trillion, as the value of equities rose by $1.1 trillion and the value of real estate rose by about $600 billion. Those gains aren’t distributed evenly. American households’ total wealth is about $96 trillion. That’s more than three-quarters of a million dollars for every American household. But roughly 50% of households have zero or negative wealth.

So, the headline numbers don’t tell the full story. An earlier report from the Federal Reserve said that less than half of all families hold stocks. Meanwhile, household debt grew at a 3.7% rate, again driven by student and auto loans. Mortgage debt excluding charge-offs rose 2.8%. State and local government debt meanwhile contracted by 1%, the second contraction in a row.

Businesses continue to pile on debt, as non-financial borrowing grew at a 5.3% rate – and despite more borrowing, corporate America is flush with cash. Non-financial companies’ liquid assets, which include foreign deposits, currency as well as money-market and mutual fund shares, reached a record of almost $2.3 trillion in the second quarter. That’s up nearly 60 percent since the recession ended in mid-2009.

Initial claims for state unemployment benefits declined 23,000 to a seasonally adjusted 259,000 for the week ended Sept. 16. Any data on the labor market is likely to be sketchy due to Hurricanes Harvey and Irma.

Yesterday, Hurricane Maria hit Puerto Rico. Today, we are getting an idea of the damage. Maria was a devastating storm; 3.4 million people are without electrical power. The hurricane dumped up to 3 feet of rain on parts of the island; flooding is a big problem; roads and bridges are washed out; buildings are splintered. Complicating matters, more than 95 percent of the island’s wireless cell sites were out of service.

The death toll has risen to at least 15 on the small Caribbean island of Dominica. Two people were also killed on the French Caribbean island of Guadeloupe. And there is one reported fatality in Puerto Rico.

This month’s storms came roughly four months after the island filed for bankruptcy protection  – no longer able to pay its $123 billion in pension obligations and bond debt. That roughly comes out to $34,000 owed for each of the island’s 3.4 million citizens. The island’s economy isn’t likely to generate the tax revenue needed to pay these massive bills.

If Puerto Rico is without power for months after Hurricane Maria, as authorities now warn, many investors in the $9 billion of Puerto Rico’s outstanding electric utility bonds risk never seeing their money. Prepa, Puerto Rico’s main supplier of electricity, filed for bankruptcy in July after Promesa, the congressionally appointed federal oversight board addressing Puerto Rico’s overall debt woes, rejected a $9 billion restructuring deal between Prepa and an ad hoc group of bondholders and insurance companies.

Prepa’s bonds, $9 billion worth, are revenue bonds whose funding stream is based on collecting customer fees. Even before Hurricane Maria knocked power out for good, bondholders were worried that Prepa would deliberately force some plants offline, jeopardizing the collateral, creating justification for a privatization plan that could leave current bondholders high and dry. Proponents argue that a brand new electric authority, free of debt, would be a huge boon to the Puerto Rican economy.

The Securities and Exchange Commission, the regulator of Wall Street was hacked last year. The SEC says EDGAR, its corporate filing system, was hacked in 2016 and information was potentially used for illegal stock trades.

EDGAR is where Corporate America goes to file statements on their businesses. It’s where the important stuff is stored: quarterly earnings reports, market-moving news, IPOs, mergers and acquisitions, it all goes into the EDGAR system, and is often filed before the news is made public.

Suppose a company was going to announce that their fourth quarter earnings were going to be well below expectations due to some outside event. They must notify the SEC of this, and they would do it through a filing in the EDGAR system. Think about this: if a company was going to issue a warning on Friday morning that may affect its stock price, would it be helpful if someone had the news the day before?

We don’t know what data was retrieved, only that there was “access to nonpublic information.” We don’t know who did it. We don’t even know the date of the hack. The SEC said it occurred in 2016, but they only discovered it last month. The SEC did say that they had “promptly” fixed the source of the breach. Here’s a simple rule about these breaches: it’s always worse than initially reported.

There’s a big reason for Wall Street to worry about hackers at the SEC: they are about to begin implementing a system that will track every trade made, and if hackers get into it would reveal a treasure-trove of secret trading information. It’s called the Consolidated Audit Trail (CAT), and it’s been under discussion for seven years.

After the Flash Crash in May 2010, the SEC realized they could not reconstruct trading activity to get at the real cause of the crash, or even who might have caused it. They did not have all the data they needed. The answer was to develop the CAT, a giant data base that would include all trades a company made.

The first implementation stage for the CAT is set to begin in November. The SEC hack throws a monkey wrench in the gears. It also serves to remind that all that information we provide to the inter-webs is treated in a very cavalier manner – whether it’s personal information gathered by Equifax, or information on our portfolios, or information about how Wall Street trades – and the very security of all those trades are very much in question. The SEC revealed that its database is decades old.  With trillions of dollars at stake, it might be a good idea for somebody to get serious about security.

Standard & Poor’s downgraded its rating on China, saying the country’s strong economic growth has been fueled by heavy borrowing — and that it expects that borrowing to continue. That could hurt China’s ability to handle potential financial shocks, like a crisis among its banks, and could lead to longer-term growth problems.

State-controlled banks have been funneling big loans to wasteful, chronically unprofitable state-run companies. Indebted local governments have been borrowing heavily as well. Even China’s national government, cautious in its previous borrowing, has been running budget deficits lately, and the country’s famously frugal households have begun using more credit.

Trump announced new U.S. financial sanctions that target North Korea and foreign companies or individuals that do business with North Korea. And today, according to Reuters, the People’s Bank of China, the country’s central bank, told banks to “strictly implement United Nations sanctions against North Korea.”

Chinese banks were “told to stop providing financial services to new North Korean customers and to wind down loans with existing customers.” China is North Korea’s chief ally and economic lifeline. Some 90 percent of North Korean economic activity involves China, and Chinese entities are the main avenue for North Korea’s very limited financial transactions in the global economy.

China is also suspected of turning a blind eye to some of the smuggling and sanctions-busting operations that have allowed Pyongyang to rapidly develop sophisticated long-range missiles despite international prohibitions on parts and technology.

Senate Majority Leader Mitch McConnell’s office said that the leader would bring the Graham-Cassidy healthcare bill to the floor for a vote next week, although nobody seems certain the bill would pass. Still, there is pressure and a deadline, because Republicans are attempting to use budget reconciliation to pass the bill, a process that would allow them to avoid a Democratic filibuster and pass the bill with only a simple majority.

But the rules that allow Republicans to use reconciliation will expire at the end of September, per a ruling from the Senate parliamentarian. That deadline means the bill will not receive a full score ahead of its introduction from the nonpartisan Congressional Budget Office. The score measures the effects on insurance coverage and costs for Americans. The CBO has said, though, that it will release a truncated score that examines the effect on the federal budget.

Republicans hold 52 seats in the Senate; that means if 3 GOP senators vote “no”, the repeal bill fails. So far, there is not much public support for the Graham-Cassidy health bill. The groups opposing the measure include: America’s Health Insurance Plans, the group that represents health insurers; the American Hospital Association, which represents thousands of hospitals and health systems; the American Academy of Pediatrics, which represents 66,000 pediatricians; the American College of Physicians, which represents 148,000 internal medicine physicians and medical students; plus ALS Association, American Cancer Society Cancer Action Network, American Diabetes Association, American Heart Association, American Lung Association, Arthritis Foundation, Cystic Fibrosis Foundation, Family Voices, JDRF, Lutheran Services in America, March of Dimes, National Health Council, National Multiple Sclerosis Society, National Organization for Rare Diseases, Volunteers of America, WomenHeart, and AARP.

The UK has gone from the fastest growing economy in the G7 – at 3.7% growth rate in 2014, to the slowest – projected at 1% in 2018.

Each year, an estimated 12.6 million people die from pollution, according to the UN’s World Health Organization. That’s the equivalent of more than three jumbo jets crashing every hour for an entire year.

Japan Has Dropped Back Into Deflation

Financial Review

Busy Day

Sinclair Noe — September 25, 2015

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DOW + 113 = 16,314
SPX – 0.9 = 1931
NAS – 47 = 4686
10 YR YLD + .05 = 2.17%
OIL + .64 = 45.55
GOLD – 7.70 = 1147.40
SILV – .05 = 15.20

For the week, the Dow was down 0.4 percent, the S&P 500 was down 1.4 percent and the Nasdaq was down 2.9 percent.

Yesterday afternoon we told you about Janet Yellen’s speech in Massachusetts; Federal Reserve Chairwoman Janet Yellen says that an initial rate hike is likely to be appropriate this year. Yellen said she expects inflation will return to 2% over the next few years as temporary factors currently holding it down will wane. Signs of weak growth overseas won’t prove large enough to have a significant impact on policy. Yellen said: “Most FOMC participants, including myself, currently anticipate…an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”

Near the end of her speech, Yellen kind of froze up; she went silent for a while, stumbled over her words, and seemed to be having a hard time. After the speech paramedics checked her out and gave her a clean bill of health. Later attributed the incident to dehydration. She was back at work today.

This morning we heard reports House Speaker John Boehner would resign his position as Speaker of the House and his seat in Congress at the end of October. Boehner held a press conference to confirm. The abrupt decision comes after he faced heavy pressure from conservatives in his party to take a harder line on their causes. Boehner also told the lawmakers that Pope Francis’ visit to Congress the day before was a crystallizing moment.

Representative Kevin McCarthy of California, the No. 2 House Republican, quickly became the leading contender to replace Boehner as speaker. McCarthy has been loyal to Boehner during his frequent tussles with conservatives, but is also close to Tea Party conservatives and in recent months has tacked to the right. Boehner declined to endorse anyone as his successor, but told reporters McCarthy “would make an excellent speaker.”

Boehner told reporters he was stepping aside to avoid another brewing House battle over his leadership, but before he leaves, Boehner will have at least one big battle. With only a few days left until a possible government shutdown, Congress is in overdrive to keep federal funds flowing despite partisan divisions over Planned Parenthood. The issue has ignited the latest crisis in U.S. budget wars and has forced the Obama administration to prepare for a potential repeat of the 2013 shutdown, which lasted 16 days and suspended the salaries of 800,000 federal employees. Boehner’s resignation appeared to ease the threat of a government shutdown next week. Many Republicans said it would free him to forge ahead with a “clean” spending bill. At least that’s one theory; the other line of thought is that Boehner will find it increasingly difficult to herd cats as a lame duck. I’m sure he’ll make a fine lobbyist.

Next on the news docket:  Chinese president Xi Jingping is in Washington for an official state dinner at the White House. President Xi announced that China will start a national pollution-trading system to cut global-warming emissions for its most polluting industries. That’s in addition to previous Chinese commitments to bring its emissions to a peak by 2030 and radically scale up solar and wind power. China even promised $3.1 billion to help poorer countries move away from fossil fuels. The move should also add pressure for a global climate change accord in Paris this December. At a joint news conference with President Obama, Xi said there was no reason to expect China’s yuan currency to depreciate against the U.S. dollar over the long run, saying the exchange rate was “moving toward stability.”

Pope Francis is in New York today. He started the day with a speech before the United Nations General Assembly. Pope Francis strongly condemned the craving for material gains and power, telling world leaders gathered at the United Nations that greed is destroying the Earth’s resources and aggravating poverty. The spiritual leader of the world’s 1.2 billion Catholics condemned the “grave offense” of economic and social exclusion. An attack on the environment was an assault on the rights and living conditions of the most vulnerable, he said, warning that at its most extreme, environmental degradation threatened humanity’s survival. Then he led multi-religious prayer services at the 9/11 Memorial and Museum site, followed by a ride through Central Park in the Popemobile, a visit to a school in Harlem, and then a mass at Madison Square Garden. And you thought you had a busy Friday.

Gross domestic product — the value of everything a nation produces — rose at a 3.9% annual rate from April to June, according to the government’s second update of how fast the nation’s economy expanded during the spring. Previously the Commerce Department had said GDP increased 3.7%. The figures get revised as the government gets more data on how the economy performed. Consumer purchases jumped 3.6%, up from a prior estimate of 3.1%. Americans spent more on services such as health care and transportation. Businesses also invested more in structures such as office buildings and plants than the government initially reported. Investment on structures rose 6.2%, double the earlier estimate. Outlays on equipment also rose slightly instead of declining. And spending for home construction climbed 9.3% instead of 7.8%. After-tax corporate profits jumped 2.6 percent to double BEA’s estimate of 1.3 percent.

S&P 500 companies, excluding financial companies, collectively had $1.43 trillion in cash reserves sitting on the sidelines in the second quarter (April to June) of this year. That’s the second highest level in 10 years, and just a tad lower than the 1.45 trillion high set in the fourth quarter last year. Tech companies especially have much more cash than they did during the dot-com bubble era. Tech leads all sectors in its cash holdings by a long mile.

Some cash numbers are remarkable. Microsoft has $96 billion in cash, Google holds $70 billion and Cisco has $60 billion. The good news is that it reflects very healthy balance sheets. The bad news is that it shows a reluctance to spend by corporate executives, which signals pessimism and that they aren’t seeing enough growth opportunities to invest in.

The final read of consumer sentiment was revised higher to 87.2 from a preliminary tally of 85.7, according to the latest University of Michigan reading. This was down from the August final reading of 91.9.

The Brazilian real enjoyed a massive rally on Thursday after the governor of Brazil’s central bank vowed to use “all instruments” available to policymakers to stem the currency’s recent slide. Busting a five-day losing streak, the real rallied as much as 7% intraday, its biggest gain since November 2008. On Wednesday, the bank announced plans to auction $2 billion worth of currency swaps over two days – restarting a program that was scrapped earlier this year.

Japan has dropped back into deflation for the first time since April 2013 in a symbolic setback to Prime Minister Shinzo Abe’s economic stimulus. Core inflation, excluding fresh food, was down by 0.1% compared with a year ago in August, as slumping global energy prices outweighed headline prices. BOJ Governor Haruhiko Kuroda continues to insist Japan can reach a 2% inflation target by the middle of next year, but most analysts think that goal is now out of reach.

Volkswagen has a new CEO, Matthias Mueller, head of the company’s Porsche brand. Volkswagen has blamed its emissions scandal on a “small group” of people and said suspended a number of staff. Müller pledged to leave “no stone unturned” and “maximum transparency” in an investigation into how the company cheated emissions tests on diesel cars. However, the new VW boss did not reveal how many staff have been suspended or who they are. Bloomberg reported that key parts of the faked emissions tests had been overseen by VW executives based in the company’s headquarters in Wolfsburg.

The iPhone 6s and 6s Plus go on sale in many countries today, including the U.S., U.K., China, Australia, Canada and Germany. Shoppers who purchase the devices in an Apple store can opt in to the new iPhone Upgrade Program, which includes Apple’s warranty plan and the option to upgrade to a new handset every year. Analysts expect 12 million to 13 million phones to fly off the shelves over the weekend, up from more than 10 million last year – when the iPhone 6’s launch was delayed in China.

Google is back under U.S. antitrust scrutiny as officials ask whether the tech giant stifled competitors’ access to its Android mobile-operating system. The Federal Trade Commission reached an agreement with the Justice Department to spearhead an investigation of Google’s Android business. FTC officials have met with company representatives who say Google gives priority to its own services on the Android platform, while restricting others.

Facebook’s Oculus and Samsung Electronics have unveiled a new version of Gear VR for $99, saying the virtual reality headset would ship in time for Black Friday. The new device is 22% lighter and will work with all of Samsung’s 2015 line of smartphones, in contrast to the highly anticipated Oculus Rift, which will need to be wired to an expensive gaming computer. Users will additionally be able to cast 360-degree videos from Facebook’s newsfeed into the Gear VR, and Netflix, Vimeo and Hulu support is also on the way.

A rare astronomical phenomenon Sunday night will produce a moon that will appear slightly bigger than usual and have a reddish hue, an event known as a super blood moon. It hasn’t happened since 1982, and won’t happen again until 2033. A so-called supermoon, which occurs when the moon is closest to earth in its orbit, will coincide with a lunar eclipse, leaving the moon in Earth’s shadow. Individually, the two phenomena are not uncommon, but they do not align often. The moon may appear 14 percent larger and 30 percent brighter, but the difference is subtle to the plain eye. But the reddish tint from the lunar eclipse is likely to be visible throughout much of North America. You’re basically seeing all of the sunrises and sunsets across the world, all at once, being reflected off the surface of the moon.

Monday, August 18, 2014 - Theory and Instinct; Nobody Knows

Financial Review with Sinclair Noe

DOW + 175 = 16,838
SPX + 16 = 1971
NAS + 43 = 4508
10 YR YLD + .04 = 2.42%
OIL - .71 = 96.64
GOLD – 7.30 = 1297.20
SILV + .04 = 19.68

Over the weekend, the geopolitical hotspots did not explode. Kurdish forces made progress against ISIS militants in Iraq; Ukrainian forces made progress against pro-Russian separatists in eastern Ukraine. The ceasefire between Israel and Hamas is holding.

In economic news, the NAHB/Wells Fargo Housing Market Index showed that homebuilder sentiment rose for the third straight month in August. That should be a positive for new home construction.

Meanwhile, mortgage-finance giant Fannie Mae cut its outlook for the housing market this year and next, because rising mortgage rates, bad winter weather and consumer “conservatism” are all hitting the housing market. In its August forecast, Fannie said it expects construction starts for single-family homes to hit 642,000 in 2014, down about 8% from its July forecast of 696,000. Likewise, Fannie cuts its outlook for new single-family homes sales in 2014 by 11% to 431,000 from 486,000.

Housing affordability hit its lowest level in nearly six years in June. The National Association of Realtors reports the mortgage payment for a median-priced US home in June requires 16.3% of median household income. Even though housing affordability is still historically quite favorable by the NAR’s index, homes are not only becoming less affordable, but affordability may be even less favorable for first-time buyers. A separate index maintained by Goldman Sachs that looks only at marginal buyers shows that housing affordability is largely in line with its historic average.

The New York Federal Reserve says a new SEC rule designed to reduce runs on the money market mutual fund industry could create runs instead. At issue is part of the new SEC rule giving funds the ability to limit outflows by restricting redemptions when liquidity runs short. New York Fed economists say: “The possibility of a fee or any other measure that is costly enough to counter investors’ strong incentives to run amid a crisis will give investors a strong incentive to run preemptively to avoid such measures.”

It is Monday, and so there was some M&A activity. Dollar General made an $8.9 billion dollar, all cash bid for Family Dollar Stores. You will recall that Dollar Tree recently made a bid for Family Dollar, which works out to $74.50 a share, while today’s bid by Dollar General works out to $78.50 a share, and it’s cash.

So, for the most part, it was a typical Monday. But we are in the Dog Days of summer, and in these seemingly quiet, low volume, illiquid sessions we can see a small move quickly turn into a bigger move; a leisurely stroll turns into a gallop, turns into a stampede. The Fed 's Jackson Hole, Wyoming, symposium at the end of the week is also expected to send a dovish message to stocks, with employment and inflation nearing Fed goals, Fed Chair Janet Yellen has consistently cautioned some labor market measures still show enough slack to warrant keeping interest rates low. Heading into this year’s Jackson Hole assembly, the labor market is giving off mixed signals even as unemployment falls. About 28 percent of all part-time workers in July reported that slack business conditions or a dearth of full-time jobs kept them from finding full-time work. That’s up from a 19 percent share at the start of the downturn.

Most people are saving next to nothing, while just a few are saving a significant amount. Those who do save are saving a lot, more than $1.2 trillion a year. According to the Fed’s financial accounts data and definitions, the personal savings rate has averaged about 10% of disposable income since the recession ended, up from around 7% before the recession. That means upper-middle class and wealthy Americans are saving nearly $400 billion more a year than they used to. The Fed has been keeping interest rates low, and part of the thinking is that it forces investors to chase yield, but Americans have nearly $11 trillion parked in cash, and bank accounts, and money market funds that pay next to zero. So, the Fed might keep rates low, until we’re all willing to gamble, at which point, rates rise, and we all lose our bets.

The high share of workers who are part time for economic reasons is one reason that the Labor Department’s broadest measure of unemployment remains far above its 8.8 percent pre-recession level. U6 unemployment, which includes involuntarily part time and discouraged job seekers in addition to the jobless, is 12.2 percent, or almost double the 6.2 percent level of the main unemployment rate. Both increased by 0.1 percentage point in July from five-year lows in June.

So, what is this market worth? Robert Shiller says the stock market is very expensive right now. Shiller is the Nobel Prize winning Yale professor who helped create the cyclically adjusted price earnings ratio, which takes average inflation adjusted earnings from the past ten years. In a New York Times article yesterday, Shiller noted that the ratio is now at 25, up from 23 a year ago, and well above the historical average of about 15. The ratio has only moved above 25 three time in the last 130 years; it happened in 1929, 1999, and 2007; and of course the markets crashed. Makes sense; to justify high valuations, earnings would need to rise significantly, or prices would need to fall.

A 5 year long rally in US stocks has taken valuations higher, leaving some investors anxious, but the CAPE is just one measure of value. The S&P 500 trailing 12 month PE is right around 17.5, which is just a little above the long-term average, but not out of line. And most estimate for the next 12 months put the forward PE multiple at about 15.

Still, the bull market is getting long in the tooth; it is now the fourth longest bull market; topped only by the bull runs ending in 1961, 2000, and 1929; and of course we know how those markets finished. The lack of a meaningful correction is a severe divergence from the norm. In the summer of 2012, stocks posted greater than a 10% pullback. Since that time, all corrections have been contained to single digits. History shows that other incidents of abnormally small corrections have preceded large corrections exceeding 20%. But it doesn’t mean a crash is imminent; the markets will eventually falter, but it could be a long, long time. Meanwhile, the Nasdaq Composite made it up to a 14 year high today. Which sounds bullish, but really means that the past 14 years were lost.

Maybe stocks will fall from here; maybe stocks will rise from here. I don’t know. Maybe the housing market will go up from here; maybe housing prices will drop. I don’t know. The yield on the 10 year Treasury note was up 4 basis points to 2.42%; nobody knows why. The price of oil dropped below $97 a barrel; apparently because the ISIS idiots did not blow up the Mosul Dam; apparently because we have built up a stockpile of oil while cutting back on demand; that could all change tomorrow.

George Soros is the biggest money making fund manager around. He’s the only hedge fund manager to have earned $40 billion in profits for his investors. George Soros just turned 84. In an article from the Irish Times they quoted his son, Robert Soros, on the success and brilliance of the co-founder of the Quantum Fund. Robert said: “you know [that] the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm and it’s this early warning sign.”

Soros has admitted to relying greatly on “animal instincts”, saying the onset of acute pain was often “a signal that there was something wrong in my portfolio”. His decisions, then, “are really made using a combination of theory and instinct”.

The economic recovery is underway, or not, depending on any expert opinion of the hour. The main stumbling block to recovery is uncertainty or not, again depending. As we wait for factories to begin operating at full capacity, investors are growing increasingly frustrated at more than half a decade of prudence, pushing chief executives to loosen the purse strings. Capital spending could increase as early indicators show that industrial companies are beginning to run at higher levels of capacity than has been the case over the last five years. When factories and the like are running at less capacity on the back of lower demand there is very low capital expenditure. In the aftermath of the financial crisis companies hunkered down and re-engineered their balance sheets, diverting funds from investment to pay off debt or stockpile cash. However, even since the recession ended and the economy has picked up, many have continued to hoard cash leading to growing calls from investors to deploy cash reserves, which earns low returns sitting on balance sheets.

It is now estimated that global firms are sitting on a stockpile of $7 trillion in cash. The world’s corporate giants are poised to tap into record cash reserves and possibly embark on a long-awaited spending spree, fuelling hopes of a massive boost to the global economic recovery.

The bulk of the cash is held by 5,100 of the world’s biggest companies, which had combined reserves – cash and short-term debt – of $5.7 trillion as of the end of 2013, according to Thomson Reuters Datastream. The cash pile total excludes financial companies such as banks and insurers, who are required by regulators to hire capital.

Corporate America dominates the pack with about $2 trillion at its disposal, led by a clutch of tech titans. Apple’s cash mountain of $140bn means it has more unspent capital than any other American company, followed by Microsoft with $83bn, and Google, which has built up $59bn of reserves.

So, investors are hollering for companies to spend their cash and deliver higher returns, because cash doesn’t pay much. There are three things the companies can do: buy other companies, return the money to shareholders, or spend the money on the business and try to grow the business organically. What will they do? Nobody knows.

Tuesday, May 13, 2014 - Record Highs and Dow Theory

Financial Review with Sinclair Noe

DOW + 19 = 16,715
SPX + 0.8 = 1897
NAS – 13 = 4130
10 YR YLD - .03 = 2.62%
OIL + 1.38 = 101.97
GOLD – 1.00 = 1295.70
SILV + .03 = 19.63

Record highs are seldom pretty; they tend to be sloppy affairs, much like our celebrations. You would like a nice neat procession, but people are marching in different directions, candles blow out, hot wax is spilled.

It doesn’t seem like we should be having record highs in the first place, but there it is:  the S&P 500 hits 1900 for the first time ever; the Dow Industrials at record highs; the Dow Transportation Average confirms with record highs. This is important because it goes back to one of the more important technical indicators in the US stock market, the Dow Theory.

The Dow Theory is based on the writings of Charles Dow, the founder and editor of the Wall Street Journal, and dates back more than 100 years. There are actually several tenets of the theory that examine the major trends in the market and posit that the market is efficient, that it incorporates and discounts all news with greater accuracy than any individual. Once a trend is in place it is likely to continue until there is definitive evidence of a reversal; in this light, the slog through the first quarter might be considered as nothing more than market noise. Dow Theory also holds that volume confirms price trends.

And the theory also holds that the Dow Transports should confirm the Dow Industrials. The idea was that the Industrial average reflected the factories scattered around the country and the transportation average consisted of the companies that hauled the goods from the manufacturer to the market. If manufacturers are producing more, they have to ship goods to consumers, so if you want to know about the health of manufacturers, look to the performance of the companies that ship the goods. The two averages should be moving in the same direction; that is, they should confirm. So, if the Transportation average hits record highs, which it did, the Industrials should also hit new highs, which happened yesterday.

In mid-March, the transports broke above prior 2014 highs while the Industrials still lagged below their corresponding 2014 high. This could have been interpreted as a divergence, and even a signal to sell the industrials. However, Dow Theory tells us that industrials lag transports. It makes sense, because goods need to be transported before they can be sold.

Now, if you want to try and front-run Dow Theory, you want to pay attention to sales. Today, the Commerce Department released April sales figures, and they were flat, up just 0.1%, but this follows a revised 1.5% increase in March; that was the largest increase since March 2010 and reflected pent-up demand after a brutally cold winter. So, March sales were spectacular, and that was reflected in the Dow Transportation Average, and eventually the Dow Industrial Average confirmed the Transports. And now, the April numbers look weak despite data like employment, as well as manufacturing and services industries surveys, suggesting the economy regained strength early in the second quarter.

A second report from the Commerce Department showed that retail inventories excluding automobile stocks barely rose in March. The government had assumed a big increase in these stocks when it made its advance growth estimates last month for gross domestic product at 0.1% growth. March trade, construction spending and factory inventory data, which the government did not have in hand for the GDP estimate, suggest downward revisions to output; likely showing the economy contracting slightly. Core sales were down 0.1% in April; core sales strip out automobiles, gasoline, building materials and food services, and correspond most closely with the consumer spending component of the GDP.

Meanwhile, the Fed reported today that Americans racked up more debt in the first quarter, the third straight quarterly increase, thanks in large part to heftier mortgages. The report on household debt and credit showed however that mortgage originations dropped to their lowest level since the third quarter of last year. Outstanding household debt rose by $129 billion from the previous quarter, boosted by a $116 billion jump in mortgage debt and smaller rises in student and auto loans.

And in the sometimes twisted logic of Wall Street, this might be considered good news, the economy isn’t collapsing but it certainly isn’t growing enough to warrant a change in interest rate policy from the Fed. Any increase in interest rates could hobble consumers, businesses, and even the government.

Prices and wages been have sluggish since the 2007-2009 recession, and especially so in the past couple of years. Inflation remains low, and it undershot the Fed’s 2% target for the 23^rd consecutive month in March, based upon the personal consumption expenditures price index. Stubbornly elevated unemployment puts downward pressure on inflation. We still have slack in the labor market, so we’ll likely have very low interest rate targets for quite some time.

Meanwhile, we’re wrapping up earnings reporting season and according to Bloomberg research, almost 76% of the 453 companies in the S&P 500 that have reported earnings had results that were higher than analysts' estimates and approximately 53% of them exceeded revenue estimates. I know this is a rigged game between corporations and analysts, but companies are making money and sitting on piles of cash.

The corporate cash pile reached $2.02 trillion in the latest quarterly filings of 2,300 non-financial companies in the Russell 3000 Index. According to Bloomberg, the total rose about 13% from a year earlier in each of the two latest quarters, the fastest six-month gain since mid-2011.  If investors aren't applying some sort of haircut to the valuations of companies with hefty amounts of cash overseas, perhaps they should be; that is the mantra of activist shareholders. And so companies are beginning to pick up M&A activity as well as share buybacks and dividend increases. Capital spending on structures, equipment and intellectual property by all US companies in 2013 increased 3.9%, the slowest pace in three years. Eventually there will be value in reinvesting in the company to grow revenue; we’re not there yet, but we’re getting closer.

Again, one of the tenets of Dow Theory is that a trend in place is likely to continue until there is definitive evidence of a reversal; we’re not there yet. The trend is bullish; the supporting data is only mildly positive. In this instance, you stay in the market and remain alert to possible reversals. The level of support for the Dow, now moves up to the 16,550 range. On the upper end, there really is no level of resistance when you hit new highs, with the possible exception of Fibonacci expansion levels, which could put a ceiling around 16,800.

Meanwhile, if you’re looking for a negative divergence, you need look no further than the Russell 2000 Index of small and mid-cap stocks. The Russell has been persistently below its 50 day moving average since early April, and last week it dipped below the 200 day moving average; yesterday it bounced up above the 200 day and remained above the average today, despite losing 12 points. So, if you are looking for an early warning, this is a good place to look. If the Russell can move above the 200 day average here, it would have to be considered positive and also confirmation of the blue chips. If there is a breakdown from here, it might drag the blue chips lower.

Now, even if the market moves lower from here, it doesn’t mean we’re crashing back down to the 2009 levels; there is no definitive evidence for that kind of a move; there is plenty of fear mongering; there are plenty of perma-bears and they are about as accurate as a broken clock. The world is not coming to an end, at least not today; the market is not crashing, at least not today. In fact, we’ve been going through one of the best five year bull runs in market history. The VIX, the volatility index is at its lowest levels in more than a year. The major trend is bullish but this is no time for complacency. One of the tricks to profitable trading is knowing when to let winners run, and when to lock in profits.

These are the days of milk and cookies. Enjoy it while you can.