Financial Review

Decision Day

Sinclair Noe — July 26, 2017

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

DOW + 97 = 21,711
SPX + 0.7 = 2477
NAS + 10 = 6422
RUT – 8 = 1442
10 Y – .05 = 2.28%
OIL – .08 = 48.67
GOLD + 10.50 = 1261.10
BITCOIN + 0.70% = 2568.14 USD
ETHEREUM – 2.22% = 197.74

The major U.S. stock indexes set all-time highs again.

The Federal Reserve Federal Open Market Committee wrapped up its two-day meeting on monetary policy. They left interest rates unchanged and in a statement, said they would begin running off their $4.5 trillion balance sheet “relatively soon”.

The Fed’s language was not dovish, but perhaps a bit less hawkish. That pushed Treasuries higher. The Euro jumped to a 2-1/2 year high against the dollar. The next scheduled FOMC meeting is September 19-20, and there is a good chance the Fed will announce the onset of the balance-sheet reduction after the September meeting, effective on the first of October.

The Fed has raised interest rates 4 times since they began removing emergency policy in December 2015, and project another increase before the end of this year – most likely at the December meeting. As the Fed starts selling securities from their balance sheet, they will start small and gradually increase the sales, which should allow markets to adjust, at least in theory.

The FOMC said it’s “monitoring inflation developments closely.” There isn’t much inflation to monitor right now, the PCE gauge is running at about 1.4%, and seems to be stuck in a rut, despite the Fed’s targets. At this point in the economic cycle, with the unemployment rate at a 16-year low, you would expect to see wages increasing, which would push prices higher.

But prices aren’t going up, and that raises questions about the real strength of the labor market and the economy. Whatever it is, it is a symptom of an economy that just keeps slogging along but can’t really take off.

Get ready for “vote-a-rama”, where Senate GOP leaders will throw everything they have that resembles a health care bill at the wall to see what sticks. Today they voted on a straight repeal of Obamacare – that vote failed (which was expected), there will be a voting frenzy for senators on a series of amendments.

Next up, votes on various amendments to repeal bits and pieces of Obamacare, or what is known as a skinny repeal that would throw the issue to a Senate-House of Representatives negotiating committee. Republicans hope the they can find some amendments which pass and can then be cobbled into some sort of bill which repeals a portion of Obamacare, in some way, shape, or form.

This morning President Trump tweeted that he would ban transgendered people from serving in the military. Who knows whether Trump will follow up his tweets with an actual order. That would normally come from the Pentagon, which was reportedly surprised by the announcement. If there is an actual order, the matter will quickly move to the courts.

New single-family home sales increased in June as purchases in the West surged 12.5 percent to a near 10-year high, but downward revisions to the sales pace for the prior three months pointed to a housing market that is struggling to gain momentum. The Commerce Department said new home sales gained 0.8 percent to a seasonally adjusted annual rate of 610,000 units last month. The sales pace for March, April and May was revised lower. Sales rose 9.1 percent on a year-on-year basis.

Copper rose again, closing at the highest price in two years and bringing its year-to-date gain to 14 percent. While some of the rally has been fueled by the usual fundamentals –  a stronger Chinese economy and labor disputes at mines –  the latest lurch higher may be caused by momentum and a short squeeze. The way that prices have been gaping higher in a straight line up suggests that somebody had some painful options positions to cover.

Earnings reporting season continues to take center stage on Wall Street and most of the news is good. Consider though, that we’re comparing second quarter 2017 to second quarter 2016, when earnings were in a recession. Are corporate earnings genuinely wonderful? It may depend on your perspective.

For example, after-tax corporate profits have grown at an annualized pace of less than 1% over the last five years. You won’t find many five-year periods that have been as anemic as that. You might assert that the only thing of importance is earnings acceleration since the fourth quarter of 2016.

After the closing bell, Facebook reported better than expected profit and revenue. Instagram, the company’s photo-sharing app, helped second-quarter sales climb 45 percent to $9.3 billion. Net income rose to $3.9 billion, or $1.32 a share, from $2.3 billion, or 78 cents, a year earlier.

There are now 2.01 billion monthly active users, and two-thirds of the monthly users are on Facebook every day. Shares dipped roughly 4% in after-hours trading over apparent confusion related to the company’s recent switch to reporting GAAP numbers. But the confusion was soon sorted out and Facebook shares are up about 1%.

PayPal reported a better-than-expected quarterly profit. The company’s shares were up 2.4 percent in trading after the bell.

General Dynamics posted higher-than-expected quarterly profits driven by increased sales in the unit that makes tanks, but projected slightly lower aerospace sales. Its stock fell 4.4 percent

Boeing swung to a net profit of $1.76 billion, or $2.89 a share, from a loss of $234 million, or 37 cents a share, in the same period a year ago. Boeing raised its 2017 adjusted EPS outlook. The stock shot up more than 8%, its largest percentage gain since August 2009, to a record high of $230.43.

Coca-Cola earned $1.3 billion in the last quarter, slightly better than estimates. Revenue came in at $9.7 billion, beating estimates. Sales of sodas and non-soda drinks improved. Then they announced changes to Coke Zero, which will soon be Coke Zero Sugar, and that’s when I sort of stopped caring.

Shares of Buffalo Wild Wings fell nearly 10 percent in extended trading after the company reported sizable misses in its earnings and revenue.

Whole Foods Market reported third quarter earnings that beat estimates. Revenue was flat. The company said its same-store sales fell 1.9 percent in the quarter, not as bad as expected. Amazon reports earnings tomorrow.

Ford Motor reported higher-than-expected second-quarter profits, and in the next breath warned of a rougher ride for the rest of the year. Ford said full-year pre-tax profit, automotive operating margins and cash flow would be lower than 2016 results, sending the company’s shares down 2.1 percent. Ford reported second-quarter net income of $2.04 billion, or 51 cents per share, up from nearly $2 billion, or 49 cents per share, a year earlier.

Britain will ban the sale of new gas and diesel cars by 2040. The UK joins France, which recently announce it would go electric by 2040. The mayors of Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centers by 2025. Electric cars currently account for less than 5 percent of new car registrations in Britain. The shift to electric will require a substantial build-out in charging stations, and for auto manufacturers – who have already started the move to electric.

In Europe, so called ‘green cars’ benefit from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions. Britain’s move will accelerate the decline of diesel and gas cars. Turning away from oil will add to discussions about whether the world is reaching peak oil demand and how additional electric power can be generated.

It also raises questions about leadership; right now, European auto manufacturers are leading both industry and government in the move to electric; Japanese car-makers are strong electric competitors, and the US is lagging. Also, the ability to generate electricity, especially distributed generation of clean energy will be a huge and growing area.

Soon, it will just be an economically easy move for consumers, as improved technology lowers costs. For example, a $1,000 car battery today is expected to cost just $73 within the next 12 years. Given the rate of improvement in battery and electric-vehicle technology over the last 10 years, by 2040 small-combustion engines in private cars could well have disappeared without any government intervention.

Financial Review

The Accord

Sinclair Noe — May 31, 2017

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

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DOW – 20 = 21,008
SPX – 1 = 2411
NAS – 4 = 6198
RUT – 1 = 1370
10 Y – .02 = 2.20%
OIL – 1.03 = 48.63
GOLD + 5.80 = 1269.60
BITCOIN + 3.27% = 2406.36
ETHEREUM – 1.46% = 228.19

President Trump could pull the United States out of the Paris climate accord. Trump refused to endorse the landmark climate change accord at a summit of the G7 Saturday in Italy, saying he needed more time to decide.

The accord, which has been agreed to by 195 countries and ratified by 147 countries since it was signed in December 2015, established a specific set of tools to help countries cut greenhouse gas emissions over time.

Its goal is to hold global warming below 2 degrees Celsius and to avoid the worst risks of a warmer planet. While it’s certainly not the end-all, be-all scheme to reverse global warming, the agreement is the most comprehensive international effort yet to tackle the climate problem, even though compliance is voluntary.

Trump has been dithering on the decision for months, thanks to a tug-of-war playing out among his advisers. He’s already rolled back the policies that would ensure we might make our commitment to Paris, so effectively, he’s stepped out of the accord before officially doing so.

Scientists have been warning us for years that a rise in global average temperature more than 2 degrees Celsius will mean widespread stresses on food and water, sea level rise, and conflict and suffering. To try to avert the worst of these threats, countries agreed to dramatically cut emissions as part of the Paris accord.

But it is essentially a nonbinding agreement and wasn’t ratified by the Senate. So, leaving could be pretty simple, though it will take about four years to formally do it. In the meantime, US officials could stop participating in climate talks. And Trump could pull out of the underlying UN Framework Convention on Climate Change.

That could happen in a just a year’s time and would send the message that the US is done with international cooperation on climate change. A third option is that Trump could declare that the Paris deal is a legal treaty that requires Senate approval.

Such a vote would fail, and then Trump would have Senate backing to not abide by the deal, which he deems a treaty. A letter that 22 Senate Republicans sent to Trump this week urging him to withdraw from the deal, increases the odds of this happening.

Pulling out of the Paris accord could cause serious diplomatic damage. The countries of the world care about climate change. They see it as a profound threat. A decision to withdraw would also fly in the face of nearly across-the-board support for Paris among top American companies, in sectors ranging from oil and gas to retail, chemicals, utilities, agriculture, finance, information, and autos.

The CEOs of ExxonMobil, Apple, Dow Chemical, Unilever and Tesla were among those urging Trump to remain in the agreement, with Tesla’s Elon Musk threatening to quit White House advisory councils of which he is a member if the president pulls out.

Business leaders know climate change is real. They know Paris is an agreement they can work with. They know having US negotiators at the table to protect their interests on matters like intellectual property and trade is crucial.

They know that the transition to clean energy is one of the biggest economic plays of this century, that climate change is a major driver of this transition, that the United States is perfectly positioned to lead with our unmatched culture of innovation, but that opting out of Paris will undermine this opportunity to expand markets, create jobs and build wealth.

In late 2015, Exxon came under fire when New York’s attorney general opened an investigation into whether Exxon misled investors about the effects of climate change. Exxon’s scientists had allegedly been telling company leadership that climate change was an issue as early as the 1970s and ‘80s, but Exxon executives cast doubt on the idea publicly for decades.

Now, Exxon backs the Paris accord. Today, 62.3 percent of investors in Exxon Mobil voted for the company to produce an annual report on the impacts of climate change policies on the company’s business. According to a copy of the resolution, the investors want Exxon to “publish an annual assessment of the long-term portfolio impacts of technological advances and global climate change policies.”

They also instruct the company to annually assess the financial risks of “a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the globally agreed upon 2-degree target.”

We are far past the point when we should be discussing whether climate change is a live risk. The Pentagon calls it a “threat multiplier” in vulnerable regions of the world. The National Intelligence Council says climate change “will almost certainly have significant effects, both direct and indirect, across social, economic, political, and security realms during the next 20 years.”

Firms like BlackRock, Goldman Sachs, Citigroup, and Shell, among others, have produced serious climate reports focused on the transition needed to meet the goals of Paris.

And just look at the signals from nature, at the dozens of “100-year” events—floods, superstorms, droughts, wildfires, record heat waves—taking place in the United States and around the world in recent years. Weather-related losses have tripled since the 1980s.

In the United States, the already strong efforts of our states and cities will loom even larger. States from California, Washington, and Oregon to Minnesota, Illinois, New York, New England, and many others are dedicated to strong climate action and will examine whether there is still more that they can do. Many more states, both red and blue, are charging ahead in developing wind and solar energy.

The dozen US cities that are part of the global C-40 group on climate change account for 25 percent of US population and 30 percent of US GDP. In Mexico City last December, they promised to deliver action, regardless of what the new Trump administration decided to do.

Business also has a crucial role to play in driving the clean energy transformation. The boom is well under way. Wind and solar accounted for two-thirds of all new electric capacity in the United States in 2016. Costs of wind and solar have dropped over 80 percent in the past eight years for solar PV and over 60 percent for wind.

And hi-tech advances are happening all the time, in battery storage, materials science, electric vehicles, and other key elements of the transition. It would be a mistake for companies to bet on a go-slow, “Trump” phase. The transition to clean energy is the smart bet for businesses and investors need to keep their eyes on the prize and not get distracted by the ideological wars of Washington.

While US withdrawal from the Paris accord might cause some other countries to pull back from their commitments to clean energy, it will likely encourage others to step up efforts to fill the void. China has just announced that electric cars are going to account for essentially all growth of car sales as of now.

China’s “road map” plans to have 20% (7 million) of new annual sales to be electric vehicles by 2025 (that is in 8 years), with 2 million electric car sales by 2020. In an extraordinary move China is seeking 8% of new car sales in China being electric vehicles in 2018 (next year). This is not only an emerging problem for the oil industry, it is also a big problem for foreign car makers without electric cars available in China next year.

Many foreign manufacturers are paying attention to China. The latest news means that if you don’t have electric cars or Chinese electric car making partners, then the Chinese market is going to be challenging. BMW has announced that it is prepared to meet the Chinese Government targets. Daimler projects electric vehicles and hybrids will account for up to 35% of worldwide sales in the next 7 years.

And the story for Indian electric car/Internal combustion engine substitution is similar, if not more dramatic (all vehicles electrified by 2032). The scale of the projected changes is huge: 1 Gigaton of CO2 emissions saved and savings of $60 billion in annual petrol/diesel costs in 2030. India is projected to be the 3rd largest automotive market by 2026.

Oil giant BP’s 2016 future energy report barely mentioned electric cars (less than 1.5% penetration by 2035). In its 2017 Energy Outlook, BP had penetration of BEVs at ~4.5% by 2035. BP has projected that the expansion of future oil demand would be dominated by China and India. Now China is saying that it plans to have electric vehicle penetration at 20% of new sales in 2025. And that might be conservative.

Self-driving electric cars are ten times cheaper to run than fossil-based cars, with an expected lifespan of 1 million miles. The only thing holding them back is battery power. The “tipping point” could arrive over the next two to three years as EV battery ranges surpass 200 miles and electric car prices in the US drop to $30,000.

By 2022 the low-end models will be down to $20,000. After that, the avalanche will sweep all before it. What the cost curve says is that by 2025 all new vehicles will be electric, all new buses, all new cars, all new tractors, all new vans, anything that moves on wheels will be electric, globally.

Revolutions have a way of creeping up on you.

Financial Review

154 More Days

Sinclair Noe — June 8, 2016

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

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DOW + 66 = 18,005
SPX + 6 = 2119
NAS + 12 = 4974
10 Y – .01 = 1.70%
OIL + 1.01 = 51.37
GOLD + 18.90 = 1263.10

The Dow closed above 18,000 for the first time since April.

The European Central Bank’s corporate-bond buying program kicked off this morning with the bank buying debt issued by companies including Anheuser-Busch InBev, Telefonica, Siemens, and Renault. Borrowing costs in Europe had already fallen to unprecedented levels with the average yield on investment-grade company notes in euros dropping to 1 percent this week.

In the sovereign debt space, where the ECB also continues to be a buyer, the yield on Germany’s 10-year bund is within a hair of turning negative, falling to (yet another) record low of 0.033 percent this morning.

Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank. Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’s ultra-low rates. Although no decision has yet been taken, the lender has held discussions on the matter with German authorities.

The bulk of negative-yielding debt is concentrated in Japan and Europe. Globally, the total is now $10.4 trillion, according to Fitch Ratings. Individual European countries that do not use the euro are largely trying to weaken their respective currencies, as investors flock to safety.

The European Central Bank, which oversees the euro, introduced negative rates to stimulate growth in the Eurozone. The Bank of Japan also wants to stimulate growth, as well as weaken the yen. The goal is the same: Flood the financial sector with money, hoping that it chases yield into riskier investments.

But if the goal were to coax money into riskier assets, such as stocks, the plan has been a failure so far. European stocks were down 30% at one point after the introduction of negative rates. In Japan, stocks are up only slightly since the beginning of the BOJ’s experiment in January of this year.

Job openings hit 5.8 million at the end of April, up slightly from 5.76 million openings in March, according to the Job Openings and Labor Turnover Summary (JOLTS) report. The report beat analyst consensus estimates of 5.7 million job openings for the month. The job openings rate was 3.9 percent in April, with the biggest increase in wholesale trade, transportation, warehousing, and utilities at 65,000 openings.

Professional and business services saw the biggest decrease, down 274,000 openings. April hires fell to 5.1 million, slightly lower than the previous month’s 5.3 million. The hiring rate was 3.5 percent, little changed in the private sector and down 31,000 for government hires, according to the report. There were 5 million separations, which includes quits, layoffs and discharges.

Last week’s anemic jobs report for May pushed interest rates lower, but the desire for mortgages was already on the rise. Mortgage application volume jumped 9.3 percent last week from the previous week, according to the Mortgage Bankers Association. The volume may have been making up for a big drop two weeks ago, or reacting to a slight drop in interest rates.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.83 percent from 3.85 percent, with points decreasing to 0.33 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio loans.

The World Bank slashed its global growth forecast. The World Bank cut its global growth forecast for 2016 to 2.4% from 2.9% as a result of “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.” The bank sees “mounting risks” and expects a “further slowdown in major emerging markets.” Specifically, China’s growth is forecast to slow to 6.7% from 6.9% and both Russia and Brazil are expected to see “deeper recessions” than initially forecast. India’s growth is expected to hold at 7.6%.

While oil markets will start rebalancing after a slump next year, an oversupply in natural gas won’t disappear until the end of the decade, the IEA warned, slashing its gas demand outlook for a fourth straight year. “Slower generation growth, rock-bottom coal prices and robust deployment of renewables constrain gas’s ability to grow faster in today’s low-price environment.” Global consumption will expand by 1.5% annually until 2021, down from last year’s forecast of 2% growth through 2020.

Meanwhile, both Brent and WTI are holding strong above $51 per barrel, helped by industry data showing a larger-than-expected draw-down in U.S. crude inventories, worries about attacks on the Nigerian oil industry and strong Chinese demand. According to data from the API on Tuesday, oil stockpiles fell by 3.6 million barrels last week. Energy Information Administration figures released today show a 3.2-million-barrel drop in inventories.

The dollar declined against the yen. The euro edged up. The dollar index was down again today. The dollar has lost some of its strength after Friday’s disappointing jobs report. That has helped energy companies, as well as mining companies and chemicals and machinery makers and commodities in general; a weaker dollar makes American goods more affordable in other countries.

If the Fed were to raise rates or even suggest that the recent jobs number was just a transitory anomaly, then the lack of strong fundamental support could produce a rather pronounced correction to the down side. Consider that oil traded today at nearly a 100% increase off of the lows that were created just this February; that kind of price movement is not just a simple supply-demand story.

The International Energy Agency reports that 1.26 million electric cars, both battery and plug-in hybrid, were sold worldwide in 2015. Is that a lot? It depends on how you look at the numbers and who is asking the questions. The trend is certainly up. Keep in mind that there were only a few hundred electric cars on the road in 2008 and the current number is a lot higher than anyone would have expected back then. The number has tripled just since 2013.

The United States now has 400,000 electric vehicles on the road, a massive increase since 2010. But there is still a long road ahead, and that road is full of cars with gas engines. There are 1 billion vehicles on the road worldwide at present and that number is expected to increase dramatically in the next 20 years as demand in countries like India and China continues to soar.  For now, lower gasoline prices are an obstacle for more electric vehicle sales.

According to Fortune’s annual ranking of companies by revenue, Walmart is still the 800-pound gorilla. With $482 billion in revenue, it sells more than Apple, Amazon and Microsoft put together. It’s bigger than the No. 2 company, Exxon Mobil, and No. 3, Apple, combined. Its sales are greater than the GDP of Poland. That’s based on revenue. Forbes puts together a list of the 2000 biggest companies around the globe, and revenue is just one metric they use. According to Forbes, the top 3 spots on their list are held by Chinese banks.

Today’s top gainer was a micro-cap stock called Gevo, up 102%. On Tuesday, Alaska Air Group flew two flights using the company’s renewable alcohol to jet fuel. The flights departed using a mixture of traditional jet fuel and a 20% bio-fuel blend made from fermented corn. They flew from Seattle to San Francisco and then on to Washington DC. The airline estimates that the 20% bio-fuel blend will reduce greenhouse gas emissions by 50%.

Keurig Green Mountain is pulling the plug on Kold, its counter-top soda machine. Many consumers balked at the price of the device, which initially cost $369, and its pods, which had cost $1.25 to make an 8-ounce drink. The move comes 10 months after Keurig rolled out Kold and three months after JAB Holding, a major global coffee player, took the company private for about $14 billion.

When Aubrey McClendon drove his Chevy Tahoe into a bridge the day after he was indicted for allegedly rigging the price of oil and gas leases, suspicions arose that he had killed himself. But a two-month probe by Oklahoma Police has found nothing to suggest the Chesapeake Energy founder committed suicide.  Investigators found no information that this was anything other than a car accident, but also admitted: “we may never know 100% what happened.”

Reports of Roger Goodell’s death have been greatly exaggerated; actually his passing was an outright lie – the result of a computer hack. The National Football League became the latest high-profile victim of hackers as the league’s official Twitter account was intercepted and wrongly announced the passing of NFL Commissioner Roger Goodell. The tweet has been deleted. Goodell is alive and well.

The primary season effectively wrapped up last night. Both the Republicans and Democrats have a presumptive nominee. And what the primary season has taught us is that most states don’t know how to hold an election.

Whether it was a lack of polling places in Arizona, or voters scrubbed from voter rolls in New York, or far too many provisional ballots that will likely never be counted in Texas, or broken machines and polling sites that opened late in California, or a judge’s ruling today in Ohio striking down provisions of the state’s recently enacted voting laws; it all points to confusion and the potential for big problems. By the way, we have 154 days until the Election Day. Good luck.