Financial Review

Go Placidly

Sinclair Noe — May 19, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 141 = 20,804
SPX + 16 = 2381
NAS + 28 = 6083
RUT + 6 = 1367
10 Y + .01 = 2.23%
OIL + 1.18 = 50.53
GOLD + 8.80 = 1256.60

Stocks finished with triple digit gains but well off session highs as news headlines once again rattled traders. The Dow gave back more than 50 points and the S&P 500 saw gains cut in half following an afternoon news dump. The Washington Post is reporting that a current White House official is a significant person of interest in the law enforcement investigation.

Separately the New York Times reported that Trump told Russian officials at the White House that firing FBI Director James Comey relieved “great pressure” from an ongoing probe into Russia and the election. The Times report cited a document summarizing the meeting.

Trump is on the first leg of a ten-day overseas trip that starts in Saudi Arabia, then moves to Israel, the Vatican, Brussels (for a NATO summit), and then Sicily for a G7 summit. The Trump administration planned to announce $110 billion in sales of advanced military equipment and training to Saudi Arabia this weekend.

Despite the firing of James Comey, and a general sense from the mainstream media that the Trump White House is in disarray, and the lowest public approval ratings since the inauguration, Wall Street continues to trade near record highs.  For the week, the Dow and S&P dropped 0.4 percent and Nasdaq was down 0.6 percent.

The dollar index lost 1.6 percent in the five days, the worst week since July 2016. Gold capped its best week in a month. The yield on 10-year Treasuries climbed less than one basis point to 2.23 percent, after rising as much as three basis points earlier in the session. It fell nine basis points this week.

Oil prices rose. West Texas crude rose 2.2 percent to settle at $50.53 a barrel in New York, for a weekly increase of 5.4 percent, the most since March and the second week of gains, on growing expectations that OPEC and other producing countries will agree next week to extend output cuts.

OPEC and other producers including Russia are scheduled to meet on May 25. They are expected to extend output cuts of 1.8 million barrels a day until the end of March 2018. U.S. crude production has climbed 10 percent since mid-2016 to 9.3 million barrels per day as shale producers have taken advantage of higher prices to boost activity.

Iran holds its first round of presidential elections this weekend. If President Hassan Rouhani remains in office, it should encourage Western investment and boost Iranian oil production. If the winner is Ebrahim Raisi, a critic of Iran’s nuclear deal with the West, then it is possible that new sanctions could be imposed, which could reduce the oil supply from Iran.

After two weeks chock full of retailers’ earnings — largely disappointing Wall Street and missing analysts’ expectations — the S&P 500’s Retail ETF (XRT) finished the week down about 3.5%. Leading the declines were names like Ascena Retail Group, Foot Locker, American Eagle and Sears.

Ascena — the parent of clothing companies such as Ann Taylor and dressbarn — saw its shares plunge more than 30 percent earlier in the week, after it adjusted its second-half outlook to reflect worse-than-expected business conditions. Meanwhile, Foot Locker’s same-store sales fell short of expectations.

Off-price retailer TJX, which operates T.J. Maxx, Marshalls and HomeGoods stores, was expected to be an upbeat outlier for the week, but even its first-quarter comparable sales couldn’t match Street estimates. Gap reported a surprise rise in quarterly same-store sales, bucking the trend of dismal results in the U.S. retail industry, as the company benefited from the robust performance at its Old Navy brand.

Campbell Soup’s quarterly sales and profit missed analysts’ estimates, hurt by higher promotions and weak demand for its condensed soups, broths and V8 vegetable juices, and the company warned that its full-year sales could decline.

Deere & Co raised its full-year sales and profit forecast for the second time, as demand improves for its farm and construction equipment, particularly in South America, sending its shares to a record high of $122. The company said it expected fiscal 2017 industry sales of tractors and combined harvesters in South America to be at the high-end of its earlier forecast of about 15-20 percent rise.

While farmers in South America have been complaining about low prices, they have enjoyed big gains in corn and soybean output.

Brazil’s Supreme Court released explosive plea-bargain testimony today accusing President Michel Temer, along with former presidents Lula da Silva and Dilma Rousseff, of receiving millions in bribes. The testimony raises serious doubts about whether Temer, who replaced the impeached Rousseff last year, can maintain his grip on the presidency.

The testimony implicates both ruling and opposition parties and indicates that Temer, a conservative, accepted $4.6 million in bribes from JBS, which ranks as the world’s largest meat processor. It also alleges that Lula, who is already facing five corruption trials, received $50 million in bribes in offshore accounts from JBS, while Rousseff took $30 million in bribes.

Temer said he would not resign from the presidency. The Supreme Court released an audio tape of Temer, approving the payment of hush money to former lower house speaker Eduardo Cunha, who last year orchestrated Rousseff’s impeachment and was later convicted for corruption.

Many politicians fear that if Cunha should turn state’s witness, his testimony could implicate scores of congressmen and members of the executive branch.

About 37,000 AT&T workers, or less than 14 percent of the company’s total workforce, began a three-day strike after failing to reach an agreement with the No. 2 U.S. wireless carrier over new contracts. This is the first time that AT&T wireless workers are on strike, which could result in closed retail stores during the weekend.

The workers on strike are members of the CWA Communications Workers of America union. The workers are demanding wage increases that cover rising healthcare costs, job security against outsourcing, affordable healthcare and a fair scheduling policy.

Slightly over half of the workers on strike are part of the wireless segment and the rest wireline workers, including a small number of DirecTV technicians.

Fiat Chrysler plans to update software that it expects will resolve the concerns of U.S. regulators about excess emissions in 104,000 older diesels. The software update would begin rolling out once the Environmental Protection Agency and California Air Resources Board approved.

In January, the EPA and California accused Fiat Chrysler of illegally using undisclosed software to allow excess diesel emissions in 104,000 U.S. 2014-2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks in a notice of violation.

The Environmental Protection Agency and California Air Resources Board announced approval of a fix for about 84,000 older Volkswagen diesel vehicles that can emit excess emissions. Volkswagen agreed last year to offer to buy back up to 475,000 2.0-liter diesel vehicles that had been sold in the United States or offer fixes if regulators approved.

Friday’s announcement covers a fix for 84,000 2012-2014 Passat diesel vehicles with automatic transmissions. A fix for vehicles with manual transmissions has not yet been approved. In January, regulators approved a fix for 67,000 2015 model diesels, leaving around 325,000 older vehicles still awaiting approval for a fix.

The federal government has, in recent years, paid debt collectors close to $1 billion annually to help distressed borrowers climb out of default and scrounge up regular monthly payments. New government figures suggest much of that money may have been wasted.

Nearly half of defaulted student-loan borrowers who worked with debt collectors to return to good standing on their loans defaulted again within three years, according to an analysis by the Consumer Financial Protection Bureau. For their work, debt collectors receive up to $1,710 in payment from the Department of Education each time a borrower makes good on soured debt through a process known as rehabilitation.

They keep those funds even if borrowers subsequently default again. What constitutes rehabilitation? Nine months of on-time payments, even if the borrower only pays $5 a month. That means that in many cases, the government pays $38 to collect one dollar. The department has earmarked more than $4.2 billion for payments to its debt collectors since the start of the 2013 fiscal year.

Seven years into an economic recovery, nearly half of Americans didn’t have enough cash available to cover a $400 emergency. That’s according to the latest findings from the Federal Reserve’s annual economic well-being of U.S. households, which found 44% in 2016 said such an expense would have to be covered by borrowing or selling something.

That’s a similar percentage to what was found in past Fed surveys. Of the group that can’t pay in cash, 45% would use a credit card to pay off the expense over time, about a quarter would borrow from friends of family, another 27% just couldn’t pay the expense and smaller fractions would turn to selling items or using a payday loan.

We now know where all the money is hiding. Retirees who are usually expected to spend that hard-earned nest egg are instead cutting their spending and living frugally, according to a University of Michigan survey analyzed by software company United Income. The median retiree spends 8 percent less than they comfortably could afford; the result, retirees now hold assets totaling more than $25 trillion.

Spending money, besides being a boost for the economy, could help retirees be more active, if they physically get out of the house to do it. Meanwhile, younger Americans, whose incomes are falling behind those of previous generations, aren’t saving enough.

So, the moral of the story is get out and spend some money this weekend, you might feel younger.

Financial Review

Undo Send

Sinclair Noe — June 23, 2015

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

Subscribe: iTunes | RSS

DOW + 24 = 18,144
SPX + 1 = 2124
NAS + 6 = 5160
10 YR YLD + .05 = 2.41%
OIL + .33 = 61.01
GOLD – 7.90 = 1179.00
SILV – .33 = 15.94

This was a flat day on Wall Street. Most of the session saw the major averages hovering around breakeven. The Nasdaq Composite eked out another record high. The economic news was mixed; durable goods orders were weak but new home sales were fairly strong. While stocks have been trading in a very tight range to start the year, some might call it boring. The Standard & Poor’s 500 index hasn’t posted a gain or loss of 2 percent or more for 126 days, the longest streak since one ending in February 2007. Meanwhile, the bond market has been pretty exciting but not in a good way. Longer-dated Treasuries have been jumping all over the place, posting some of the biggest back-to-back gains and losses on record as the Federal Reserve talks about raising interest rates and European leaders act out a Greek tragedy.

The bond market is supposed to be a safe haven, and so bond investors have pulled $327 million from exchange-traded funds focused on this longer-dated debt in the past week alone, and $1.4 billion year-to-date.

The Commerce Department says non-defense capital goods orders excluding aircraft rose 0.4 percent last month. Overall orders for durable goods fell a seasonally adjusted 1.8% last month, but the decline stemmed mostly from a 35% plunge in bookings for commercial aircraft. Apart from transportation, there were increases in demand for primary metals, fabricated metal products, machinery and computers and electronic products. Orders for electrical equipment, appliances and components fell. Although the May report on durable goods was generally positive, businesses still aren’t spending and investing at a pace that would suggest they have full confidence in the economy. Business investment in the first five months of 2015, for example, was 2.6% lower compared to the same period in 2014.

New single-family homes sold at an annual rate of 546,000 in May, up 2.2% from April, and up 19.5% from a year earlier. That’s the fastest pace since February 2008. The median price of new homes, meanwhile, fell 1% to $282,800 compared with May 2014.  The S&P Homebuilders ETF (XHB) touching a new eight-year high intraday. There are several positive factors for the homebuilders, including some M&A activity; last week Ryland Group and Standard Pacific announced a merger.

But the big news in housing is first time buyers. The latest Census Bureau report in April marked the fastest back-to-back gains in household formation since the second half of 2005. Confirmed by yesterday’s report from the National Association of Realtors showing first time buyers accounted for 32 percent of purchases this month, up from 30 percent in April and 27 percent a year ago. Excluding November 2009, when demand spiked from the expiration of the first-time homebuyer tax credit, sales last month were the strongest in more than eight years for this group.  If you look at people between the ages 18 and 34, nearly a third of them are at home with their parents; if they move out, that would be 4 million households that would be created.

Atlanta Federal Reserve’s GDPNow forecast model shows the US economy is on track to grow 2.0% in the second quarter, up from earlier forecast of 1.9% growth.

Euro zone leaders welcomed new budget proposals from Athens as a basis for further negotiations to unlock billions of euros in frozen aid and avert a default. But it’s not a done deal. Greek lawmakers reacted angrily to concessions Athens offered, and parliament’s deputy speaker warned the proposals might be rejected.

While Americans are the biggest foreign owners of Greek stocks, it’s not much. Overseas investors hold 59 percent of the Greek stock market, and of that U.S. traders have about 25 percent. That comes out to $5.7 billion, about the size of doughnut maker Dunkin’ Brands Group, the 110th weighting in the S&P Midcap 400 Index. U.S. investors kept sending money to Greek stocks even as the market tanked. An exchange-traded fund tracking the shares has had inflows every week this year and received $9.5 million last week. Its market cap reached a record this month. We have clearly been programmed to anticipate bailouts. While there might not be much direct exposure to a Greek default, the spillover could still be problematic. Greece may be small but it is important geographically, geopolitically, and there is always the risk of contagion.

European shares climbed to three-week highs on today, extending the previous session’s rally on expectations that Greece was getting closer to a debt deal. Greece’s ATG share index rose 6.1 percent, adding to a 9 percent jump in the previous session. The pan-European FTSEurofirst 300 index gained 1.1 percent to touch its highest level in three weeks.

Economic activity in the Eurozone grew at the fastest pace in four years in June, providing the latest sign that a recovery in the region is gaining traction. Markit’s Composite Flash Purchasing Managers’ Index rose to 54.1 from 53.6 in May, boosted by momentum in Germany and France, the bloc’s two largest economies. The data adds to the evidence that the ECB’s massive stimulus program is taking effect.

The fast-track trade bill cleared a key procedural hurdle today in the Senate, all but ensuring it will win final passage this week and be sent to the White House for the president’s signature. Fast-track, or trade promotion authority, would allow the president to assure potential trade partners that the deals they negotiate with the U.S. will be presented to Congress for a yes-or-no vote without amendment.

Samsung Group heir apparent Lee Jae Yong apologized in a nationally televised address on Tuesday for failing to stop the spread of MERS at a Seoul hospital run by a group foundation. About half of the 175 MERS cases in South Korea have been traced to Samsung Medical Center. The outbreak has prompted travel restrictions and scared off tourists, dealing a blow to the country’s economy.

Nearly 30 percent of Americans are one emergency away from financial ruin; 29 percent of people don’t have money set aside to cover  emergencies, up from 26 percent last year, according to an annual survey from Bankrate.com. Many of the people who had savings didn’t have enough money to get them through a serious emergency or prolonged period of unemployment. About 20 percent of people said their savings would not last longer than three months. At the same time, the number of people with substantial savings is falling. About 22 percent of people had enough cash to cover six months of expenses, the lowest level in five years.

South Carolina Gov. Nikki Haley called for the removal of the Confederate flag from the grounds of the state Capitol. The flag wasn’t lowered to half-staff along with the other flags at the Statehouse after the shooting at Emanuel African Methodist Episcopal Church Wednesday because doing so is under the authority of the state’s General Assembly — and so is taking it down. The South Carolina legislature is convening to consider the proposal. Other states are also looking at taking down the flag, including Mississippi, and Virginia’s governor is calling for removing the flag from license plates. Wal-Mart, Sears, Amazon.com, and eBay all said they would stop selling products bearing the Confederate flag. Meanwhile, a chorus of corporate CEOs, from Tim Cook to Mitt Romney, are calling for the flag to be taken down.

General Mills said it would stop using artificial flavors and colors in almost all of its cereals, joining the food industry’s move towards products perceived as healthier. The packaged foods maker said it plans to have 90 percent of its cereals free of artificial flavors and colors by 2016, up from about 60 percent currently.

If you go to a restaurant there is a good chance the food comes from Sysco or US Foods; they are the two largest food distributors. Earlier this year, Sysco bid $3.5 billion to take over US Foods. The Federal Trade Commission sued to block the deal on antitrust grounds. Today, a federal judge ruled that there is a reasonable probability that “the proposed merger will substantially impair competition in the national customer and local broadline markets and that the equities weigh in favor of injunctive relief.” And that effectively kills the deal.

Netflix has approved a 7-for-1 stock split. In soaring almost 100 percent this year, Netflix shares have reached nearly $700. As of last week, Netflix was the third-most expensive stock in the S&P 500. The split will come in the form of a dividend of six additional shares for each outstanding share. It is payable on July 14 to stock owners of record at the July 2 close. Trading at the post-split price will start July 15.

Starting next month, Amazon will overhaul the way it pays royalties to self-published authors on its e-book platform, by rewarding them based on the number of pages read, rather than the number of times their book has been borrowed. The move applies to books published via the Kindle Direct Publishing service, which follows the pay-per-track model of music streaming services like Spotify.

Have you ever sent an email to the wrong person? Gmail has come up with an option to “Undo Send”. Here is how to set it up. Once in Gmail, click on the “General” tab on the top right of the screen — the one that looks like a little gear. Choose “Settings,” scroll down, click “Enable Undo Send,” and choose a cancellation period of between five to 30 seconds. That is how much time users have to hit “Cancel” above an email while it’s sending. Once pressed, users will get a chance to edit or delete their email. The only question is why did it take so long?

Financial Review

The Moral and Economic Issue of Our Time

Sinclair Noe — April 22, 2015

 

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

Subscribe: iTunes | RSS

DOW + 88 = 18,038
SPX + 10 = 2107
NAS + 21 = 5035
10 YR YLD + .06 = 1.98%
OIL – .45 = 56.16
GOLD – 15.00 = 1187.80
SILV – .22 = 15.86

The National Association of Realtors reports existing home sales increased 6.1% in March, the fastest pace of sales in 18 months. The jump in March sales follows a couple of slow months due, at least in part, to bad winter weather. But the latest figures suggest the mix of low mortgage rates, steady job creation and pent-up demand could push full-year sales to prerecession levels. Mortgage rates also are still near their lows for the year. The average interest rate on a fixed, 30-year mortgage was 3.67% last week, down from 4.27% a year ago, according to Freddie Mac’s latest weekly survey.

Greece will not present a list of economic reforms to Eurozone finance ministers on Friday; the deadlines don’t really help and they might even hurt because they lead to brinksmanship in negotiations on what reforms the Syriza government in Greece needs to do to secure more funding. There are signs Greece’s creditors are curbing demands for far-reaching reforms as part of current talks, perhaps a realization that they can’t get blood from a turnip, but the softening stance comes on condition Greece stays co-operative on fiscal targets. The liquidity situation in Greece is already a little tight, but it should be sufficient into June. The European Central Bank’s Governing Council raised the cap on Emergency Liquidity Assistance by about $1.6 billion; this is emergency cash to prevent a run on the Greek banks.

There are really only limited options for Greece; they can’t pay back what they owe because they just don’t have the money; they have already made huge cuts, and it has only pushed the economy into depression; voters made it clear that they did not want further cuts. And even if Greece pays back what they owe and they qualify for a new round of bailout funds, the money would go to banks and almost nothing would go to the Greek economy. So, the only option is for some sort of compromise.

And maybe the ECB and the IMF and the Euro-bankers are starting to realize that a Greek collapse and exit from the European Union would be more expensive than a compromise. While Greece is not a very large economy, the risk of a default and exit has far reaching implications because it would hurt the Euro-banks; not just the default, but the side bets, or derivatives on debt, and the implications for other struggling countries such as Spain and Italy, which might result in recalculation of their debt. The threat is that a couple of hundred billion in bad debt could cascade into much more; just as we saw the collapse of a relatively minor investment bank like Lehman Brothers back in 2008, turn into a major financial meltdown. Beyond that, if Greek leaves or is kicked out of the Euro Union it casts doubt on the whole idea of a European free trade zone, and that economic integration is beneficial to all members of the EU. The consequences of free trade are not always positive. The consequences of a Greek collapse are significant for all of Europe, and by extension the global economy.

Earnings season is in high gear with several big names reporting:
This morning, McDonald’s stock moved higher after the company announced a new turnaround plan to be revealed early next month. Results, though nothing to brag about, were better than expected.

Coca-Cola posted its first quarterly sales gain in two years after higher drink prices helped make up for sluggish demand.

Tesco, the British grocer, reported an annual loss of $9.6 billion, one of the biggest in British corporate history, and warned investors there could be more pain to come. The 96-year-old group, which dominated the British retail landscape for decades, wrote down the value of its business by 7 billion pound. After two decades of uninterrupted growth, Tesco lost its way when it was distracted by expensive overseas expansion and failed to spot the threat from discounters at home.

Boeing said its first-quarter profit rose 38% on growth in its commercial-airlines segment, but its revenue growth didn’t keep pace and costs tied to its flagship 787 program continued to mount.

Chip maker Qualcomm beat earnings estimates but reduced the 2015 outlook for its semiconductor business due to reduced sales in integrated processors.

EBay reported stronger-than-expected first-quarter earnings and sales, led by an 18% improvement in total payment volume and a 26% increase in merchant services volume.

Facebook reported a big jump in revenue, from about $2.5 billion to more than $3.5 billion, but they plowed more money back into the company for data centers and long term initiatives, and net income dropped slightly. Facebook generates more than half its revenue overseas and a stronger dollar hurt results.

AT&T reported slightly lower first quarter profit, just short of analysts’ estimates. Revenue edged slightly higher but also missed estimates. AT&T added more than 400,000 new wireless phone customers even as they faced greater competition from smaller rivals such as T-Mobile and Sprint.

And the competition is about to heat up big time. Google rolled out its wireless phone service today. Google’s service will run on the networks of Sprint and T-Mobile, switching between them depending on the stronger signal, and it will use Wi-Fi nets to route phone calls and data. Here’s the kicker: you only pay for the data you use. No other major US phone carriers do that. You pay $20 per month for unlimited calls, texting, mobile hotspot usage, and international coverage. Then you pay $10 for every gigabyte of data you want to use in a month. If you don’t use all the data you buy, Google refunds you the difference. So, if you buy a 3 gigabyte per month plan and you only use 1.4 gig, you get a $16 refund. If you watch a lot of videos on your phone it could get expensive. If you use basic service it will be a bargain. Either way, it is a radical departure in wireless phone pricing.

Today is Earth Day, celebrated on April 22 to build support for environmental protection around the world. First celebrated in 1970, Earth Day is observed in more than 192 countries with festivals, rallies and environmental activities. More than one billion people participate in Earth Day campaigns every year and it is the largest civic event in the world. Today, President Obama delivered a speech on climate change in the Everglades in Florida. I’m not really sure how to celebrate Earth Day, most of the numbers about the Earth and the climate are nothing to celebrate.

The World Wildlife Fund’s Living Planet Report estimates that there has been a decline by 40% in wildlife populations around the world since 1970; almost a third of global fisheries have collapsed since the 1960s; The Keeling Curve, which tracks atmospheric CO2 since 1958, shows we are heading towards catastrophic climate change; and a group of experts say that out of nine safe operating boundaries for Earth, four of them are in the red zone.

Maybe you forgot about Earth Day, maybe you never cared about it, but environmental issues will likely be front and center this year like never before. And the reason is Pope Francis. This summer, Pope Francis will deliver the first major encyclical of his papacy. It will be on climate change and the environment. Encyclicals are a big deal.

Later this month, the Vatican will host a climate change-themed conference, entitled “Protect the Earth, Dignify Humanity. The Moral Dimensions of Climate Change and Sustainable Development.” 2015 is a pivotal year for efforts to jumpstart a transformation of the energy system from a carbon-intensive one that is threatening to destabilize the planet to a low-carbon one that can slow the rise of the planet’s temperature. World leaders are committing to long-term efforts to slow the use of carbon-intensive energy, and the Vatican wants to influence those deliberations that conclude in Paris at the end of the year. The Pope will publish his encyclical in July; he will visit the US in September and address a joint session of Congress.  It could be an uncomfortable moment for many lawmakers: 169 members of the 114th Congress have expressed doubts about the science behind climate change, 35 of whom identify as Catholic. Beyond politics, the Pope recognizes that climate change is becoming the moral issue of our time.

The Pope is likely to use his encyclical, or his letter to more than 1 billion Catholics to explain the basics of what climate change is in plainspoken language that makes the issue available and relevant to everyone, rich and poor, and explain why we need to care about it.  And the Pope will explain that people of faith are called to love their neighbors; because climate change harms our neighbors, we must solve climate change if we want to protect the people we love. Christians are also called to remember our rightful place within creation. That rightful place is one that respects a vast web of life, and honors our responsibility to protect and defend the creation. Pope Francis told a crowd in Rome last May that mistreating the environment is a sin, insisting that believers “safeguard Creation … Because if we destroy Creation, Creation will destroy us! Never forget this!” Christians are also called to care for the poorest and most vulnerable among us, a theme that this particular pope embodies better than any in recent history. The poorest people are least responsible for climate change and most affected by it.

Changing the way we use energy will have an impact on the economy, and many people are fearful of added energy costs, without recognizing the economic opportunities that will be created by the transition. The truth is that climate change itself is the greater economic threat. The natural world underpins everything we do. Climate change will disrupt every sector of the economy, from agriculture and transportation to energy. Beyond the science and the policies and the biblical rationale beneath it, the most important aspect of the pope’s encyclical will be his call to the church to take up the moral cause. The church will hear it, understand it and advocate for it. When a billion people heed their religious leader’s call to reflect and then advocate and act on it, business and political leaders will have no choice but to pay attention.