Financial Review

Make Way for May

Sinclair Noe — April 28, 2017

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DOW – 40 = 20,940
SPX – 4 = 2384
NAS – 1 = 6047
RUT – 16 = 1400
10 Y – .02 = 2.28%
OIL + .21 = 49.18
GOLD + 4.20 = 1268.70

Looking back on the week, we had a couple of strong moves Monday and Tuesday, following the French election over the weekend – the rally was based on an absence of bad news. After that, markets looked for good news and floundered.

The tax reform plan failed to impress. We had some good earnings reports, which helped to lift a few stocks – notably a few of the big tech stocks, and that helped the Nasdaq Composite climb above 6,000 to new record highs. For the week, the Dow rose 1.9 percent, the S&P gained 1.5 percent and the Nasdaq rose 2.3 percent.

During April, the Dow gained 1.3 percent, the S&P rose 0.9 percent and the Nasdaq jumped 2.3 percent.

Yesterday, Alphabet, Amazon, and Microsoft reported earnings. Alphabet and Amazon crushed it. Microsoft was a slight disappointment. From the close of the market on Thursday to session highs on Friday, all three stocks hit an all-time high. That added more than $30.6 billion to Alphabet’s Class A market capitalization, $14.2 billion to Amazon’s market capitalization, and $6.7 billion to Microsoft’s market cap, reaching about $52 billion between the 3.

The stocks later pared gains, falling below their peaks. By the end of the day on Friday, the trio were just $27.4 billion richer, with Alphabet seeing $22.75 billion of those gains. The gains left both Amazon and Alphabet closing in on share prices of $1,000.

Amazon went public in 1997; if you had been brilliant enough to invest $10,000 at the IPO price of $18, and patiently held, you would be sitting on just over $4.8 million. Amazon’s market capitalization reached about $442 billion, pushing founder Jeff Bezos’ wealth closer to the richest in the world.

Alphabet and Microsoft had market caps of about $636 billion and $529 billion, respectively.

The US economy expanded at the slowest pace in three years as weak auto sales and lower home-heating bills dragged down consumer spending, offsetting a pickup in investment led by housing and oil drilling. Gross domestic product, the value of all goods and services produced, rose at a 0.7 percent annualized rate after advancing 2.1 percent in the prior quarter.

Consumer spending, the biggest part of the economy, rose 0.3 percent, the worst performance since 2009. There is a tendency for weak economic growth in the first quarter; the past few years winter storms were blamed for the declines; this year, warm winter weather is being blamed.

Since 2000, expansion in the first quarter of each year has averaged 1 percent, compared with 2.2 percent for the rest of each year. The pattern I recognize is that consumers get tapped out over the holidays and must tighten their belts in the first quarter.

The good news is that the unemployment rate is low, people have jobs, there is no immediate economic dilemma, and the economy should rebound as we move through the rest of the year. The bad news is that the growth trajectory looks a lot like the past few years, solid but sluggish. And in the background, inflation is eating into consumers’ wallets.

Real disposable personal income rose at a 1 percent pace in the period, the weakest since the fourth quarter of 2013. The report also showed price pressures were picking up. The GDP price index rose 2.3 percent in the first quarter. A measure of inflation tied to consumer spending and excluding volatile food and energy costs was up 2 percent, the fastest in four quarters.

And there is a good chance consumers will loosen the strings on the pocketbook in the second quarter. The University of Michigan consumer confidence survey shows consumers feeling good. The current conditions index in April was at its second-highest since 2005, and consumer expectations for inflation in the year ahead, and in five to 10 years, were unchanged from the prior month.

The employment cost index, released by the Labor Department, showed a 2.4 percent annual rise — the fastest pace in two years – and climbed 0.8 percent from the prior quarter for the strongest rate since the end of 2007. The wages and salaries component also increased 0.8 percent in the first three months of the year, the most since the second quarter of 2008.

The Federal Reserve FOMC policy meeting is next week and it is widely expected the Fed will leave interest rates at current levels while maintaining guidance for 2 more rate hikes this year.

The federal government will continue for at least one more week. Faced with a budget deadline of midnight tonight, legislators could not agree on the details of a budget plan to keep the doors open and the lights on, but they did agree to kick the can down the road. Congress approved a one-week extension to agree on a spending bill to fund the government through September.

Leaders of both parties say they’re close to agreement on a broader spending plan after Republicans signaled they would accept Democratic demands that the Trump administration promise to continue paying Obamacare subsidies and drop its bid for immediate funds for a wall on the Mexican border.

House GOP leaders abandoned efforts to vote this week on their plan to repeal and replace Obamacare for lack of support in their party. A vote is still possible next week.

Brazil is on strike, a nationwide general strike to protest President Michel Temer’s austerity measures, hitting public transport and closing schools, factories, banks and other businesses in every state. Police clashed with demonstrators in several cities, firing tear gas in efforts to clear roadways blocked by burning barricades.

Protesters also obstructed the entrances of airports and metro stations. Temer’s efforts to pass pension and labor reforms have deeply angered many Brazilians. Temer has proposed a minimum age for retirement. The lower house of Congress approved a bill this week to weaken labor laws by relaxing restrictions on outsourcing and temporary contracts.

GM, Ford, Toyota, and Mercedes all halted production at factories in Sao Paulo. the strike was strategically concentrated in public transportation so that even people who might want to get to work could not.

Young Europeans are sick of the status quo in Europe. And they’re ready to take to the streets to bring about change, according to a recent survey. Around 580,000 respondents in 35 countries were asked the question: Would you actively participate in large-scale uprising against the generation in power if it happened in the next days or months? More than half of 18- to 34-year-olds said yes.

A U.S. appeals court has blocked health insurer Anthem’s bid to merge with Cigna, upholding a lower court’s decision that the $54 billion deal should not be allowed because it would lead to higher prices for healthcare. The ruling effectively kills the proposed merger that was opposed by the U.S. Justice Department, 11 states and a district court judge after consumers, medical professionals and others objected to it.

In the end, Cigna itself tried to back out. Anthem and Cigna are suing each other. Cigna has sought to abandon the merger and force Anthem to pay a $1.85 billion breakup fee while Anthem filed a lawsuit to force its smaller rival to go through with the combination.

A consortium led by private equity firms Hillhouse Capital Group and CDH Investments offered on Friday to buy Belle International Holdings in a deal valuing the entire Hong Kong-listed shoe retailer at about $6.8 billion.

After months of speculation about whether Time, Inc. would be acquired, its board of directors has decided not to sell the company. Following the news, Time Inc. shares were down more than 19%.

Two initial public offerings went opposite directions Friday, as software company Cloudera shares shot up above its issue price and car-vending machine company Carvana saw its shares slump. Cloudera gained 20%, while Carvana dropped 26%.

Gasoline demand in the US dropped 2.4% in February compared with a year earlier, the second straight monthly decline. Still, coming in at 8.9 million barrels per day. The price of oil has nearly doubled from 12 months ago – a powerful motivation to conserve, but the lower demand also points to less economic activity.

Oil prices settled a bit higher today but still registered a second straight monthly decline. The problem for oil companies is that oil has spent a very long time consolidating around $50 to $55 and has now dropped under that range. Meaning any move higher will face strong resistance.

Meanwhile, any move below $47 would break through support. For oil companies, they have largely based their guidance for 2017 on prices in the $60 a barrel range.

Rising crude prices helped Chevron and Exxon Mobil easily beat analysts’ quarterly profit expectations. Chevron and Exxon expanded production in their American shale portfolios during the quarter, with both deciding the low-cost fields offered an easy opportunity to boost profit. They have laid out plans to increase drilling in those fields this year.

Exxon reported quarterly profit more than doubling to $4 billion, even as production fell 4 percent. Chevron swung to a $2.6 billion quarterly profit and turned cash flow positive. Chevron’s results were helped by $2.1 billion in asset sales. The company has sold more than $5 billion in assets since last year and is seeking buyers for its Canadian oil sands business.

General Motors recorded its highest ever profit for a first quarter. US sales of Chevrolet trucks and crossovers rose 3.5 percent and 12 percent, respectively, during the quarter, while GMC truck and crossover sales jumped almost 10 percent. GM’s net profit rose 33 percent in the first quarter to $2.6 billion, or $1.70 per share, beating estimates of $1.48 per share.

Financial Review

Blue Moon

Sinclair Noe — July 31, 2015

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DOW – 56 = 17,689
SPX – 4 = 2103
NAS – 0.5 = 5128
10 YR YLD – .07 = 2.20%
OIL – 1.64 = 46.88
GOLD + 7.10 = 1096.40
SILV + .04 = 14.87

For the week the S&P 500 index gained 1.2%, while posting a 2% gain for the month of July. The Dow Industrials finished the week with a 0.7% gain which lifted the monthly gain to 0.4%. The Nasdaq was up 0.8% for the weeks and 2.9% for the month. For the month, the yield on the 10 year Treasury dropped 13 basis points. Spot gold dropped 6% for the month and silver was down 5%. The big decline came in oil prices: down 12.59 per barrel or 21% for the month.

Consumer sentiment fell to a final July reading of 93.1 from a final June level of 96.1. For context, the consumer-sentiment gauge averaged 86.9 over the year leading up to the recession. After adjusting for changes in prices, just three in 10 surveyed thought their chances were better than 50 percent for real income gains over the next five years. Call it the voice of experience.

An index that measures the price of US labor slowed sharply in the second quarter, easing fears of inflation and signaling the labor market may not be as healthy as the low unemployment rate suggests. The employment cost index barely increased, rising 0.2% in the second quarter after a 0.7% increase in the first three months of the year. The rise was an all-time low for the series going back to 1982. In the past 12 months, compensation (wages plus benefits) have risen just 2%, about the same pace as since 2010. A spike of 2.6% in the first quarter, which got everyone excited about wage growth, was apparently just a spike in bonus pay, especially for Wall Street. There is no indication companies are having to pay up to lure or retain workers; there is no wage push inflation moving prices higher. Today’s employment cost index certainly gives no reason for the Fed to hike interest rates, but Fed policymakers have not made higher wages a precondition for raising rates.

We still haven’t worked through the fallout from the housing crash.  RealtyTrac reports 7.4 million borrowers were still “seriously” underwater on their mortgages at the end of June. The real estate information company defines that as the loan amount being at least 25 percent higher than the property’s estimated market value. Over 13 percent of all properties with a mortgage are in this predicament, and that is actually a slight increase from the first quarter of this year. The number of underwater borrowers has now increased for two straight quarters but it is still lower than a year ago, when over 17 percent of borrowers were seriously underwater. One reason why there is still a serious negative equity problem is because people with equity have sold to take advantage of higher prices, while homeowners who are underwater are stuck.

The International Monetary Fund has warned it will not participate in a third bailout for Greece unless debt relief is granted to the country. IMF staff reportedly told the fund’s board that Athens’s debt burden and poor track record of implementing reforms rule out further financial help from the fund, until there is an “explicit and concrete agreement” on debt relief from Greece’s Eurozone creditors. The warning means the IMF is unlikely to provide further funds to Athens at this stage, potentially raising pressure on Greece’s Eurozone partners to find more money to plug the country’s short-term financing needs. This is an unusual development; the IMF has never been a friend to debtors. While talk of debt relief may sound magnanimous, it likely just means extending maturities, or lowering interest rates. And the IMF is still demanding structural reform. I’m not sure what would satisfy that requirement; more austerity likely.

Greece’s financial markets are scheduled to reopen on Monday, ending a five-week suspension that began after the country imposed capital controls amid a confrontation with creditors. Greek traders will be able to buy stocks, bonds, derivatives and warrants – but only if they use new money such as funds transferred from abroad or cash-only deposits.

Meanwhile, when or if Greece gets another bailout package, it won’t help much; only a fraction of the money would go toward healing the economy. Nearly 90 percent would go towards debts, interest, and supporting failing Greek banks. And another bailout would actually hurt by increasing Greece’s overall debt, which stifles the potential for an economic rebound.

Investors are bracing for Puerto Rico to miss $58 million in bond payments in the coming days, as the commonwealth attempts to restructure $72 billion of debt. Saturday’s deadline could mark the first skipped payment to bondholders.

Chinese shares suffered their worst month in nearly six years this July despite (or perhaps because of) government-led recovery efforts. The Shanghai Composite lost 9% this week, and is down 14% month to date – its worst monthly performance since August 2009. The latest market crackdown: China’s securities regulator said it launched a probe into automated trading, restricting 24 stock accounts suspected of “influencing securities trading prices.”

Oil prices touched a four-month low. The rout in Chinese stock markets prompted concerns that oil demand in one of the world’s largest energy consumers would fall. Also, high international supplies have kept prices under pressure and increased competition among producers, who are taking cost-cutting measures. But few have ventured to cut production. WTI posted the biggest monthly decline of 2015. For the month of July, U.S. crude has lost 21%.

The big news in earnings today came from Big Oil. Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as Exxon could slash expenses. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges. The companies’ shares fell to the lowest in more than three years. Exxon and Chevron contributed to the avalanche of supply by increasing second-quarter crude output by 12 percent and 1.7 percent, respectively. Exxon cut share repurchases for the current quarter in half to $500 million. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

And while the weak performance from the oil patch raises many questions, one of the most important for investors is what will happen to dividends. The answer is not much. Chevron maintained its quarterly dividend at $1.07 per share in the second quarter, returning $2 billion to shareholders. Chevron hasn’t raised its dividend since Q2 2014. Exxon raised its dividend to 73 cents per share from 69 cents in the first quarter. And that’s about all you can hope for; look for dividends to remain flat, and if you’re lucky, they won’t be cut.

General Electric is taking steps to shift some U.S. manufacturing work overseas now that the U.S. Export-Import Bank will be shuttered at least until September. GE Vice Chairman John Rice says the company is looking to work with export credit agencies in other countries to finance potentially $10 billion worth of projects, with much of the production going to GE plants in those foreign locations.

Three bottlers of Coca-Cola products in Europe are in advanced talks about a merger that would further Coke’s push to consolidate its bottlers around the world and cut costs. Coca-Cola Enterprises is discussing the tie-up with Coca-Cola bottlers in Poland and Germany. Terms of the potential deal are not known, but it is likely to be valued well into the billions of dollars.

Yesterday we told you about Google’s Project Loon, a plan to beam internet from helium balloons. Now, comes word that Facebook has completed building its first full-scale drone called the Aquila, which has the wingspan of a Boeing 737 and will beam Internet down to remote parts of the world. The plane will hover between 60,000 feet and 90,000 feet, above the altitude of commercial airplanes, and will be able to fly for 90 days at a time.

Google is quietly distributing a new version of Google Glass to various enterprise partners ahead of a full launch later this year. The device’s price appears to be “well below” the $1,500 charged for the Explorer Edition, and contains a button-and-hinge system to attach the mini-computer to different glasses. Google is pitching the product “exclusively to businesses,” and that a new consumer version is still “at least a year away.”

The weak underbelly of high tech cars has been exposed again. A white-hat hacker  has released a video showing a security flaw in GM’s OnStar vehicle communications system that can be remotely accessed to unlock cars and start engines. The move comes just one week after Fiat Chrysler recalled some 1.4 million vehicles after hacking experts demonstrated a more serious vulnerability in the Jeep Cherokee. That bug allowed them to gain remote control of a Jeep traveling at 70 mph on a public highway.

The hackers are everywhere. The FBI says financial companies are facing extortion threats from hackers who threaten to knock their websites offline unless firms pay what amounts to a ransom. More than 100 companies, including targets from big banks to brokerages in the financial sector, have received distributed denial of service threats since about April.

Today is not only the end of the month, it is a blue moon, which is not really a reference to the color of the moon, rather it means the second full moon in one month; which also means that 2015 features 13 full moons. Step outside after sunset to check out the blue moon, then if you’re so inclined, go ahead and celebrate by doing something you only do “once in a blue moon.” You do have an excuse, after all.

Financial Review

Month End Review

Sinclair Noe — April 30, 2015

 

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DOW – 195 = 17,840
SPX – 21 = 2085
NAS – 82 = 4941
10 YR YLD + .01 = 2.05%
OIL + 1.19 = 59.77
GOLD – 20.60 = 1185.00
SILV – .44 = 16.20

For the month, the Dow was up 0.4 percent, the S&P 500 gained 0.9 percent and the Nasdaq rose 0.8 percent. For the month of April, the dollar index fell about 3.7 percent. Some month end portfolio buying pushed yields on ten year notes to 2.05% after hitting a 7 week high of 2.11% earlier in the session. The big mover in April was in the energy market, where crude oil jumped more than 21%. S&P 500 earnings for the first quarter now are forecast to have increased 1.1 percent from a year ago, Thomson Reuters data showed, while revenue is forecast to be down 3.2 percent.

The Commerce Department reports consumer spending rose 0.4% in March as households stepped up purchases of big-ticket items like automobiles; that follows a 0.2% gain in February. The savings rate fell for the first time in four months to 5.3% from 5.7%. A year earlier, Americans were saving at a 4.8% rate. Consumer spending rose 1.9% in the first quarter, down from 4.4% and 3.2% in the prior two quarters. That might indicate there is pent-up demand, but a rebound in economic activity could be crimped by an inventory overhang.

The Employment Cost Index, which measures the cost of employing the average US worker climbed 0.7% in the first quarter, compared to a 0.5% increase in the fourth quarter. And while there has been a lot of attention to low paying jobs in retail and restaurants, and talk about raising the minimum wage, the job gains last month came in higher paying professions. Professional, scientific and technical services workers saw a 2.1% gain, and the real estate, rental and leasing business saw a 1.5% advance. While retail employee pay rose 0.5% in the first quarter. In the 12 months through March, labor costs jumped 2.6 percent, the largest rise since the fourth quarter of 2008. They are approaching the 3 percent threshold that economists say is needed to bring inflation closer to the Fed’s 2 percent target.

Meanwhile, inflation as gauged by the PCE price index rose 0.2% in March. The core rate that excludes food and energy edged up a smaller 0.1%. The PCE inflation index has climbed just 0.3% over the past 12 months, though the core rate is up 1.3% in the same span.

The number of Americans filing first-time claims for unemployment benefits fell 34,000 to a seasonally adjusted 262,000 from a revised 296,000 in the prior week; that’s a 15 year low. This report from the Labor Department covered the period from April 19 to April 25, which included the Easter holiday, so the numbers should be taken with a grain of salt.

Another report showed that factory activity in the Midwest accelerated in April, after hitting a 5-1/2-year low hit in February. The Institute for Supply Management-Chicago’s business barometer rose to 52.3 from a March reading of 46.3. A reading above 50 indicates an expansion in the region’s factory sector.

The Dollar Index was lower, for its eighth consecutive day of declines, the longest losing streak since April 2011. The losses cap the dollar’s first monthly decline since June. When you get to where sentiment is all one way in one trade, the trade gets very crowded. According to Commodity Futures Trading Commission speculative traders cut net bullish bets on the greenback to a six-month low of 324,940 contracts last week. While the FOMC called anemic first-quarter growth, in part, “transitory” in its statement, the absence of a stronger signal for higher rates prompted dollar bulls to begin to doubt their conviction.

Yesterday, the FOMC brushed off a first quarter slowdown as weather-related and transitory; more consumer spending and fewer claims for unemployment would support the Fed’s outlook, and of course, the financial markets have been hooked on cheap money and accommodative policy from the Fed. Just a reminder that the first quarter of 2014 showed negative GDP, and then the economy came roaring back in the second and third quarters. The Fed seems to think we might see a repeat this year. Yesterday, the Commerce Department reported first quarter GDP growth of 0.2%, and if the economy comes roaring back, it’s a good bet the Fed will hike rates later this year. But there are no guarantees the economy will bounce back this year.

The Atlanta Federal Reserve Bank’s “GDP Now” forecast predicted first quarter GDP growth of 0.1% – pretty close to the reported number – and they predict second quarter GDP growth of 0.9%. And while that represents economic growth, consider that the strong dollar cut one percentage point from first quarter GDP; now the strength of the dollar is moderating, which should help exports and boost second quarter GDP. Also, bad winter weather lopped off one percentage point from the first quarter GDP number; nobody is predicting crippling snow storms hurting second quarter growth.

So, the big question is whether the Fed will raise interest rates, and the answer seems to be that they will be data dependent, as they continually repeat in their FOMC statements. Weighing in on the matter today is former Fed Chairman Ben Bernanke, who has become much more provocative since he left the Fed. Bernanke now writes a blog for the Brookings Institute. In his first blog he took on Larry Summers’ ideas about secular stagnation. In today’s blog he takes on the Wall Street Journal editors, specifically an editorial entitled “The Slow Growth Fed”, which argued that the Fed’s economic growth  projections have been too high since the financial crisis (which Bernanke concedes is true). The WSJ then argues that monetary policy is not working and should be discontinued.

Bernanke responds: “It’s generous of the WSJ writers to note, as they do, that “economic forecasting isn’t easy.” They should know, since the Journal has been forecasting a breakout in inflation and a collapse in the dollar at least since 2006, when the FOMC decided not to raise the federal funds rate above 5-1/4 percent.”

Bernanke has a very good point. Plenty of people have been forecasting hyper-inflation and a dollar collapse. It hasn’t happened. They were wrong. Economic forecasting isn’t easy. But instead of looking at the data, some people, including the WSJ editors, insist that their version of reality must be correct and the data must be wrong.

Indeed, there is good reason to credit monetary policy with providing a boost to the labor market. Just look at the unemployment rate of 5.5% in the US compared to 11.3% unemployment in the Eurozone, where the ECB was slow to implement accommodative policy. Bernanke admits that monetary policy is not a panacea, and he said that several times when he was Fed chairman. Bernanke then writes:  “I am waiting for the WSJ to argue for a well-structured program of public infrastructure development, which would support growth in the near term by creating jobs and in the longer term by making our economy more productive. We shouldn’t be giving up on monetary policy, which for the past few years has been pretty much the only game in town as far as economic policy goes. Instead, we should be looking for a better balance between monetary and other growth-promoting policies, including fiscal policy.”

Again, Bernanke has a great point; fiscal policy has been missing in action in the recovery. It is estimated that rebuilding the crumbling US infrastructure would create 13 million jobs. That is something that the Federal Reserve doesn’t control. The American Society of Engineers gives the US a “D+” for the state of its infrastructure, and estimated in 2013 that it will cost $3.6 trillion to bring America’s public infrastructure to an acceptable level by 2020. Chronic underinvestment in the nation’s essential infrastructure will ultimately require a national investment plan unseen since Europe’s post-war reconstruction.

According to the World Economic Forum’s Global Competitiveness Report for 2013, the US ranks 25th in the world in terms of overall infrastructure, behind such nations as Barbados and Oman, and only one spot ahead of Qatar. The quality of America’s air transport infrastructure is ranked 30th in the world, while quality of the electricity supply ranks 33rd. So, the business case for investment in infrastructure is strong, and even though the Federal Reserve is far from perfect, Dr. Bernanke is correct.

Later this evening, Elon Musk, the CEO of Tesla Motors will make a big announcement. He is expected to introduce a home battery product, which people can use to store energy from their solar panels or to backstop their homes against blackouts, and also a “very large utility-scale” battery product, which may do the same for large companies or even parts of the grid. Tesla’s $5 billion Nevada “Gigafactory” will likely provide most of the muscle behind this bid for a non-automotive product line. The factory will be the largest producer of lithium-ion cells in the world, and Tesla hopes economy of scale will drive prices down.

Tesla is already supplying batteries to homes and businesses like Wal-Mart through a pilot program and a supply agreement with another Elon Musk property, SolarCity. The storage batteries can absorb energy during peak production times, and discharge it later. This eliminates concerns about lack of wind or sun, and ensures that these resources don’t go to waste when they’re available.

Tesla isn’t the only company in the battery game, and whatever happens with Tesla, this market is expected to grow. A study by GTM Research and the Energy Storage Association earlier this year found that while storage remains relatively niche, the market was sized at just $128 million in 2014, it also grew 40 percent last year, and three times as many installations are expected this year.

There are still plenty of questions, including how much it will cost to drop off the grid. Stay tuned for the answers tomorrow.