Financial Review

Milk and Cookies

Sinclair Noe — June 19, 2017

DOW + 144 = 21,528
SPX + 20 = 2453
NAS + 87 = 6239
RUT + 11 = 1418
10Y + .03 = 2.19%
OIL – .64 = 44.10
GOLD – 9.80 = 1244.60
BITCOIN + 1.34% = 2677.18 USD
ETHEREUM – 3.60% = 358.49

The Dow Industrial Average hit another record high today. The S&P 500 is up 9% so far, this year, hitting another record high close today.

Just 10 companies have accounted for almost half of the benchmark’s return this year. While stock bears have been stressing caution, some have gone as far as to compare the current environment to the dotcom bubble. The reality is that this concentration is not unusual; it happens in rallies.

On June 9, tech stocks in the S&P 500 dropped 2.7%. But that money mostly stayed in the stock market, flowing into energy and financial shares. Nasdaq’s biotechnology index rose 2.5 percent in its biggest one-day gain since February while the S&P’s healthcare index had a record-high close.

The S&P’s financial sector was also one of the benchmark’s strongest gainers with a 1% rise after New York Federal Reserve President William Dudley said U.S. inflation was a bit low but should rise alongside wages as the labor market continues to improve, allowing the Fed to continue gradually tightening monetary policy.

Dudley said: “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go. This is actually a pretty good place to be.” Apparently, the Fed sees underlying strength in the economy that the data doesn’t show right now. The Fed’s base case is that this is just kind of a soft patch and we will continue to cycle higher.

And Wall Street always seems to be optimistic when we have big merger and acquisition news – which we saw on Friday with the Amazon/Whole Foods deal. Not everybody loved the deal, Kroger lost 19% on Thursday when they announced a bad earnings report, then came news of Amazon, and Kroger dropped another 9%, losing $7 billion in market cap in just 2 days. Today, the bottom fishers came in and Kroger bounced 1.5%.

Also, Blue Apron started its IPO roadshow today, hoping that nobody paid any attention to anything last week. Blue Apron Holdings, a startup that offers cook-at-home preparation kits, expects shares to price between $15 and $17 in its initial public offering. With Amazon now casting an anticipatory shadow over the “Fresh food to urban yuppie home delivery” sector, Blue Apron is caught in a gnarly Catch 22.

Its IPO only makes sense if people believe that its business model can drive revenue and maybe create profit, but if that model can indeed drive revenue, what’s to stop Amazon from copying it, using 80 million Prime subscribers and the vast coverage of Whole Foods distribution network?

Resurgent growth is reviving one of the past decade’s hottest trades. Emerging-market investors are again piling into the so-called BRIC nations — Brazil, Russia, India and China — pushing monthly inflows and stock prices to almost two-year highs. Non-resident portfolio flows into BRIC nations rose to $166 billion last month, from $28 billion of outflows 12 months prior.

Oil fell, extending four weeks of declines, as U.S. drillers continue adding rigs and Libya boosts output. U.S. drillers added rigs for a 22nd straight week, the longest uninterrupted stretch of growth in three decades.

The Supreme Court just ruled that social media is a constitutional right. Today, the justices unanimously held that states can’t broadly limit access to social media because cyberspace “is one of the most important places to exchange views.”

In Packingham v. North Carolina, the justices were asked to review a North Carolina statute that bars sex offenders from accessing social media altogether and makes it a felony if they post on any platform. The case has implications for all members of American society, however, not just sex offenders, and the court appears to be extremely conscious of the broader effect.

Justice Anthony Kennedy wrote, “A fundamental First Amendment principle is that all persons have access to places where they can speak and listen, and then, after reflection, speak and listen once more.” Given the fact that social-media platforms allow for this kind of free communication, and that the constitution protects the right to exchange, the justices recognized this case was widely societally important.

North Carolina convicted over 1,000 sex offenders based on its statute barring access to all social platforms. That, according to the high court, simply isn’t acceptable considering the role Facebook, Twitter, Snapchat and others play in current public communication.

The Supreme Court agreed to consider whether there are constitutional limits to how far lawmakers can go in drawing electoral districts to maximize partisan political advantage, a case that could have profound implications for US elections.

The justices in a brief written order said they would review a redistricting case from Wisconsin, where a three-judge lower court last year invalidated a redistricting plan enacted by the Republican-controlled Wisconsin legislature in 2011. That court said Wisconsin lawmakers redrew the state’s legislative districts after the 2010 census to unlawfully maximize the number of Republicans elected and dilute the power of Democratic voters.

Democrats won a popular majority of assembly votes in 2012 and 2014, but Republicans managed to take 60 of the 99 assembly seats. The practice of redrawing electoral maps along partisan lines is known as “gerrymandering.” The Supreme Court has previously struck down gerrymandered maps that disadvantage minority voters, but has yet to prohibit a map because it unfairly advantages one political party over another.

Also today, the Supreme Court struck down part of a law that bans offensive trademarks, ruling in favor of an Asian-American rock band called the Slants and giving a major boost to the Washington Redskins in their separate legal fight over the team name.

The justices were unanimous in saying that the 71-year-old trademark law barring disparaging terms infringes free speech rights guaranteed in the Constitution’s First Amendment. Justice Samuel Alito said in his opinion for the court, “It offends a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.”

Silicon Valley went to Washington today. The White House has enlisted tech CEOs to improve government services, reform outdated information technology systems, cut fraud and government costs and improve services for taxpayers. It has cited an economic opportunity to save up to $1 trillion over 10 years through such measures.

Jared Kushner, Trump’s son-in-law, said before the sessions began that the administration wanted to “unleash the creativity of the private sector to provide citizen services in a way that has never happened before.”

French President Emmanuel Macron is poised to rearrange his Cabinet after his new centrist party won a solid majority in the country’s parliamentary election, enabling the government to quickly start passing its first big laws. President Macron flew opened the world’s biggest air show in Paris, today.

Boeing generated a burst of activity on the opening day by launching the 737 MAX 10. Boeing said it had more than 240 orders and commitments from at least 10 customers for the new 737, which can carry up to 230 people in a single-class configuration. Airbus immediately hit back with an order for 100 of its popular A320neo planes.

The Federal Trade Commission said it will seek to stop the merger of DraftKings and FanDuel, because the combined company would control more than 90 percent of the U.S. market for paid daily fantasy sports contests.

This is the latest setback for two companies, which have faced regulatory challenges in several states. They announced the deal in November 2016 as a merger of equals that would cut their legal bills. The companies said in a joint statement that they were considering their legal options.

Late Friday, we told you that CenturyLink had been sued in Arizona by a former employee for allegedly running a sales incentive scheme, by adding services to accounts without customer approval. The whistleblower was fired.

Now, the case is going to class action status in California, seeking damages up to $12 billion. CenturyLink is amid a $34 billion merger with Level 3 Communications.

Financial Review

Send in the Clowns

Sinclair Noe — May 22, 2017

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DOW + 89 = 20,894
SPX + 12 = 2394
NAS + 49 = 6133
RUT + 9 = 1377
10 Y + .01 = 2.25%
OIL + .48 = 50.81
GOLD + 4.80 = 1261.40

First quarter earnings season is wrapping up, and the big-name reports are getting scarce, with this week’s heavy hitters including Best Buy, Dollar Tree, and Costco. Both the S&P 500 and tech-heavy Nasdaq composite set records early last week before worries about growing political uncertainty in Washington, which could hamper President Trump’s agenda of tax cuts and deregulation, knocked those indexes back from their highs.

On Wednesday, the Congressional Budget Office will release its analysis of the health-care bill that passed the House of Representatives earlier this month. Official Washington will comb through the score, with partisans on each side hoping it suits their talking points. The first CBO score estimated that 24 million more people would be uninsured in 2026, and that number is not expected to change substantially.

Another number could unravel the whole deal.  If the bill isn’t found to save at least $2 billion over 10 years, Republicans won’t be able to use the so-called budget reconciliation process to pass it. Under that process, 51 votes are required to pass legislation in the Senate, versus 60.

Not saving at least $2 billion would mean Republicans would have to start all over again by passing a new budget resolution.

The Trump administration today asked that a major federal court case weighing the fate of the Obamacare cost-sharing subsidies be put on hold again, leaving billions of dollars in payments to insurers up in the air for 2017 and 2018. The subsidies are available to low-income Americans who buy individual health insurance on the ACA exchanges.

In the meanwhile, insurers that are trying to set premium rates for insurance plans to be sold in 2018 are running up against deadlines and have repeatedly asked Congress to fund the subsidies during the transition.

Tomorrow, the White House is scheduled to release Trump’s first full budget. A president’s budget is a wish list, and many of the proposals in it may not become law.

Also Wednesday, the Fed will release the minutes of its May 2-3 meeting. Over the last few week, labor market and inflation data have sent contradicting signals. The labor market supports the hawkish Fed stance. Employment rose 211,000 in April from a wobbly showing in early spring and the unemployment rate dipped to 4.4%, matching the lowest level since May 2007.

On the other hand, core inflation data was soft in both March and April. Today, Dallas Fed President Rob Kaplan said he still expected two rate hikes this year. Perhaps more important than the timing of the next rate hike is what the Fed plans to do about its balance sheet. Chair Janet Yellen and other top officials have claimed for some time that they are eager to begin reducing their nearly $4 trillion in US government and mortgage debt.

And while this may be true at the margin, the truth is that though many of them may make noises about reducing the size of the balance sheet, a sizable and probably most of the Fed officials believe the massive balance sheet is here to stay — indeed, most of them schooled in the modern central banking theories believe a rather large balance sheet is now an essential part of monetary policy.

More than one Fed official has indicated that even a “normal” balance sheet as they currently envision it could total about $2 trillion worth of government and/or housing debt.

President Trump visited Saudi Arabia over the weekend and sealed $110 billion in arms deals with the Saudis, with options running as high as $350 billion over 10 years. Shares of defense firms General Dynamics, Raytheon, and Lockheed Martin all hit record highs before easing to trade up between 0.6 percent and 1.6 percent. Boeing was up 1.5 percent and the biggest boost on the Dow.

Blackstone and Saudi Arabia’s main sovereign wealth fund, the Public Investment Fund, signed a non-binding memorandum of understanding to create a $40 billion vehicle to invest in infrastructure projects, mainly in the United States. Blackstone said it expected the vehicle to have $40 billion of equity commitments, with a $20 billion anchor investment from the PIF and the rest of the money obtained from other investors.

Through this equity and debt financing, Blackstone expects to invest in over $100 billion of infrastructure projects. Today, Trump visited Israel. Next up, the Pope.

Oil prices moved higher on rising confidence that top exporters will this week agree to extend supply curbs, or even deeper cuts. However, energy companies lagged. Iraq announced this afternoon, that it will back a proposal from Saudi Arabia and Russia to extend output cuts for nine months, removing one of the last remaining obstacles to an agreement at the OPEC meeting in Vienna this week.

Iraq, the second largest producer in OPEC, has the worst record of compliance with its pledged cuts, pumping about 80,000 more barrels of oil a day than permitted during the first quarter.

The Supreme Court delivered a unanimous decision on where patent lawsuits may be filed, a setback to patent trolls, or companies that buy patents not to use them but to demand royalties and sue for damages. Such companies have often sued in remote federal courts that have a reputation for friendliness to plaintiffs.

More than 40 percent of patent lawsuits, for instance, are filed in a federal court in East Texas. In recent years, a single judge based in Marshall, Texas, oversaw about a quarter of all patent cases nationwide, more than the number handled by all federal judges in California, Florida and New York combined. The decision was a victory for big technology companies and other patent holders, which have complained about what they called forum shopping in patent cases.

The case, TC Heartland v. Kraft Foods raised the question of whether companies could sue essentially anywhere their products are sold, or in the jurisdiction where it resides.  Today’s Supreme Court decision won’t eliminate patent trolling but it will probably limit the practice.

A divided U.S. Supreme Court rejected two North Carolina congressional districts, saying Republican lawmakers relied too heavily on race when drawing them. The gerrymandered voting districts were used until the 2014 election. The case produced an unusual split: Justice Clarence Thomas, perhaps the most conservative justice, joined the court’s four liberals in the majority.

Ford Motor replaced its chief executive, Mark Fields, and vowed to catch up in the race to build self-driving cars and define a new era in personal mobility.  Jim Hackett, who had overseen the Ford subsidiary that works on autonomous vehicles, immediately takes over as the new CEO.

Fields came under fire from investors and the company’s board for failing to expand the company’s core auto business and for lagging in developing the high-tech cars of the future. But for a Ford CEO, stock price is Job One; Fields’ biggest transgression during his 3-year tenure as Ford CEO was a 40% drop in Ford’s share price.

Hackett said the board had given him a free hand to transform the nation’s No. 2 automaker, including seeking alliances with Silicon Valley firms, changing its product lineup, and divesting itself of unprofitable global operations.

US-based Huntsman Corp. and Switzerland’s Clariant are combining to create a chemical manufacturer with a market value of more than $14 billion. The deal creates a global specialty chemicals company that is 52% owned by Clariant shareholders and valued at about $20 billion when including debt. Clariant makes aircraft de-icing fluids, pesticide ingredients, and plastic coloring. Huntsman makes chemicals used in paint, clothing, and construction.

In the past 30 days, about 40 percent of the Midwest got twice the amount of normal rainfall, with soils saturated from Arkansas to Ohio. While spring showers usually benefit crops, the precipitation has come fast enough to flood some corn and rice fields and trigger quality concerns about maturing wheat. Bad conditions got worse with rain on Friday. There are lakes in some fields.

Planting was off to a fast start in the second half of April, before 10 inches of May rainfall and lower temperatures erased early optimism. Corn and wheat are headed for monthly gains on the Chicago Board of Trade while rough-rice futures are headed for the biggest such advance in six years. Even with the challenges, farmers have made speedy work of planting.

U.S. sowing of corn, soybeans and spring wheat was ahead or even with the five-year average as of May 14, while corn emergence was behind schedule.

For years, Citigroup employees suspected that millions of dollars that the bank was moving to Mexico might be suspicious. Yet the bank failed to sufficiently alert regulators or step up its monitoring for money laundering. From 2007 to 2012, the banking unit generated about 18,000 alerts of suspicious transactions among the 30 million Mexico remittances it processed, yet the bank conducted fewer than 10 investigations.

Today, Citigroup agreed to pay $97 million to settle an investigation into Banamex USA. In exchange, the Justice Department will not charge the bank criminally for the misdeeds of Banamex USA, based in California.

After 146 years, the Greatest Show on Earth, Ringling Bros. and Barnum & Bailey Circus took its final bow. An army of circus performers and technicians end a tradition that first had its roots in 1871 under showman P. T. Barnum. The circus animals, lions, tigers, and bears will be sent to sanctuaries or to work in European circuses.

And if you’re looking for the clowns, well you can find a reasonable facsimile in Washington DC.