Financial Review

Cake and Panic

Sinclair Noe — May 17, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 372 = 20,606
SPX – 43 = 2357
NAS – 158 = 6011
RUT – 38 = 1355
10 Y – .11 = 2.22%
OIL + .30 = 48.96
GOLD + 24.20 = 1261.90

Today marks the 225^th anniversary of the New York Stock Exchange. On the floor of the exchange, they celebrated with cake and panic. Stocks started the session with triple digit losses on the Dow, and then drifted lower throughout the day.

It was the worst loss on Wall Street since September, while the Nasdaq Composite Index plunged 2.6 percent for its steepest drop since June 24.

The dollar fell by nearly 2 percent against the yen to its lowest level since April and hit a six-month low against the Swiss franc. The dollar index, which tracks the U.S. currency against six peers, fell 0.6 percent to its lowest level since Nov. 9, surrendering all its “Trump bump” gains.

The VIX, the volatility index jumped nearly 5 points, or 46%. The 10-year Treasury yield sank to 2.22 percent in its steepest decline since July. The spread between 10-year and two-year yields narrowed to the flattest since before Trump’s election.

Today’s drop in markets comes after Tuesday evening saw the second damaging story for President Donald Trump in as many days. The New York Times reported  that Trump asked former FBI director James Comey to end an inquiry into ties former national security advisor Michael Flynn had to Russia.

And Comey documented the meeting in a memo. The Comey memo caused alarm on Capitol Hill and raised questions about whether Trump attempted to interfere with a federal investigation, something that might constitute obstruction of justice and could potentially be invoked to impeach Trump.

And this report came just a day after The Washington Post reported Trump revealed “highly classified” information to Russia’s foreign minister. Last week, Trump fired Comey, even as the FBI was investigating possible ties between Trump’s campaign and Russia.

The market reacting negatively to Trump-related headlines is a definite change from what we’ve become accustomed to in recent months. After the market’s violent election night reaction, stocks have moved up and to the right unabated, with the political chaos in Washington seeming to have little impact on financial markets.

The difference might be that several Republican leaders are now starting to say it may be time for an independent commission or special prosecutor. House Speaker Paul Ryan held a press conference this morning; he did not call for a special prosecutor, but he said, “we have an obligation to carry out our oversight regardless of which party is in the White House.”

And just as important as what Ryan said, was what he didn’t say. Ryan did not attack former FBI Director Comey, a marked change from last week. And Ryan did not attack the media.

In a letter to acting FBI Director Andrew McCabe on Tuesday, the Republican chairman of a House oversight committee, Jason Chaffetz, set a May 24 deadline for the FBI to produce all relevant material relating to any communications between Comey and Trump. Ryan backed Chaffetz’s request.

The Senate Intelligence Committee sent two letters to former FBI Director James Comey and Acting FBI Director Andrew McCabe requesting their cooperation in the committee’s ongoing investigation into Russia’s election interference. The senators have requested that Comey appear before the committee “in both open and closed sessions.”

Senator John McCain, who has called for the creation of a special bipartisan congressional panel to investigate the Russia matter, compared the controversies enveloping Trump to the Watergate scandal that forced Republican President Richard Nixon to resign in 1974. This is not to say that Republicans have deserted Trump – far from it, but there are some cracks in the wall.

Speaker Ryan insisted the Republican legislative agenda was not becoming paralyzed, but that might be wishful thinking. There is no way this controversy will help efforts to repeal and replace Obamacare, it will not aid tax reform or infrastructure efforts. That does not mean the agenda can’t move forward, just that it will be tougher.

Apple stock was down 3.3% today. Apple stock was up 34% this year on anticipation that the next iPhone could spur a “super cycle” of sales as well as hopes that federal tax reform could enable Apple to bring home some of its $240 billion in cash and marketable securities that are held outside the United States at lower tax rates.

Apple has suggested that if the company were able to repatriate some of its overseas holdings at a lower tax rate, it would return some of the money to its shareholders.

Trump leaves Friday on a 10-day trip to Saudi Arabi, Israel, and the Vatican. Today Trump told graduates of the Coast Guard Academy that he has been treated worse than any politician “in history”, although Mrs. Lincoln probably would have disagreed.

It took nearly a decade, but debt has made a comeback. Americans have now borrowed more money than they did at the height of the credit bubble in 2008, just as the global financial system began to fall apart. The Federal Reserve Bank of New York says total household debt had reached a new peak — $12.7 trillion, exceeding its peak in the third quarter of 2008.

Student loans account for 10.6 percent of that total, up from 3.3 percent in 2003, Student borrowers today owe $1.3 trillion, more than double the $611 billion nearly nine years ago. About one in 10 student borrowers is behind on the loans — the highest delinquency rate of any type of loan tracked by the report.

While mortgage balances still make up much of household debt, they are a smaller share of total obligations and have fallen back to 2003 levels. Auto loans totaled about $1.1 trillion, or 9 percent, of all household debt. Defaults have been creeping up in auto loans.

Credit card balances shrunk by $15 billion to $764 billion, but there has been a recent uptick in delinquencies on these payments. The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also speaks to growing optimism among banks and other lenders about economic growth.

Debt can fuel consumer spending, which accounts for about 70 percent of all economic activity in the United States. But debt can be risky. The good news is that the economy is stronger than it has been in some time. Consumers were delinquent on 4.8% of total debt, a marked improvement from the 11.9% of debt that was at least 30 days late at the end of 2009.

Cisco Systems, the world’s largest networking gear maker, reported its sixth straight drop in quarterly revenue, largely due to declines in its router business. The company’s net income rose to $2.5 billion, or 50 cents per share, from $2.3 billion, or 46 cents per share, a year earlier. Revenue fell 0.5 percent to $11.9 billion.

Target reported better-than-expected first-quarter earnings and revenue. Target reported adjusted earnings per share of $1.21, beating estimates of 91 cents. Sales, at $16.0 billion, were ahead of estimates for $15.6 billion, though they were down from $16.2 billion last year. E-commerce sales climbed 22%. Same-store sales were down 1.3%.

Shares of Ascena Retail Group fell more than 30 percent in after-hours trading as the owner of Ann Taylor, Loft, Lane Bryant and other brands said it adjusted its second-half outlook to reflect worse-than-expected business conditions. In what’s been a rough earnings season for retailers, Ascena expects third-quarter comparable store sales to decline 8 percent and for full-year comparable sales to decline between 6 percent and 7 percent.

I/O is Google’s annual developer conference. And they had some interesting announcements. There are now about 2 billion active devices based on the company’s Android software. The big headline: Google Assistant is coming to the iPhone. It’s no longer stuck on Android.

Google is also expanding its third-party support for Assistant. Before, third parties could build “actions” for the Assistant in the Google Home speaker. Now they’ll work wherever Assistant is, including Android phones and the iPhone. Google Home, the company’s connected speaker, will soon let you call any number in the US or Canada from the speaker for free.

A new product, Google Lens has some of the most impressive new features. You can scan just about anything with your phone’s camera and have Assistant analyze its contents. For example, if you take a photo of a concert venue, you can listen to an artist’s music, buy tickets, and more. Or for the amateur botanists, take a picture of a flower, and Google will tell you what it is.

Google’s Daydream virtual-reality platform now supports standalone headsets, not just ones that need to be powered by smartphones. Perhaps the most ambitious program is Google.ai, or artificial intelligence. Put away your machine learning degrees — artificial intelligence is now at the stage where it’s ready to replicate and improve on itself.

Googlers have designed AIs that are capable of “learning to learn,” which they hope to use on every single product across the Google portfolio, including its cloud business. Google announced a new generation of its custom AI chips today, the second version of its Tensor Processing Units.

Google’s TPU represents a next generation of chip, one custom-built for the task of handling AI, and twice as fast. The new hardware will be available for developers on Google’s cloud service and for companies that want to add artificial intelligence to their operations when renting processing power.

Financial Review

Stormy Weather

Sinclair Noe — April 3, 2017

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

Subscribe: iTunes | Android | RSS

DOW – 13 = 10,650
SPX – 3 = 2358
NAS – 17 = 5894
RUT – 16 = 1369
10 Y – .05 = 2.34%
OIL – .33 = 50.27
GOLD + 3.80 = 1254.00

The Institute for Supply Management (ISM) said its index of national factory activity slipped to a reading of 57.2 last month from 57.7 in February, which was the highest since August 2014. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.

The U.S. Markit manufacturing purchasing manager’s index fell to 53.3 in March from 54.2 the previous month.

In a separate report, the Commerce Department said construction spending increased 0.8 percent to $1.19 trillion in February. That was the highest level since April 2006 and followed an upwardly revised 0.4 percent drop in January. Construction spending increased 3.0 percent from a year ago.

In February, private construction spending rose 0.8 percent to its highest level since May 2006 after being unchanged in January. Spending on residential construction surged 1.8 percent to its highest level since July 2007.

Investment in home-building has now increased for five straight months. Spending on private nonresidential structures fell 0.3 percent in February, declining for a second consecutive month.

The yield on the 10-year Treasury note fell 5 basis points to 2.34%. Over the first quarter, the yield curve became flatter, meaning the difference of rates between short-term bonds and long-term bonds narrowed, signaling concern over the economic outlook.

Among Federal Reserve speakers, Philadelphia Fed President Patrick Harker reiterated that he still backs two more rate hikes this year. Richmond Fed President Jeffrey Lacker is scheduled later this evening. The big event on the economic calendar this week is the Jobs Report on Friday.

After 238,000 people were hired in January and 235,000 in February, some analysts are looking for a pullback in hiring, possibly a number below 200,000, simply because the economy can’t keep up that kind of hiring pace nearly eight years into a recovery in which employment has grown by nearly 15 million jobs.

Senate Democrats appear to have enough votes to block Neil Gorsuch’s confirmation to the U.S. Supreme Court under current rules, a move that may lead to a unilateral rule change by Republicans known as the “nuclear option”.

While the GOP controls the Senate 52-48, current rules require 60 votes to move a high court nomination toward a final vote. Democrats say they have 41 votes to oppose advancing the nomination. Senate Majority Leader Mitch McConnell has guaranteed that the Senate will confirm the judge, a hint that the GOP is prepared to force a rule change this week.

The rule change could happen Wednesday with a full vote on Friday. Gorsuch’s confirmation would give the court five Republican-appointed justices, restoring a majority that had been in place for almost half a century before the February 2016 death of Justice Antonin Scalia.

Brexit could disrupt millions of expats’ lives. The more than 3 million EU nationals who live in Britain and the almost 1 million British citizens who live in other EU countries face uncertainty. With the free movement of citizens—a basic tenet of EU law—curtailed or restricted, theoretically they could see bank accounts closed, employment terminated or rental agreements revoked—not to mention deportation.

Passenger car sales dropped last month even as automakers offered some very juicy discounts. Ford suffered the biggest loss with a 7.5 percent drop in sales, followed by Fiat Chrysler at 5 percent, Toyota at 2 percent and Honda at just under 1 percent. Nissan sales were up over 3 percent, Volkswagen’s rose just under 3 percent and GM posted an increase of just under 2 percent.

The LMC Automotive consulting firm said incentives hit a March record, averaging $3,768 per vehicle and the highest amount since March of 2009. In addition, cars and trucks are sitting on dealer lots for an average of 70 days, the highest level for any month since July of 2009 during the sharp economic downturn.

Even some truck and SUV inventories are starting to climb. Ford, which saw a 24 percent decline in car sales, executives were happy with monthly numbers largely because of a 10 percent increase in sales of the F-Series pickup.

Tesla said it delivered a record 25,418 vehicles in the quarter ended March, a 69-percent increase from last year. Tesla shares climbed about 6%, giving Tesla a market capitalization of $48 billion – surpassing Ford Motor’s $45 billion value and just below General Motor’s value of $51 billion. Tesla sold about 40,697 vehicles in the U.S. last year. Ford delivers that many F-Series trucks about every three weeks.

The Tesla story is not about past year performance but growth potential. Ten years from now it will be difficult to buy a new gas powered vehicle. The future is electric; something Ford and GM have failed to fully embrace. Still, there are doubters.

Short interest in Tesla has risen to 29 percent of its free float from a 52-week low of 20 percent in mid-October, even as Tesla shares have jumped nearly 40% since the start of the year – meaning short sellers have lost more than $2.2 billion in the first quarter, at least on paper. Today Elon Musk tweeted: “Stormy weather in Shortville …”

Looking ahead, Tesla will introduce the Model 3, with a more realistic price of around $35,000; they expect to produce 500,000 a year by 2018. But Tesla is more than a car company. It’s a vertically integrated energy company that also makes vehicles.

Tesla plans to transform from its original state as a small, financially precarious manufacturer of luxury electric cars to the world’s dominant supplier of clean, autonomous transport, and an electricity source for millions of businesses and homes. Tesla can start to deliver on that promise by combining the solar energy firm SolarCity, its massive lithium-ion battery plants, a growing number of retail stores, and expanding commercial and residential energy storage business.

Tesla’s theory goes that it can innovate faster, engineer a seamless user experience and reduce costs through economies of scale. As a one-stop shop for clean energy and mobility at work, home and on the road, Musk has mused before that Tesla could be the world’s first $1 trillion company one day.

If Tesla succeeds, it will find itself as a major global player in two of the world’s largest markets: energy and transportation.  Of course, a lot needs to happen first, and Tesla will likely weather a few storms along the way.

Companies that provide oil and gas drilling services had to lower prices for their clients during the most recent oil crash. Some oil-field services providers lowered prices for offshore drilling by as much as 50%, toward levels that would have made their businesses unprofitable, according to Reuters.

Oil-field services giants like Baker Hughes and Halliburton lost pricing power because the oil crash hurt their clients’ revenue. That fiscal pain led clients to be more willing to find the cheapest driller. Separate from the oil crash, there has been a structural decline in the average cost of drilling for oil for the past few years.

Per a report from the Energy Information Administration last March, costs per well increased from 2006 through 2012 — a time of rapid growth in US drilling activity. But average costs have fallen since 2012 partly because of more efficient technology. That does not mean oil will trade much lower, but it likely helps define a trading range of about $40 to $60 a barrel.

The New York Federal Reserve announced that in 2017 total household debt will reach its previous peak of $12.68 trillion, which it reached in the third quarter of 2008. It’s already close: Total household debt in the fourth quarter of 2016 was nearly as high, at $12.58 trillion.

Compared with 2008, fewer borrowers have housing-related debt — including their first mortgages, or home equity lines of credit — and instead more have taken on auto and student loans. Although housing debt has decreased since 2008, mortgages still make up the bulk of the debt total, at 67%.

In 2016, borrowers with $100,000 in student loans or more make up just 5% of borrowers, but account for about 30% of total outstanding student debt. What’s more, these borrowers appear to be struggling more than they have in recent years.

But the default rates have spiked over the decade. Just 6% of borrowers with $100,000 or more in loans who left school between 2005 and 2006 defaulted on their debts five years later, per the NY Fed. More than 20% of borrowers who left school between 2010 and 2011 owing that amount defaulted within five years.

Over the past several years, higher education leaders have become most concerned about the fate of student loan borrowers with relatively low balances of about $10,000 or less. That’s because these borrowers are typically at the highest risk of defaulting on their debt, likely because their low balance is a signal that they didn’t complete much education.

Borrowers with six-figure debts, on the other hand, are less at risk of default because their high balances are often a sign that they’ve completed more schooling that’s made them valuable in the labor market.

Now it appears these borrowers are facing more challenges. While borrowers with high balances are still less likely to default than their counterparts with less debt, their default rates are catching up with the share of borrowers defaulting overall. The increased struggles of borrowers with six figure debts may reflect that it’s becoming more common to borrow $100,000 or more without getting a professional degree, like a medical degree, that typically assures good outcomes in the labor market.

In other words, $100,000 in student debt just doesn’t buy what it used to.

Financial Review

No Sense in Wasting Our Time

Sinclair Noe — February 23, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 188 = 16,431
SPX – 24 = 1921
NAS – 67 = 4503
10 Y – .02 = 1.75
OIL – 2.09 = 31.30
GOLD + 17.10 = 1226.40

The G20 is meeting this weekend in Shanghai. The US will call on G20 countries later to use fiscal policy in order to boost global demand.  American officials will also urge all members to refrain from manipulating exchange rates for competitive purposes, in line with existing G20 commitments.

The world’s oil giants were meeting today. At a conference in Houston, Saudi oil minister Ali Al-Naimi, considered the world’s most powerful energy policymaker, said production cuts will not happen. Last week, Saudi Arabia, Russia, Qatar and Venezuela proposed a freeze that would cap production at January levels.

But Naimi said: “Freeze is the beginning of a process, and that means if we can get all the major producers to agree not to add additional balance, then this high inventory we have now will probably decline in due time. It’s going to take time. It is not like cutting production. That is not going to happen because not many countries are going to deliver even if they say they will cut production, they will not deliver. So there is no sense in wasting our time seeking production cuts.”

Global production is projected to be 95 million barrels a day in the first quarter of 2016, and consumption around 94 million, according to the EIA.

JP Morgan will set aside an additional half a billion dollars to cover potential bad loans to oil and gas companies in the first quarter. According to a study by Deloitte, thousands of jobs have been cut in the U.S. energy sector and roughly a third of oil producers, or 175 companies, are at high risk of slipping into bankruptcy this year, increasing the risk that bank loans will not be repaid.

JP Morgan expects to set aside an additional $500 million for oil and gas loans in the first quarter, on top of the $815 million it had at the end of 2015; they will also increase reserves for metals and mining loan exposure by $100 million to $350 million.

What worries Wall Street types? A hedge fund called Two Sigma surveyed Wall Street analysts, and here’s what has them losing sleep: a market liquidity event, or a rapid draw-down with losses of more than 20% in one or more assets as market participants try to liquidate positions simultaneously; a hard landing for China, with GDP growth dipping below 3%; sustained global deflation, which would be the big 3 economies experiencing consecutive CPI readings below zero; emerging market sovereign debt crisis with one or more emerging markets defaulting on public debt leading to the risk of contagion; and US corporate credit liquidity crisis, which you probably remember from 2008.

BHP Biliton posted a $5.6 billion first half loss, due in part to a massive write-down of US energy assets. The world’s largest mining company by market value cut its midyear dividend by 74% to 16 cents a share.

Other leading miners and energy giants, including Rio Tinto, Glencore and ConocoPhillips, have cut shareholder payouts in recent months. BHP’s first half loss included an $858 million charge against the Samarco iron-ore mine in Brazil, where a wastewater dam collapsed in November, killing 19 people and polluting 400 miles of rivers.

Home Depot reported a profit of $1.4 billion, up from $1.3 billion a year earlier. Revenue grew to $20.9 billion from $19.1 billion. And Home Depot raised guidance for 2016.

Toll Brothers reported first-quarter net income of $73 million. That was down from its year-ago result of $81 million. The results matched analyst estimates. Revenue increased about 10% and came in better than estimates.

European earnings roundup: Standard Chartered shares plunged after full-year underlying operating income fell 15% to $15.4 billion. Swiss Re posted a 31% rise in 2015 net income, announced the retirement of CEO Michel Lies, and declared a dividend hike and €1-billion-euro buyback. Danone reported a rise in sales for the fourth quarter, boosted by a resurgent performance in its fresh dairy unit in the U.S.

Puerto Rico’s much-delayed audited financial statements for 2014 are expected to be finished and issued by April, Governor Alejandro Garcia Padilla said in a letter to House Speaker Paul Ryan, attributing the tardy submission to “complexities posed by our current financial crisis.”

The S&P Case-Shiller 20-city composite was steady in December, with 10 of 20 cities showing increases in prices for existing homes. After seasonal adjustment, prices rose 0.8%. Over the last 12 months, home prices increased 5.7%, with Portland, San Francisco and Denver each posting double-digit gains. Home prices in Phoenix were up 0.5% in December and up 6.3% for the past 12 months.

In a separate report, the National Association of Realtors reported home resales rose 0.4% to an annual 5.47 million rate in January; that topped expectations of 5.3 million. It was higher than year-ago levels by 11%. Tight supplies pushed prices higher. The median price was up 8.2% from a year earlier in January, the fourth straight month of accelerating yearly price gains.

According to the New York Fed’s quarterly report on household debt, mortgage debt outstanding nearly doubled in the period from 2000 and 2006, but has risen only about 1% since 2012. In 2008 Americans had $12.6 trillion in debt outstanding, of which housing debt made up $10 trillion, or 79% of the total. In the fourth quarter of 2015, there was $12.1 trillion in total debt, and housing’s share had dwindled to 72%, or $8.7 trillion.

One reason is that cash-out refinancing has dropped from around $300 billion a year down to around $30 billion a year, and the small amount of cash-out refi going on is almost completely offset by people repaying second mortgages and HELOCs. Also, the pace of home buying has slowed even as Americans are paying down their home loans.

Another reason is that homeowners are paying down mortgage debt much faster than in previous years, and the reason is that more people are holding their mortgages for longer; people aren’t moving as much as in the past and that means that mortgages are getting older; so payments are further along in their amortization process and principal, rather than interest, is being paid down.

Consumers' confidence fell in February to the lowest level in seven months, as American became a bit more pessimistic about job prospects and business conditions. Stock market losses also added to the anxiety. The Conference Board’s consumer confidence index dropped to 92.2 from a revised 97.8 in January. Consumers’ short-term outlook grew more pessimistic, with consumers expressing greater apprehension about business conditions, their personal financial situation, and to a lesser degree, labor market prospects.

Western Digital will buy SanDisk for $15.8 billion, sticking with plans to combine the makers of memory chips after a potential Chinese investor backed out of another deal amid a national security probe. Western Digital will pay $78.50 a share in cash and stock for SanDisk, 16 percent more than Monday’s closing price.

United Technologies has rejected another merger offer from Honeywell International on concerns it will not be approved by antitrust regulators. Honeywell is said to have offered $108 per share for United Technologies last week, a more than 20% premium to the share price at the time.

United Technologies said the two firms only held “preliminary” conversations. A tie up would have created one of the aerospace industry’s largest companies worth more than $160 billion. However, United Technologies broke off talks because a deal “would face insurmountable regulatory obstacles and strong customer opposition”.

Boeing has won an order from United Continental for 25 current-generation 737 aircraft in a transaction that could be worth over $2 billion at list prices. The follow-on deal comes just weeks after United agreed to buy 40 737-700 jets.

Alphabet is shuttering Google Compare, its U.S. comparison-shopping site for auto insurance, credit cards and mortgages after one year. The quick reversal is a setback to the company’s efforts to provide consumers with niche shopping and financial-services tools, and follows the demise of a similar website called Google Advisor that was shuttered in 2011.

Bill Gates weighs in on Apple’s battle with US government. The world’s richest person shared his thoughts on Apple versus the FBI, and says there should be a debate about whether or not the phone of one of the San Bernardino shooters should be unlocked.

Meanwhile, in the latest edition of their annual letter published today, Bill and Melinda Gates argue that the world needs “an energy miracle,” and are willing to bet that such a breakthrough will arrive within 15 years. In the letter, Gates outlines the environmental and economic quandary that the world faces: a growing population, growing demand for services, and increased energy use.

Each of these factors contributes to rising carbon dioxide emissions, a major driver behind climate change, and there’s no sign that their upward trends will reverse. But Gates argues that we could still avert environmental disaster by focusing on the carbon dioxide produced by energy – specifically, by reducing it to zero.

And even though the energy represents a multi-trillion-dollar market, Gates says the normal venture capitalist model that has worked for biotech and worked for software is not quite right here.” He cited the Breakthrough Energy Coalition – a fund he launched late last year with Facebook CEO Mark Zuckerberg – as a promising new model.

Financial Review

Nobody Knows Normalization

Sinclair Noe — February 12, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 313 = 15,973
SPX + 35 = 1864
NAS + 70 = 4337
10 Y + .10 = 1.75%
OIL + 2.77 = 28.98
GOLD – 9.40 = 1238.00

The Nikkei Stock Average finished down 11% for the week, its biggest weekly percentage drop since October 2008. For the day, the index ended off 4.8% at 14,952, the lowest since October 2014. The Nikkei is down 21% year-to-date.

Japanese Prime Minister Shinzo Abe held a meeting with his top financial diplomat today, as well as the BOJ’s governor, following a report that the “architect of Abenomics” called for a Group of 20-wide response to the recent market rout. Friday’s high-level gathering came as the country’s stock markets plunged again and the yen hit highs not seen since October 2014. Speculation is also rampant that Tokyo could conduct yen-selling intervention.

The Hang Seng China Enterprises Index of mainland Chinese companies trading in Hong Kong fell 2% Friday and was off 6.8% for the week. Trading was halted on the Kosdaq, the smaller cap, tech focused exchange in South Korea as the index dropped by more than 8%.

Here in the US, we’re not quite in bear territory for the major indices: The Nasdaq dropped 18% from last summer’s high; the S&P 500 dropped 15% from last year’s high.

And then we bounced today, not enough for weekly gains, but a bounce off the lows, as expected. For the week the Dow lost 1.4%, the S&P lost just under 1% after hitting a two-year low yesterday, and the Nasdaq lost just over a half a percent for the week. I’m just glad the markets will be closed Monday.

So, the very, very bad start to the New Year in the markets has carried over into February, and everybody is looking for a market bottom. And maybe yesterday marked a low; we can never really know until after the fact, but one day does not confirm a trend reversal. Add Bank of America to the list. The firm’s research team is the latest on Wall Street to lower expectations for the U.S. stock market in 2016, after one of the worst starts to a year on record wiped out more than $2 trillion in value.

The bank now expects the Standard & Poor’s 500 Index to end the year at 2,000. While the bank’s new target implies a 7.7 percent advance from the current level, it’s 9 percent lower than the prior target of 2,200. It would also mean a small annual loss. Of course, nobody knows where stocks will finish the year. You don’t know, Bank of America doesn’t know, I certainly don’t know, and the central bankers of the world have no clue.

So far, all attempts by central bankers to respond to the situation have not been working out. The People’s Bank of China has been selling dollars and substituting derivatives to prop up its balance sheet; a strategy that seems likely to result in devaluation of the Chinese currency.  Japan is fumbling around for answers and the yen has been getting stronger.

Europe has joined Japan with negative interest rates and it isn’t stimulating the economy, it is just leading banks, businesses and individuals to hoard cash. And Eurobanks are looking especially vulnerable right now. Deutsche Bank’s problems came into focus this week. The yield on Deutsche Bank’s 6% Contingent Convertible bonds, or CoCos, rose to more than 13% from 7.5% at the start of the year. The bank’s shares were down 40% in the same period.

When the debt of Germany’s biggest bank is trading like junk, it should catch your attention. As a side note, it would be high irony if Germany had to go begging to the EU to save its banking system. But Deutsche Bank is not the only Eurobank with problems.

Janet Yellen tried to normalize interest rates and instead the yield curve flattened. Fed Chair Janet Yellen wrapped up her testimony before Congress yesterday, stressing that the central bank was not on a “preset” path to return policy to “normal” and “wouldn’t take negative rates off the table.”

Yellen told lawmakers this week she was studying ways to “be prepared” in the event the current slide in world stock markets, concern about financial sector stress, and slowing economic growth all translate into a recession or another financial crisis. The growing consensus is that the Fed can’t raise rates again and a majority of money managers are calling for cuts.

What are the central banks going to do when another wave of bad news breaks over the markets? And will whatever they do work? The idea of the central bank “put” seems to be losing its punch, or even worse, backfiring. While the recent market volatility might just be an overblown response to the December rate hike by the Fed, you also have to question how one tiny little rate increase could cause this much damage, and if the real problem goes much deeper?

Retail sales rose 0.2% in January, as consumers boosted purchases of new cars as well as groceries and shopped more online. Sales in December were sharply revised higher to show a 0.2% gain instead of a 0.1% decline. Sales at gas stations dropped 3.1% in January.

Core sales – excluding autos, gas, building materials and food – rose an even stronger 0.6%. In an early sign of lackluster spending, Retail Metrics, a private research firm, said sales at stores open at least a year fell 0.9 percent in January from a year earlier. Meanwhile, business inventories climbed a seasonally adjusted 0.1% in December. To put it simply, sales are not strong enough to clear the shelves.

The University of Michigan’s preliminary February reading on consumer sentiment dropped to 90.7 from 92.0 in January. The expectations component fell from 82.7 to 81.0 during the month. The gauge of current conditions was down less, falling from 106.4 to 105.8. Consumer views of their financial situations improved, but largely because they expect lower inflation. In fact, respondents anticipated the lowest inflation rate on record in the January survey.

Sure enough. The Labor Department said import prices dropped 1.1% last month after decreasing 1.1% in December. Import prices have decreased in 17 of the last 19 months, reflecting the strong dollar and plunging oil prices.

A new report from the New York Federal Reserve shows older Americans have been ramping up their debt while younger Americans have not. In real terms, debt in the hands of Americans between 50 and 80 years of age has increased by 59% since 2003. At the same time, the aggregate debt of those age 39 and younger has dropped by 12%.

This is mainly a result of the housing market. Home-secured debt, per capita, has surged 47% for those age 65, for an increase of $11,191, while it’s dropped 28% to $8,195 for those aged 30. The same trend played out for auto loans as well; on a per-capita basis, auto debt is up 29% for those 65 years old, but it’s down 6% for those 30 years old. Overall, balances owed by households grew $288 billion in 2015, slightly less than the $306 billion increase seen in 2014.

Major world powers have agreed to a cessation of hostilities in Syria set to begin in a week and to provide humanitarian assistance to besieged areas, but failed to secure a complete ceasefire or an end to Russian bombing. The U.S., Russia and more than a dozen other nations also reaffirmed their commitment to a political transition when conditions on the ground improved, following a marathon meeting in Munich aimed at resurrecting peace talks.

Meanwhile, Saudi Arabia says it is willing to commit ground troops to fight ISIS in Syria; exactly how or when they might deploy, and what they intend to do if they deploy, and the extent of US involvement in any Saudi deployment – those are still open questions.

Oil prices were on a 6-day slide from February 4 until this morning; prices went from a high of 33.60 to a low of 26.05; or a 22% bear market in 6 days. Needless to say, there were some big bets on the short side, and when news of a hint of OPEC production cuts hit the wires, the shorts cashed in, which caused prices to pop, which squeezed the remaining short positions.

A big move up in oil prices today (10.5% and 12.3% intraday) but for the week, oil was down 4.7%. Most of the volatility in oil right now is due to speculators. At the same time, stocks have been moving in lockstep with oil; that correlation is not based on fundamentals; stocks and oil will disconnect eventually, just not today.

Christine Lagarde is set to win a second term as managing director of the International Monetary Fund, after a nominee deadline passed with no new candidates to challenge her. In a statement released Thursday, Treasury Secretary Jacob Lew said the U.S. supports her for a second term.

A full 76% of S&P 500 companies have reported fourth quarter earnings through early Friday. And the picture is not pretty. FactSet data show expectations for first-quarter per-share earnings have fallen to a decline of 6.3%, far wider than the decline of 5.5% they were showing as recently as Monday.  Back in September, that forecast was for growth of 4.8%.

By the end of December, it had fallen to growth of just 0.8%. The energy sector is looking worst, but all 10 S&P 500 sectors are facing lower expected earnings-growth rates for the first quarter than at the end of September

In case you missed it, Burger King announced this week that it will add hot dogs to its fast food menu. Proof positive that there is still some common sense in this world.

FINANCIAL REVIEW

Faster and Faster but No Liftoff

Sinclair Noe — November 25, 2014

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

DOW – 2 = 17,814
SPX – 2 = 2067
NAS+ 3 = 4758
10 YR YLD – .05 = 2.26%
OIL – 1.95 = 74.22
GOLD + 2.90 = 1202.20
SILV + .20 = 16.77

The major stock indices couldn’t close at records, but Apple reached a milestone today. Apple’s market capitalization hit a record $700 billion; that’s double from 3 years ago when Tim Cook became CEO. Apple is the first S&P 500 company to ever reach a $700 billion market cap. Yet, on an inflation-adjusted basis, it still has way to go to be the most valuable company of all time. Microsoft’s market cap peak of $613 billion in 1999 translates to nearly $874 billion in 2014 dollars. When Microsoft was at the top, it was trading at 72 times earnings. Apple’s price-to-earnings ratio is currently 18, in line with the overall S&P. It’s a little tough to imagine what Apple will do in the future to match the growth they’ve experienced in the past.

The economy is better than you thought. The Commerce Department revised its estimate of third quarter gross domestic product from 3.5% up to 3.9%. There will be another revision before settling on a final number. Second quarter GDP came in at a 4.6% growth rate; combined second and third quarter GDP was the strongest back to back growth since 2003. Let’s break down the data.

A couple of key factors behind the increase include more consumer spending along with a little more business investment. Falling gas prices meant that people could go to the gas station and still have cash for other purchases. A separate report from the New York Fed show household debt balances also increased $78 billion in the third quarter at $11.7 trillion. Overall household debt still remains 7.6% below the 2008 peak of $12.7 trillion, but the increase was enough for the NY Fed to conclude that household deleveraging is over. Not so fast. The Conference Board reported that consumer confidence declined in November. The Consumer Confidence Index dropped to 88.7 from 94.1 in October. Consumers lowered their opinions on business conditions and the labor market. Maybe consumers are finished with deleveraging, or maybe they took on debt because wages haven’t kept pace with a growing economy.

Growth in domestic demand was revised up to a 3.2% pace in the third quarter instead of the previously reported 2.7% pace. Consumer spending grew at a 2.2% pace instead of the previously reported 1.8% rate.

Business investment was also up. Nonresidential investments grew by 7.1%, revised up from 5.5%, while investment in equipment reached 10.7%, with a stronger pace of spending on equipment than previously thought accounting for the bulk of the revision. Corporate, after tax profits grew at a 3.2% rate in the third quarter; that was down from a very strong 8.6% increase in corporate profits in the second quarter; still, after 6 months of extremely strong profit growth, companies were well positioned to spend a little on equipment. The strength in business investment spending would point to more hiring as well. In a separate report, the Federal Reserve Bank of Atlanta says the quality of new jobs is improving; 95% of the new jobs in October were full-time, which is a move in the right direction.

Export growth was lowered to a 4.9% rate from the previously reported 7.8% rate, while imports were revised up. That left a trade deficit that contributed 0.78 percentage point to GDP growth instead of the previously reported 1.32 percentage points. Government spending, which grew 4.2%, turned out to be a little lower than the Commerce Department initially estimated.

The Department of Agriculture reports net farm income in the US is forecast to be $97 billion, down 21% from a year ago and the lowest since 2010. Farmers are selling livestock for more, but that’s because many farmers culled their herds during the droughts of the past couple years; crop receipts are down, along with prices for many commodities, while expenses have increased.

Also today, the S&P/Case-Shiller home price index increased 4.8% for the 12 months ended in September, down from 5.1% reported for the 12 months ended in August. So home prices are going up, but at a slower pace; and that has been the trend; home price gains have now slowed for 9 straight months. In Phoenix, home prices dropped 0.1% from August to September, and for the past 12 months, prices increased a modest 3%.

A couple of extra bits on the housing market; Corelogic reports that distressed sales, both REO and short sales, accounted for 11.8% of total home sales nationally in September; that’s down from 15.2% distressed sales from September of 2013, but it is still a pretty high number. And another consideration is that back in the mid-2000s we saw a surge in mortgage debt fueled by an increase in home equity lines of credit, or HELOC, loans; it was a way for homeowners to tap into equity. The majority of HELOCs were originated at the peak of the home equity boom between 2004 and 2006, so there is concern of an oncoming wave of defaults when the estimated $190 billion in HELOC loans reset between Q4 2014 and 2017. The fear is that payment shock will not only cause a wave of defaults, but that it also may impact bank balance sheets and the mortgage markets where HELOCs are concentrated. Unlike the first-lien market when banks sold off most of the credit risk, more than 85% or $580 billion worth of HELOC loans are on bank balance sheets.

So, when you combine the stronger GDP numbers with the weaker consumer confidence index and a lackluster housing market, what you get is more of the same; an economy that looks like it should fly but can’t quite achieve escape velocity. Even when you add in corporate capital expenditures improving, that is just a step in the right direction without creating a discernible trend. Part of the problem is that the rest of the global economies are stuck in quicksand.

The Organization for Economic Co-operation and Development says the global economy will slowly improve over the next 2 years but Japan will grow less than previously expected while the euro zone struggles with stagnation and an increased deflation risk. The OECD calculates that a gradual 10% depreciation of the euro and the yen against the dollar over the next two years could potentially raise growth in the euro area and Japan by around 0.2 percentage point next year and twice as much the following year. Overall, the global economy is set to grow by 3.3% this year, 3.7% in 2015 and 3.9% in 2016. In the United States growth is projected to gain more momentum and remain above trend, reaching 3.1% next year.

Oil prices have plunged more than 30% since midyear on growing global supplies of oil and weak demand growth. OPEC is meeting Thursday in Vienna to discuss oil prices, but before the official meeting an official from Venezuela says that informal talks before the meeting point toward no output cuts. That’s bad news for Venezuela, and even worse news for Russia, which is watching its oil-dominated economy stumble under lower prices. Crude futures extended losses on that news. Rumors on production cuts were flying today. The low prices for oil may be considered another indicator of global economic growth. As oil producers such as Venezuela and Russia fret about the drop in oil prices, more affordable energy would benefit the worldwide economy. Many people feel the global recession was really triggered by the rise in oil prices from 2000 through 2008 and some of the slow growth or stagnant growth in the global economy is because prices stayed so high for so long.

Jeff Gundlach, the CEO of Doubleline Capital, says oil markets are in their “second part of the cycle” wherein prices will drop because producers are getting squeezed after oil settled below $80. Production will see an increase “maybe on the sly” by countries that depend on oil revenue, creating a “vicious cycle” for the commodity’s price. He predicted that $70 is the “line in the sand” for West Texas Intermediate: Any drop below that level will lead to a significant fall in price. He also said an oil price around $75 (which is where we are today) would suggest that the consumer price index should probably be near zero, meaning that there is no inflation in the economy.

And just to keep things interesting, much of the oil boom in the US was done with financial engineering. There is an astonishing amount of debt that continues to build up on the smaller exploration and production companies’ balance sheets. Even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

And it is not just OPEC countries holding on for dear life waiting for production cuts. Particularly in the gas and natural gas liquids drilling directed sector, every operator (and their financier) is waiting for every other operator to stop or slow their drilling programs, so there can be some recovery in the supply-demand balance. And at some point, you have to wonder if the banks will put an end to the boom.

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

Financial Review with Sinclair Noe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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