Financial Review

Thank You

Sinclair Noe — November 10, 2017

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DOW – 39 = 23,422
SPX – 2 = 2582
NAS + 0.89 = 6750
RUT + 0.25 = 1475
10 Y + .07 = 2.40%
OIL – .31 = 56.86
GOLD – 8.90 = 1276.60

Cryptocurrency

• Number of Currencies: 899
• Total Market Cap: $196,936,621,147
• 24H Volume: $13,213,160,008

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	6,374.8	$107.77B	$4.99B	37.79%	1	-2.54%	-10.80%
	Ethereum	ETH	298.15	$28.77B	$817.87M	6.19%	0.0470464	+0.67%	-0.12%
	Bitcoin Cash	BCH	1,135.50	$18.86B	$4.64B	35.11%	0.175766	+14.24%	+81.41%
	Ripple	XRP	0.20300	$7.97B	$133.81M	1.01%	0.00003237	0.00%	+0.97%
	Litecoin	LTC	59.590	$3.21B	$295.57M	2.24%	0.00934421	+0.49%	+7.74%
	Dash	DASH	326.23	$2.51B	$91.67M	0.69%	0.051139	+0.07%	+18.30%
	NEO	NEO	27.907	$1.81B	$49.28M	0.37%	0.00436266	-0.52%	+3.16%
	NEM	XEM	0.18682	$1.68B	$7.49M	0.06%	0.00002913	-3.21%	+6.99%
	Ethereum Classic	ETC	17.2500	$1.67B	$600.88M	4.55%	0.00268302	+20.87%	+44.31%
	Monero	XMR	105.00	$1.60B	$69.48M	0.53%	0.0163628	+0.44%	+20.69%

The S&P 500 and the Dow Jones Industrial Average ended the week lower for the first time in nine weeks. For the week, the Dow lost 0.5 percent and the S&P 500 slipped 0.2 percent. The Nasdaq gave up 0.2 percent for the week, snapping six weeks of weekly gains.

The yield on 10-year Treasuries punched through 2.40 percent, joining a spike in European sovereign rates. Junk bonds stabilized after 3 days of declines. Global equities hit historic highs during the week as investors were encouraged by solid earnings and synchronized global economic growth.

Wall Street remained focused on Washington and the promise of tax cuts. Republican tax writers in the House and Senate are scrambling to find ways to make the math work on their respective tax plans. The House Ways and Means Committee hammered together a bill and sent it toward the House floor for a vote promised next week, while the Senate Finance Committee revealed a proposal it intends to mark up on Monday.

After the Senate plan’s release Thursday, Sen. Jeff Flake voiced fears about the effect of broad cuts on the national debt. The budget resolution approved by Congress allows it to pass a plan that adds as much as $1.5 trillion to federal budget deficits over a decade. While the nonpartisan Congressional Budget Office has not scored the Senate plan, it estimated that an earlier version of the House bill would increase federal budget deficits by $1.7 trillion over 10 years.

The current plans appear to come nowhere close to canceling out tax cuts with new revenue. The House is on track now to hold a vote before Thanksgiving, and the Senate perhaps soon after. But it’s far from clear either measure can pass in the opposing chamber, let alone be combined into one bill that can clear both and land on Trump’s desk.

Republican plans to overhaul US taxes includes a provision to cut the corporate tax rate from 35% to 20%. The House Republicans’ proposal would make the cut immediately, while the Senate Republicans’ plan would delay the cut for two years, which freaked out Wall Street.

The corporate tax cut is the single most important part of Republicans’ proposals. The Tax Policy Center estimates that the House plan would cost the government $2 trillion in revenue over the next 10 years, and that is a problem because they can only blow a $1.5 trillion hole in the budget.

On its face, cutting corporate taxes is a good idea. Most economists believe that it is more efficient to tax people, not companies. Taxes on companies discourage them from making investments and encourage them to move profits abroad to tax havens.

There are strong arguments that lower corporate taxes would increase economic growth, especially if corporate tax cuts were targeted to provide relief for companies that invest in new equipment, or hire more employees or for more research and development.

The problem with Republican proposals to reduce corporate taxes is that the $2 trillion in cuts are not replaced by other revenues. Thus, the government would borrow money to cut corporate taxes, on the bet that the economy will grow faster and make up for the shortfall. It almost certainly won’t.

The Tax Foundation, an ideologically conservative think tank, finds that even with increased economic growth, the Republican tax plan will lead to $1 trillion in lost government revenues, and more government debt. There is a very simple solution to pay for corporate cuts. Hike income taxes on the rich.

Currently, the top federal income tax rate, applied to incomes above $480,000, is 39.6%. Among wealthy countries, that rate is comparatively low. Researchers from the Brookings Institution estimate that raising the US’s top income tax rate by 10 percentage points—in line with the rates in Japan and Sweden—would generate about $100 billion in government revenue every year. That would pay for a large portion of the corporate tax cuts.

A review of the academic literature by the IMF found that an increase in the top income tax rate is unlikely to negatively impact the US economy. And an analysis by a researcher at Uppsala University concluded that the US could raise its top income tax rate above 70% on the very rich without a significant negative impact on the economy. That could pay for some hefty corporate tax cuts.

The current plan to cut corporate tax rates and individual rates for the wealthy just doesn’t add up. You can’t eat your cake and have it, too.

The more we dig into the tax plan, the more it seems the whole scheme was just slapped together with bailing wire and duct tape. Take the plan to eliminate the tax credit for adoptions. That idea didn’t sit well with Pro-Life, pro-family evangelicals.

Late yesterday, the House Ways and Means Committee realized their error and added the credit back to their bill. The question remains – what were they thinking? And the answer is – they weren’t.  They’re just looking to get a bill passed and they aren’t paying attention to details.

Crude oil was down slightly as expectations OPEC and other producers will extend their production cut agreement were offset by U.S. drillers adding the most oil rigs in a week since June, indicating output will continue to grow. U.S. energy companies added nine oil drilling rigs in the week to Nov. 10, the second increase in three weeks, bringing the total count to 738.

Meanwhile, the political situation in Saudi Arabia remains sufficiently volatile to spike crude prices at any given time. Over the past week, Saudi security officials rounded up dozens of members of Saudi Arabia’s political and business elite in a corruption purge. War in Yemen, a dispute with the Gulf emirate of Qatar and growing tension with Iran is a concern to investors too. We saw that this week as West Texas Intermediate briefly popped up to $57.92, its highest since July 2015.

The University of Michigan consumer sentiment index fell to 97.8 from 100.7 in October. Gauges of both current and future expectations declined — but the index still was at its second-highest level since January. There was a slight rise in expectations for inflation over the next year, and growing expectations of increasing interest rates.

A new report from the Institute for Policy Studies shows inequality is growing. According to the report, three men – Bill Gates, Jeff Bezos, and Warren Buffet –  have collectively more wealth than the 160 million poorest Americans, or half the population of the United States.

The study shows the bottom 19 percent of Americans are financially underwater, meaning they have zero or negative net worth. Even those low- and middle-income families who do have some wealth often don’t have any liquid assets — cash or savings — at their disposal. Over 60 percent of Americans report not having enough savings to cover a $500 emergency.

Today is Alibaba’s big day – Singles’ Day, an annual online discount sales event that has become the world’s biggest shopping spree. It started out as a sales gimmick – Alibaba offered a day of discounts with the idea that lonely hearts could buy a gift for themselves. It has now become the biggest day for shopping – outpacing Black Friday and Cyber Monday combined.

In the first 3 minutes today, sales topped $1.5 billion. Sales for the 24-hour period are expected to top $24 billion. The event gets shoppers around China scouting for bargains and loading up their online shopping carts, while delivery men – and robots – are braced for an estimated 1.5 billion parcels expected over the next six days.

Yesterday, after the closing bell, Nvidia and Disney posted third quarter earnings. Nvidia jumped 6 percent and hit a record high after the chipmaker’s revenue forecast for the current quarter topped estimates. Disney rose 2.7 percent as the promise of a new “Star Wars” trilogy overshadowed its weak quarterly results.

Equifax reported a third-quarter revenue miss late Thursday. New customers are putting off contracts with Equifax until, or unless, the company can prove its cybersecurity practices are up to par. Most of Equifax’s business is selling services to other businesses, and there is always a concern that customer deferrals will turn into cancellations. After stripping out nearly $90 million in breach-related costs, Equifax claimed a third-quarter profit beat. I’m guessing $90 million might not be enough to clean up their mess.

Department store chain J.C. Penney reported third-quarter same-store sales that were twice what it had estimated. The retailer said comparable sales rose a better than expected 1.7 percent. Penney’s still reported a net loss of $128 million for the quarter – nearly double the loss from a year earlier, but much of the loss was due to heavy discounting to clear slow-moving inventory. Share popped 14%.

Saturday is Veterans Day. The holiday traces its origins back to the end of World War I. On Nov. 11, 1918, an armistice between the U.S.-led Allied nations and Germany went into effect on the 11^th hour of the 11^th day of the 11^thmonth – the date recognized as the end of the “war to end all wars.”

November 11^th was originally called Armistice Day. There are 6.7 million Vietnam Era veterans in 2016. There were 7.1 million who served during the Gulf War (representing service from August 1990 to present); 768,263 who served in World War II; 1.6 million who served in the Korean War; and 2.4 million who served in peacetime only.

There are 18.5 million military veterans in the U.S. according to the Census Bureau. 9.2 million of those are age 65 and older. Tomorrow, Veterans Day, is a good day to say thank you for their service and for our freedom. It’s always a good day to say thank you – no need to wait.

So, to all veterans Saturday – Thank you.

Financial Review

Milk and Cookies. Enjoy While You Can.

Sinclair Noe — February 25, 2015       

 

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DOW + 15 = 18,224
SPX – 1 = 2113
NAS – 0.98 = 4967
10 YR YLD – .02 = 1.97%
OIL + 1.75 = 51.03
GOLD + 2.90 = 1205.20
SILV + .22 = 16.64

Another record high for the Dow Industrial Average. These are the days of milk and cookies.

Federal Reserve Chairwoman Janet Yellen continued her semi-annual Humphrey-Hawkins testimony today in front of the House Financial Services Committee. The prepared opening remarks were identical to the testimony yesterday in the Senate. The Q&A session became a bit testy today as Yellen was accused of political bias. Republicans questioned Yellen about an October speech on inequality, just before the midterm elections, as evidence she was leaning toward the Obama administration and Democrats. Methinks they doth protest too much. There were also calls for an audit of the Fed, historically a nonstarter with Federal Reserve Chairs. It made for generally poor political theater.

The important part of the testimony was fairly easy to find. Keep in mind the Fed has a dual mandate of maximum employment and price stability. So the key statement from Yellen was when she said: “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2% objective.”

So, higher rates will come with higher inflation, indicating that disinflation and deflation are still a concern for now. The Fed believes that inflation is going to move lower before it moves higher because of oil prices and import prices. As for the timing of when we will see inflation and possible interest rate hikes, Yellen said: “We expect inflation over the medium term — the next two or three years — to move up to our 2% target.”

Greek stocks and bonds surged yesterday, with Athens’ main stock exchange closing almost 10% higher on the day after Eurozone financial ministers approved a four-month extension to the country’s bailout program. Although the list of proposals were accepted, the ministers warned that the reforms must be expanded in detail before new bailout funding would be released.

The German government is now selling five-year bonds with a negative yield. That means investors will pay to lend money to the country for five years. Germany auctioned 3.28 billion euros ($3.72 billion) of bonds due in April 2020 at an average yield of negative 0.08%.

Today the Senate moved to avert a shutdown of the Department of Homeland Security. The upper chamber voted 98-2 on a procedural hurdle that would pave the way for a “clean” funding bill to be brought to the floor. It remains unclear when the Senate will vote on final passage on the funding bill. If the Senate passes a clean bill, it would then move over to the House, and it is uncertain if House Speaker John Boehner would allow a vote on such a bill. DHS funding runs out in 2 days.

The White House says President Obama would veto a House Republican effort to rewrite the federal “No Child Left Behind” law. The House bill is expected to pass the chamber later this week. Senate Republicans are working on their own version of No Child Left Behind, which expired in 2007.

New homes sold at annual rate of 481,000 last month, essentially unchanged from December. The Commerce Department reports sales were 5.3% higher in January compared to a year earlier; this despite a drop of 51% in the Northeast, where bad weather kept buyers away. The median price for a new home was up 9% from a year ago.

For all the talk about how lower oil prices would reduce supplies, it hasn’t happened yet. Just the opposite. According to EIA weekly data released today, crude oil in storage in the US jumped 2%, or 8.4 million barrels, to 434 million barrels. Oil storage is bursting at the seams and inventories remain at their highest levels in at least 80 years. The rate of growth of production is slowing slightly but production continues at the highest rate since 1972, for now.

Southwest Airlines took 128 of its jets out of service late Tuesday, or roughly one-fifth of its fleet, after informing federal regulators that it “inadvertently omitted” required maintenance checks on the planes’ backup hydraulic systems. Dozens of flights were immediately canceled as a result, while officials from Southwest and the FAA discussed plans to complete the maintenance checks and return the planes to service.

American Express will raise interest rates on about one million customers. Annual rates will climb by an average of 2.5 percentage points to at least 12.99%. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles.” Typically banks make large scale changes in response to broader shifts in interest rates or risk.

Anthem, which earlier this month reported that it was hit by a massive cyberbreach, has concluded that the personal information of 78.8M customers was exposed in the attack, including 8.8M-18.8M people who were members of independently run Blue Cross Blue Shield plans. Anthem still believes the hacked data was restricted to birthdays and Social Security numbers, among other data, but doesn’t appear to have involved medical information or financial details.

Another company that had problems with cybersecurity is Target, but it doesn’t seem to have hurt their most recent results.  Target saw a higher-than-expected jump in its fourth-quarter earnings and is forecasting modest growth for the first quarter of 2015. Exiting Canada, as the company recently announced it will do, will cost it $5.1 billion.

Earlier this month Wal-mart announced they would be paying workers at least $9 an hour, increasing to $10 an hour next year. Wal-Mart is of course the largest retailer, and we thought this might ripple out through other retailers. Sure enough. T.J. Maxx, Marshalls and other chains owned by TJX Cos. will be increasing the pay of US workers to at least $9 an hour beginning in June, increasing to $10 an hour next year.

Now for today’s edition of “Banks Behaving Badly”; yet another foreign currency scandal, Reuters reports that BNY Mellon is in settlement talks with the DOJ and New York AG over claims that it defrauded clients in foreign exchange transactions. The bank faces several lawsuits, including class actions, stemming from allegations that it misled clients about how it determined currency exchange rates for certain transactions.

HSBC has a “terrible list of problems,” so says the chairman of HSBC, Douglas Flint. And he admits that he couldn’t rule out further scandals emerging at the bank along the same lines as the tax evasion schemes at HSBC’s Swiss private bank, but he said: “I sincerely hope there are no more skeletons.”

A British parliamentary committee questioned Flint and CEO Stuart Gulliver after the tax evasion schemes were revealed by several news organizations. The news story only came to light 4 years after a former HSBC employee turned over bank files. Some of the clients whose details HSBC’s Swiss operations were sheltering included arms dealers and politicians who were part of discredited regimes, like that of Bashir-al-Assad in Syria. Earlier, when asked why some HSBC clients reportedly came to Switzerland with wads of cash, Flint was lost for words. Still to be determined is why the bank should not be broken up.

Move over Alibaba, you could have company next year. Postal Savings Bank of China, the country’s sixth largest lender by assets, is seeking an initial public offering in 2016 that could make history by bringing in some $25 billion .

In a new S-1, GoDaddy declared plans to list on the NYSE under the symbol “GDDY” and announced IPO underwriters including Morgan Stanley, JPMorgan, Citi and others. GoDaddy is a fast-growing company which posted revenue of $1.4 billion in 2014, up 23% from 2013 levels, according to the filing. But it’s also a big money loser. The company posted a loss of $143.3 million in 2014, which is the fourth annual loss in a row.

FINANCIAL REVIEW

Floors and Ceilings

Sinclair Noe — October 17, 2014

0 0

   

Financial Review

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DOW + 263 = 16,380
SPX + 24 = 1886
NAS + 41 = 4258
10 YR YLD + .05 = 2.20%
OIL + .27 = 82.97
GOLD – .70 = 1239.20
SILV – .10 = 17.37

The markets were down for the week, even with the bounce today. For the week, the Dow and the S&P each dropped about 1%; the Dow was down 164 points on the week, and the S&P was down 20 points. The S&P is now down for 4 consecutive weeks.

Let’s take a look at the charts. Earlier in the week I talked about support and resistance. Someone mentioned to me that they weren’t quite clear on the concept. So, here is a good way to look at these topics. Support is the floor and resistance is the ceiling. Think of a chart as a staircase under construction. The stairs are being built, hopefully higher and higher, and to prop up the stairs, you have to have a structure, or floors and ceilings. When you break through the ceiling to a new higher level, that ceiling then becomes the floor for the next level up. In other words, resistance becomes support. If the staircase of price falls, the last floor will catch you, or provide support. Then to go higher yet again, you will have to punch through that ceiling, or resistance, again.

So, let’s look at support and resistance for the major indices. The Dow Industrials dropped below support last Friday, when the price dropped below the 200 day moving average at 16,592. On Monday, the Dow dropped below another level of support at 16,310, slightly below the old low of 16,333 on August 7. Tuesday, the Dow was just slightly lower, trying to cling to that level of support. Wednesday, was another big down day. Thursday was an inside day, just slightly down; an inside day means the high and the low were within the range of the highs and lows for Wednesday. Then today we got a bounce.

So, as of today, we have a new floor, which is the low for the day of 16,118. The next ceiling, or level of resistance is 16,310, and then the next level of resistance is the 200 day moving average at 16,586, and then the next level of resistance is the old high on September 19th at 17,350. That means the Dow would have to break through three ceilings to get back to new highs. Keep in mind the idea of the staircase, and as we go through each ceiling we have to have something to prop up the staircase. We would need very strong earnings, or accommodative monetary policy, or something that could justify those prices going higher.

Now, the really important short-term level of resistance and support is around 16,310. If we look back over the past few months we find that that level served as support in April, May (twice in May), and August. That’s important because the more times that floor supports the market it indicates that that is a level where the floor is very strong. If the Dow cannot hold above the 16,300 to 16350 level, then the next support level is around 15,350 from back in February. So, if next Monday or Tuesday, we take out today’s low of 16,118, the next level of support is all the way down to 15,350.

For the S&P 500 index the 200 day moving average is at 1906, which is also the low from August. Of course that level was breached at the start of the week. And so now the old level of support at 1906 becomes the new level of resistance. Then, the next level of resistance would be the old high from September 19, at 2019. If the S&P 500 can’t hold above today’s low of 1864, we might expect to drop down to the next level of support. The next levels off support are at 1815, the old low from April; then at 1737, the old low from February.

Today’s price action would indicate that the indices are trying to reverse the slide. If you use candlestick charts, the pattern today could be described as a morning star. The morning star is a three candle pattern. The first candle was Wednesday, which was a big down day; yesterday was a neutral day (slightly positive on the S&P 500 and only slightly negative on the Dow), or what is known as a doji; and today we had a strong positive day that closed above the high from Wednesday.

When found in a downtrend, this pattern can be an indication that a reversal in the price trend is going to take place. What the pattern represents from a supply and demand point of view is a lot of selling in the period which forms the first black candle; then, a period of lower trading but with a reduced range, which indicates indecision in the market; this forms the second candle. This is followed by a large white candle, representing buyers taking control of the market. Today, you have to think that some of the hedge funds and big money players were stepping in to buy the dip, or pick up bargains, or to cover short positions. And if you want to increase your probabilities, you would wait for confirmation in the fourth candle, however today’s move was big enough that more aggressive traders might not wait. With the usual caveat that I don’t know what the markets will do on Monday, you don’t know; nobody knows. None of this is a guarantee, it is just looking at probabilities.

Another consideration is that we are still in a very long and strong bull market; the past couple of weeks have not changed that overall trend. We’ve had a few whiffs of panic, lots of indecision, and reasons for concern, but we haven’t seen a full-fledged freak out. The possible exception to that, at least in equities, would be the Russell 2000 index of small cap stocks, which saw a 10% drop, or what is considered a correction; and there we saw a nice bounce back this week. The Russell was down about 3 points today, but for the week it is up about 30 points at 1082.

There are several possible reasons why small caps have found support, including: bargain hunting and short covering, but also small caps have less international exposure; and with global weakness, especially in Europe, the small caps are a way to focus on US growth. And even though the economic news in the US has not been great, it has been reasonably good and it has been better than most other global markets.

Today, the Thomson Reuters/University of Michigan preliminary October reading on the overall index on consumer sentiment came in at 86.4, up from 84.6 in September, and the highest since July 2007.

And separate data showed groundbreaking for new homes rose more than expected last month. Housing starts rose 6.3% to an annual 1.02 million-unit pace. Newly issued permits also rose. You’ve got to think the recent reduction in rates will have a somewhat positive effect for the housing market in the next couple of months.

Toss in a few good earnings reports today: GE’s third-quarter net income rose 10% to $3.5 billion, or 35 cents per share; that was better than expected. Revenue, at $36.1 billion was a bit under guesstimates, but then GE raised guidance on revenue.

Morgan Stanley reported an 87% increase in third quarter earnings, as they got back to their investment banking roots, and focused on bond trading and wealth management; and working on the Alibaba IPO also helped.

Honeywell reported net income rose to $1.17 billion in the quarter, or $1.47 per share, from $990 million, or $1.24 per share, a year earlier. Honeywell also raised the low end of its full-year forecast range for both profit and revenue, and said it is looking for acquisitions. Not a big surprise as Honeywell is very involved in aerospace, which has been very strong this year.

Schlumberger reported better than expected earnings and revenue. Schlumberger is in the oilfield services business, and they provide drilling technology and equipment, and construction services and such. Of course, the drilling activity in the US has carried over to that sector. Of course, it will be interesting to see how the oil sector fares moving forward as oil prices are down more than 25% from the June highs.

Earlier this week, Russian President Vlad Putin warned that Russia might reduce gas supplies to Europe if Ukraine steals from the transit pipeline to cover its own needs. In June, Russia cut off supply to Ukraine over what gas exporter Gazprom said were billions of euros in unpaid bills. Without Russian flows, there is concern Ukraine might have to siphon off gas from flows transiting the country en route to Europe this winter. Today, after talks with leaders from Europe and Ukraine in Milan, Italy, Putin said a deal had been reached that would ensure gas supplies to European buyers “at least for the winter.” More talks continue in Brussels next week.

Also, earlier this week, Credit Suisse published a report saying rising inequality in the US is at levels that have been associated with recessions in the past, and that the ratio of income to wealth is at the highest level since the Great Depression. Today, Federal Reserve Chairwoman Janet Yellen delivered a speech in Boston at a conference on inequality, and she said the increase in inequality is a concern for her. Though Yellen didn’t go so far as to echo Credit Suisse’s recession alarm, she did warn that rising inequality risked doing serious harm to the overall strength of the US economy. Yellen noted that living standards have been “stagnant” for most Americans for the past few decades, and that is an unhealthy development for an economy that relies mainly on consumer spending to drive growth.

Yellen also stepped just a little outside the boundaries of monetary policy to hint at the idea of more federal funding for education. The Boston Fed named education as one of the four “building blocks of opportunity” that could help reduce inequality, with the other three being parents’ financial resources, starting a business, and inheritance.

Tuesday, August 05, 2014 - Go Firgure

Financial Review with Sinclair Noe

DOW – 139 = 16,429
SPX – 18 = 1920
NAS – 31 = 4352
10 YR YLD - .01 = 2.48%
OIL - .86 = 97.43
GOLD + .40 = 1289.60
SILV - .39 = 19.84

We start with a couple of economic reports: The Institute for Supply Management’s services index rose to 58.7 last month, the highest level since December 2005, from 56.0 in June. A reading above 50 indicates expansion. Orders jumped to a 9 year high. A sub-index gauging services industry employment also rose as did order backlogs, but export order growth moderated.

In a separate report, the Commerce Department said orders for manufactured goods increased 1.1% in June, more than reversing May's 0.6% decline. Orders for non-defense capital goods excluding aircraft hit a record high; this might indicate a renewal in business confidence and equipment spending plans. Factory orders rose across all categories, with bookings for electrical equipment, appliances and components recording their largest gain since November 2010. In another sign of strength, unfilled orders saw their largest rise in seven months.

So, a couple of good reports on the economy, and the stock market tumbles. Go figure.

The situation in Ukraine appears headed to a tipping point. Ukrainian forces have been pushing back against Russian backed separatists in eastern Ukraine. Meanwhile, Russia is massing troops on the border. Some 20,000 troops are now stationed about 50 kilometers from the border, closer than they had been stationed previously. In April, Russian President Vladimir Putin had briefly deployed about 40,000 troops at the border. The latest troops include Russian Elite forces, armored brigades, artillery and anti-aircraft units. Poland’s foreign minister thinks Russia is preparing to invade Ukraine; he didn’t flat out say an invasion was imminent, just that the Russians are getting ready.

Putin has ordered his government to prepare retaliatory measures against US and European economic sanctions imposed on Russia. We don’t know what Putin means by retaliatory measures. Russia may limit or ban flights over Siberia by European carriers bound for Asia as a response to sanctions levied against the country. Russia has also called for the UN Security Council to hold an emergency meeting on the humanitarian situation in Ukraine. It isn’t a humanitarian situation when the pro-Russian rebels shoot a plane full of civilians out of the sky, but it is a humanitarian situation when the rebels start getting their butts kicked.

One thing that hasn’t happened yet is a disruption in oil and gas supplies from Russia to Europe. Russia derives half its tax revenue from the oil sector; Europe relies on Russian supplies. As the weather changes and winter sets in, Europe’s resolve, which has already been soft, will weaken further. For now, energy prices are moving lower, despite violence in Eastern Europe, Libya, and Iraq. Global oil demand has been running below supply over the last few months, building up a glut of high quality crude oil in the West African, European and Asian markets. The US Energy Information Administration reported last week that gasoline supplies rose by 400,000 barrels at a time when market bulls hoped to see a reduction. Oil prices are at their lowest levels since February.

Yesterday we told you about the collapse of Portugal’s Banco Espirito Santo; today we report on the fallout. The French bank Credit Agricole held a 14% stake in Banco Espirito Santo and two seats on its board. Crédit Agricole's ties to the Portuguese group go back to 1986 when it helped the Espírito Santo Group set up Banco Internacional de Crédito. Over the years, the French bank raised its stake in the Portuguese group, as part of a larger international expansion plan in southern Europe.The French bankers say they never detected any “slip or difficulties” at Banco Espirito Santo. The collapse of the Portuguese bank nearly wiped out all the second quarter profits at the French bank.

Standard& Poors today announced that it was dropping its 10-year estimate of annual GDP growth in the US from 2.8% to 2.5%, which over a decade amounts to a pretty significant reduction. Why are they cutting the growth forecast? Here’s what S&P says: "Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population... At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold...."

S&P analysts say it basically boils down to the idea that high levels of income inequality cause more affluent households to save more of their increasing income rather than spend it, and as that cash is withdrawn the economy slows. At the other end of the economic scale, as income declines, households go into debt to try to maintain their standard of living, a strategy that is simply unsustainable over time. And when the unsustainable ceases to be sustained, you get a breakdown, much like that of 2008. In fact, S&P notes, as income inequality increases, an economic system becomes more and more vulnerable to a boom-and-bust cycle. It cites research demonstrating that income distribution plays a much more important role in sustaining long-term economic growth than any other factor.

Although the issue of income inequality is often addressed in moral terms, S&P concludes, at its foundation it is really an economic issue, saying: "A rising tide lifts all boats … but a lifeboat carrying a few, surrounded by many treading water, risks capsizing."

Earnings reporting season:

Retailer Target cut its second quarter earnings estimates due to higher promotions and more discounting; they also lost about $148 million related to that data breach, where hackers gained access to customer credit card info; that’s a small number compared to total sales at Target, but it apparently proved a costly distraction. Morgan Stanley reduced its second quarter earnings by 2 cents per share due to increased legal settlements. Disney posted better than expected earnings; shares moved just a smidge higher in after-hours trading. Cablevision cut back on its promotions and subscriber losses doubled in the second quarter. First Solar posted profits that missed estimates by a wide margin; they blamed project delays. Groupon fell in after-hours trading after posting a second quarter loss nearly triple the loss from a year ago. Zillow announced a second quarter loss, even as revenue increased; and they raised their full year revenue outlook. This was Zillow’s first quarterly report since they announced a $3.5 billion deal to acquire rival Trulia.

Time Warner and Fox both report earnings tomorrow, but the big news came today. Fox withdrew its offer for Time Warner. Game over. When Fox made the hostile bid, its stock dropped and Time’s stock soared; meanwhile Time’s board and management opposed the takeover and refused to discuss the offer. Now that Murdoch has dangled a huge windfall in front of Time Warner shareholders, only to take it away, one imagines that some of those shareholders may soon be venting their frustration to Time Warner's board and management.

Several America corporations have found a loophole in the tax code, which allows for a company to acquire a partial interest in a foreign company, and then change the address of its headquarters in order to evade US taxes; it’s called an inversion. There have been 22 such deals since 2011, most have been in the pharmaceutical industry, where overseas sales generate significant income that cannot be brought back to the US without suffering a major tax hit; but there have also been inversion deals in the media, consumer and manufacturing sectors. Some of those deals have collapsed, amid disputes over price and political scrutiny.

Walgreens was next on the list; closing in on a deal to buy the 55% of British pharmacy retailer, Alliance Boots; Walgreens already owns 45% of Alliance Boots. Walgreens will buy out Alliance Boots, but it won’t move its corporate headquarters abroad and it will not change its corporate citizenship to a lower tax country. They say they won’t do the inversion move because they would have had to renegotiate an existing agreement, and Alliance Boots wasn’t willing. There may also have been some political pressure.  President Obama has denounced tax inversions as unpatriotic and has urged Congress to stop them; which is like asking a Kleenex to stop a freight train. So, now the Treasury Department says there may be an executive order to provide a partial administrative fix, you know, until Congress gets back from its 5 week vacation.

As Ebola spreads, pharmaceutical giants are sitting this one out. That's mainly because treating a disease that affects a relatively small number of people who typically don’t have a lot of money doesn’t offer a great return on investment. It's unclear how much profit it would take to get Big Pharma interested in finding an Ebola cure, but right now such a project could well be a money-loser. Instead, small biotech firms, academics and government agencies are leading the search for an Ebola cure. And in a twist of fate, they may have found a way to treat the virus: tobacco.

A tiny San Diego-based company provided an experimental Ebola treatment for two Americans infected with the deadly virus in Liberia. The biotechnology drug, produced with tobacco plants, appears to be working. Mapp Biopharmaceutical produced an experimental drug called ZMapp, an antibody that had been tested only on infected animals; now it’s been given to human patients, and it seems to make a big difference. The antibody work came out of research projects funded more than a decade ago by the U.S. Army to develop treatments and vaccines against potential bio-warfare agents, such as the Ebola virus.

The tobacco plant production system was developed because it was a method that could produce antibodies rapidly in the event of an emergency. To produce therapeutic proteins inside a tobacco plant, genes for the desired antibodies are fused to genes for a natural tobacco virus. The tobacco plants are then infected with this new artificial virus. The infection results in the production of antibodies inside the plant. The plant is eventually ground up and the antibody is extracted. The whole process takes a matter of weeks.

Thursday, June 12, 2014 - The Beautiful Game

Financial Review with Sinclair Noe

DOW – 109 = 16,734
SPX – 13 = 1930
NAS – 34 = 4297
10 YR YLD - .05 = 2.59%
OIL + 2.51 = 106.91
GOLD + 12.70 = 1274.30
SILV + .34 = 19.63

This is a big day for sports fans. In the US, many fans are thinking about the NBA playoffs or the start of the US Open golf championship, but those games are small potatoes compared to the World Cup. Over the next month, the World Cup will attract about 4 billion television viewers, maybe more when we consider all the digital devices that can replay the games; that’s more than the 3.6 billion viewers who watched the Beijing Olympic games; more than the 3.2 billion that watched the 2010 World Cup. By comparison, the Seahawks-Broncos Super Bowl managed a record 111 million viewers. The cumulative viewership for all the matches over the next month might top 35 billion. It’s a corporate marketing bonanza.

Over the next month, there will be countries across the globe that will quite literally shut down for 90 minutes intervals. Courts will delay hearing cases, hospitals will not schedule surgeries, offices and retail outlets and factories will shut down, the crime rate will drop, the streets will empty with almost zero traffic, planes stop flying, and trains stop running. I’ve seen it happen; and because I am blessed to be married to a lovely Brazilian woman, I have been caught up in the madness.

If you are still unclear, and most Americans are unclear on this subject, I’m talking about the beautiful game, futebol, or what we call soccer and the rest of the world calls futebol. The World Cup is the global championship in soccer and this year it is being played in Brazil, which is the greatest soccer team in the history of the World Cup. The first game was just a little earlier today, Brazil beat Croatia 3-1.

The whole thing was once strange to me as well, but I have a friend, Charles Oelfke, the Honorary Brazilian Consulate in Arizona; he is also an American married to a Brazilian, and when I talked with him about this World Cup thing, he pulled out an article he wrote back in 1994; that was the year the US hosted the World Cup; that was also the year Brazil won its fourth championship.

Here’s what I learned from Charles’ Gringo’s-eye view of the World Cup Extravaganza. Because of my marital affiliation, I will be required to watch all games involving my adopted country every four years. It’s a cultural thing. I will be required to record every game. I will be required to call Brazil immediately after each game to discuss why, for example, a 0-0 tie was such an exciting, logical, tactical display, clearly proving Brazil’s world dominance in the sport. I will be required to replay each game at least 3 times that same night, then twice weekly for the next four years. And apparently it also involves turning the TV room into a green and yellow shrine to Brazilian futebol.

I still don’t really understand the game and the rules, but Charlie explained that there is a certain methodology of the 22 men in plastic shorts and long hair who run around like decapitated chickens for 90 minutes making life miserable for the goleiros (the goalkeepers) who wear oversized sticky gloves while flying horizontally through the air. The goleiros can’t win games, but they’re so often blamed for losing them that volunteers for this position on the team are scarce and they are often hired from other countries.

Next question: just how large is a soccer field? I’ve learned from experts (of which Brazil now has more than 200 million) that it’s… oh…maybe… uh 70 or 80 meters wide by about maybe…, 100 meters… uh.. maybe 110 meters long; something like that. The regulation probably reads “the dimensions of which depend upon space available.” You have to respect the degree of precision in the world’s most popular sport.

My own travels in Brazil reveal that futebol, at least on the amateur level, can be played on almost any stretch of open field, or a street without too much traffic, or the beach, or even on a volleyball court. The only requirement is a ball, or something that looks like a ball.

I asked about the 1994 World Cup, which was in the US but for some reason I have almost no personal recollection of it. It was supposed to be the games that introduced soccer to the US, and the US to World soccer; but mainly it proved that we weren’t quite ready, with the possible exception of our ability to grow and mow grass.

And then I asked about the actual final, the championship game from ’94. Charlie explained that back then he and his wife Josefa had been inviting friends to watch the TV broadcasts at their home, and this usually involved a lot of yelling and screaming and copious overeating (and I’m guessing quite a few cervezas and caipairinhas), but the numbers grew too fast, and they ran out of chairs for everybody, and they had to set up in a restaurant (a steak house, of course) for the final game. About 300 Brazilians showed up, and about 3 very foolhardy Italians; and there was a lot of cheering and dancing and singing. It’s a cultural thing, he explained.

And about that final game in 1994, he said: “It was Brazil’s destiny. Everyone agrees, Brazil was the best team and I believe that, but…” the final of 52 games, of an every four year event, the showcase, the championship of the world’s most popular sport, between two tri-champion teams, the most important athletic competition in the universe with billions of spectators around the world ended in a 0-0 tie. And after 30 minutes of overtime, still a 0-0 tie.

So then it was decided by penalties, a shoot-out, a lottery. Why not just give the goleiros a last cigarette, put a blindfold on them? And … 4 years of preparation and 52 games and it all came down to individual luck. The experts called it a great game, a real cliff hanger, and justified the Brazil win because Brazil had 22 shots on goal compared to Italy’s 8.  That’s like saying Michael Jordan had a great game because he shot 22 air balls. Still, it will go down in history as Brazil Campeao 3-2 over Italy. It was also the first championship to be decided by penalty kicks. Something that still upsets Charlie 20 years later.

Brazil is the undisputed greatest national team in the history of futebol. They have 5 championships; their closest rivals have 3. And this year, Brazil, the most futebol crazy country in the world, is the host country for the World Cup; and most of the experts are picking Brazil as the favorite to win a sixth championship. This would seem to be a perfect, futebol dream come true. Not so fast.

Many Brazilians are angry about how much was spent preparing for the Cup and how the country still struggled to be ready. Anger about broken promises and the ballooning cost of soccer venues contributed to widespread protests that drew over a million Brazilians into the streets last year. Detractors say the World Cup has done more harm than good by taking funds away from social programs and investment projects. The Brazilian government has spent an estimated $11 billion on the World Cup, while protesters say the money should have gone to low income housing, hospitals, better roads, and better schools.

And as the games start today, Brazil is ill-prepared, with many projects over budget and behind schedule. The government spent nearly $300 million for a stadium in Manaus, a city that doesn’t have a major league soccer team, and is deep in the jungle along the Amazon River. It’s expected that after the World Cup, the stadium will sit empty for the most part. Building materials were shipped in by boat because you can’t drive to Manaus.

And to add insult to injury, the ticket prices for most games will price average Brazilians out of the stadiums, and the profits from the games don’t go to Brazil, they go to FIFA. And part of FIFA’s deal is complete tax exemption on all profits. Toss in some charges of bribery and FIFA is being compared to the mafia.

Part of the preparations for the World Cup involved what is known as pacification plans for the favelas, the massive shantytowns that are home to tens of millions of the urban poor. The police move in and after they enforce order, they are supposed to upgrade hospitals and schools. So far, it has been a police invasion without the benefits.

Last year, Brazil hosted the Confederation Cup, a trial run for the World Cup; that led to riots, and protests that drew hundreds of thousands to the streets. The protests continued today, with subway workers on strike in Sao Paolo, and protest camps set up just out of sight from the stadiums.  Two days ago, Joseph Blatter, the President of FIFA, the international football association that arranges the World Cup, kicked things off in Sao Paulo. Brazilian celebrities including President Dilma Rousseff as well as the governor of the state of Sao Paulo and the mayor of the megacity stayed away from the event. They didn’t want a repeat of last year, when Blatter and Rousseff were booed off the stage. Blatter’s solo performance in Sao Paulo speaks volumes about the mood in the country. The World Cup may be a fiasco, but if Brazil loses the World Cup Championship it could be a disaster for the government.

Brazil is the 5^th largest country in the world; it has the 6^th largest economy; Sao Paulo and Rio de Janeiro are major cosmopolitan cities with massive favelas; it is the 17^th worst country when it comes to inequality. When millions live in poverty, and corruption is rampant, and basic public services are denied, a sports extravaganza seems inappropriate, even if it is futebol on Brazilian soil. And so they play. Maybe this is Brazil’s destiny.

Wednesday, June 04, 2014 - An Airtight Defense

Financial Review with Sinclair Noe

DOW + 15 = 16,737
SPX + 3 = 1927 (record close)
NAS + 17 = 4251
10 YR YLD + .01 = 2.60%
OIL - .27 = 102.39
GOLD – 1.30 = 1244.60
SILV - .01 = 18.90

Eight times a year the Federal Reserve gathers economic updates from the 12 districts and publishes the information about two weeks before its FOMC meetings. The data is published in a beige folder, and that is why it is called the Beige Book, although it might actually refer to the writing style. Anyway, economic activity expanded all across the country, with most districts reporting moderate or modest growth. Consumer spending expanded across almost all districts. Tourism was another bright spot and manufacturing activity expanded across the country. Home sales were described as “mixed across the country” even as home prices continue to rise. Labor markets were described as steady. Inflation was tame, with a slight exception for higher food prices in some areas.

In other words, when the Fed meets in a couple of weeks, there won’t be any big changes in monetary policy.

The Institute for Supply Management said its services index rose to 56.3%, its highest level since August, from 55.2% in April. That’s the number and they’re sticking with it.

The US trade deficit grew to $47 billion in April, up from $44 billion in March. Exports slowed in April, down slightly to $193 billion. Imports, meanwhile, surged by nearly $3 billion to $237 billion, mainly driven by increased spending in consumer goods and cars.

A new survey from the MacArthur Foundation finds 70% of Americans still feel a housing crisis remains today and the worst is yet to come; that’s down from 77% a year ago, but still it doesn’t look like there’s much confidence in a housing recovery. Half the respondents think housing represents a good long term investment, while 43% says that’s not the case; two-thirds say it’s harder to build wealth through home ownership than 20 or 30 years ago. Over half of Americans, 52%, have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years.

In line with the survey on housing, a new poll from CNN and ORC International finds 59% of adults think the American Dream has become impossible for most to achieve, up from 54% in a poll conducted in 2006. What’s more, 63% of those surveyed believe most children in the US will grow up to be worse off than their parents. While most Americans say they’re better off than the prior generation, they also feel gains in living standards are grinding to a halt. One problem is that the survey didn’t define exactly what the American Dream is supposed to be.

ADP, the payroll processing firm, issues a monthly payroll report ahead of the Labor Department each month. The ADP report is not always an accurate predictor of the government report but it is still closely watched for any hints. ADP says the economy added 179,000 private sector jobs in May; that’s significantly below the consensus estimate of 200,000 to 215,000 jobs for the Friday jobs report.

According to the latest revisions from the Labor Department, productivity in the first quarter declined at a 3.2% annual rate, the worst in six years, as workers spent more time on the job producing fewer goods during an unusually stormy weather.

A new research study published today from the Economic Policy Institute shows a sharp disconnect in the late 1970s between the overall productivity of the US economy and wage gains for the average worker. Normally, when workers make more things during a work day, they get paid more for that day’s work. From 1948 to 1979, both hourly wages and productivity roughly doubled. But from 1979 to 2013, productivity rose 65% while average hourly compensation rose just 8%; those at the bottom and middle of the income ladder saw little of those gains.

Wages for everyone at or below the 30th percentile of the income distribution have essentially been flat, while wages for the poorest 10% of workers have fallen during that time period. At all income levels, women earn less on average than men do.  Most wage growth has flowed to the top 1% of earners, posting a 153% increase in wages. Since wages for the lowest income group have fallen while wages at the highest income group have grown, income inequality has also increased.  Piketty was right.

The S&P 500 index hit another record high close today, and even at that it’s just up about 5% year to date. The best performing market year to date is in Dubai; posting a 56% return since the start of the year and posting a 117% return for the past 12 months. The strongest S&P 500 subsectors this year include oil & gas equipment and services, which is up 17%; oil & gas exploration and production, up 15%; real estate investment trusts, up 15%; natural gas utilities, up 21%; and electric utilities, which have risen 14%, largely on the back of some big mergers.

The top performing stocks in the S&P year to date include: Forest Labs, up 60%, a takeover target; Nabors Industries, a contract oil driller based in Bermuda is up 54% year to date; Electronic Arts, the video game developer is up 51%; Keurig Green Mountain has returned 50% this year, this is the coffee company that makes those little single serve containers of coffee; Newfield Exploration, an oil and gas exploration and development company out of Texas is up 49% since the start of the year; Delta Airlines is up 47% after rejoining the S&P 500 index; and Pepco, the Washington DC based utility is up 47% YTD, after agreeing to be acquired by Exelon. Probably nobody picked those stocks as the top performers at the start of the year.

After the close of trade today, comes word that Sprint is nearing an agreement price to acquire T-Mobile for about $40 a share, or around $32 billion, a 17% premium to the closing price today. There will be regulators to deal with. An announcement and an actual deal are still down the road. If you are unhappy with the service and price you pay for your mobile phone, this won’t help.

A federal appeals court has overturned a decision by Judge Jed Rakoff to reject a federal settlement deal with Citigroup. Judge Rakoff had considered the Citigroup-SEC settlement to be little more than a slap on the wrist. The original case accused Citigroup of duping investors into buying tainted CDO’s, Collateralized Debt Obligations. The bank agreed to pay $285 million to settle the civil fraud case, without admitting wrongdoing.

Judge Rakoff called the fine “pocket change” for the bank and said the settlement deprived the public “of ever knowing the truth in a matter of obvious public importance.” And now the court of appeals decision is going to rein in judicial discretion even more. The ruling essentially says that a judges job is not to search for the truth.  One small victory for Judge Rakoff: the SEC last year reversed its longstanding yet unofficial policy of allowing companies to neither “admit nor deny wrongdoing,” signaling that it would force admissions in particularly egregious cases.

If only the SEC had the backbone to pursue a particularly egregious case.

The G-7 or Group of 7 is meeting today and tomorrow; it used to be the G8 until Putin invaded Crimea, and so Russia was kicked out of the clubhouse. A draft of the G7 communique calls on Russia to "accelerate withdrawal of military forces from the eastern border with Ukraine" and "exercise its influence among armed separatists to lay down their weapons".

More important is how Europe will deal with energy security as the continent relies on Russia for about a third of its oil and gas, a fact that gives Putin considerable leverage over the EU. The G7 draft communique says: "The use of energy supplies as a means of political coercion or as a threat to security is unacceptable." Euro leaders say they are committed to diversifying energy sources away from Russia, but it won’t happen overnight. Complacency on the energy front seems like a really big mistake.

As the G7 meeting wraps up, the various leaders will head to France on Friday to mark the 70^th anniversary of the D-Day invasion at Normandy. Putin will be there. No negotiations or diplomatic level talks are planned but it should make for some interesting photo ops.

And before the D-Day anniversary there will be an uncomfortable dinner between President Obama and French President Hollande, who will make the case that the French bank, BNP Paribas should not be fined $10 billion for money laundering. Naturally, this has BNP clients nervous about what all this means for business, and the upper echelons of BNP management nervous about how their employees might respond to questions about money laundering.

Once upon a time BNP thought they could beat the rap. BNP showed prosecutors a memo that the bank thought would explain and possibly mitigate the conduct. The memo, drafted around 2004 by an outside law firm, essentially authorized the bank to process certain transactions for Sudan, as long as BNP’s employees in New York were not involved in the arrangement. BNP argued that it lacked the intent to commit a crime, saying that it followed the law firm’s directive. That legal argument, known as the “advice of counsel” defense, prompted prosecutors to pore over the single-page memo and weigh the bank’s argument. Ultimately the prosecutors concluded that the memo alleviated only a small fraction of the wrongdoing. Apparently hiring lawyers to tell you that you can do whatever you want turns out to be a little bit less than an airtight legal strategy.