Financial Review

Passable?

Sinclair Noe — November 9, 2017

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DOW – 101 = 23,462
SPX – 9 = 2584
NAS – 39 = 6750
RUT – 7 = 1473
10 Y + .01 = 2.33%
OIL + .28 = 57.09
GOLD + 3.60 = 1285.40

Cryptocurrency

Number of Currencies: 896

• Total Market Cap: $207,584,766,926
• 24H Volume: $7,033,013,883

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	7,284.4	$120.72B	$3.25B	46.27%	1	+2.26%	+1.71%
	Ethereum	ETH	319.08	$30.61B	$890.04M	12.66%	0.0444694	-0.14%	+10.62%
	Bitcoin Cash	BCH	654.88	$11.03B	$700.58M	9.96%	0.0913918	+0.90%	+9.01%
	Ripple	XRP	0.21539	$8.39B	$144.05M	2.05%	0.00003023	+1.55%	+7.10%
	Litecoin	LTC	65.100	$3.52B	$289.23M	4.11%	0.00910873	+0.76%	+19.87%
	Dash	DASH	324.80	$2.51B	$109.99M	1.56%	0.045418	+1.58%	+22.79%
	NEO	NEO	31.615	$2.06B	$78.55M	1.12%	0.00441338	-0.44%	+26.09%
	NEM	XEM	0.23474	$2.04B	$7.66M	0.11%	0.00003145	+4.24%	+32.08%
	Monero	XMR	117.79	$1.84B	$86.31M	1.23%	0.0166556	-0.18%	+41.71%
	IOTA	MIOTA	0.53201	$1.50B	$71.30M	1.01%	0.00007488	-0.47%	+46.60%

The Senate version of the Republican tax plan was supposed to be unveiled today. Morning came and went. No plan. Lunch passed without a plan. This afternoon, the Senate released an outline of their tax plan. It looks like the Senate tax cut plan would delay until 2019 a reduction in the corporate tax rate and fully repeal the federal income tax deduction for state and local taxes, two key differences with a House tax plan.

The Senate plan, like the House version, would cut the corporate tax rate to 20 percent from 35 percent, but would delay this by one year until 2019; it also grants a more generous system of deductions for smaller businesses.

The House bill would repeal a deduction on federal income tax that Americans can now take for state and local income and sales taxes, but keep the deduction for business owners. It would cap the deduction for state and local property tax paid at $10,000.

The Senate plan would repeal the state and local tax (SALT) deduction entirely – that one issue could be a big problem, especially for Republicans in high tax states. The Senate bill maintains the current seven tax brackets but adjusts the qualifying income levels and doubles the standard deduction for individuals, married couples and single parents. Senate rules dictate the tax bill can only increase the deficit by $1.5 trillion in the first 10 years and cannot affect it after that.

That rule has already posed a major math problem for Republicans in the House, who are unified in their goal to cut taxes across the board but have faced deep internal disagreement on how to offset those cuts with changes to deductions, loopholes, and credits elsewhere. It’s not clear how that debate will unfold in the Senate. What is clear – is that the tax cut plan has a math problem.

In addition to delaying the corporate tax cut and eliminating deductions for state and local taxes, the working Senate draft would: Keep the cap for home mortgage deductions at $1 million. The House bill lowered the cap to $500,000. Keep the adoption tax credit, which the House bill eliminated. Keep the medical expense deduction, which the House bill eliminated. Expand the child tax credit and creates a more refundable tax credit than the House bill did.

Both the Senate and House versions would eliminate the alternative minimum tax. The proposal does not touch current tax protections for 401(k) retirement investments. A repeal of the requirement under the Affordable Care Act, or Obamacare, that individual Americans obtain health insurance or pay a fine does not look like it will be included in the Senate plan. Again, it is still too early to give you many details, but again, the math doesn’t seem to work.

If the politicians cut in one place, they need to find the money from somewhere else. Where? Well, a 2018 budget blueprint approved by Congress late last month would reduce Medicare spending by $473 billion over 10 years compared with the current baseline projection, and proposes $1.3 trillion in cuts to Medicaid, various Affordable Care Act (ACA) tax credits and cost sharing subsidies and other health spending.

Republicans need the spending reductions to make room for $1.5 trillion in tax cuts, mostly for corporations and wealthy households. The budget plan does not include the specifics on how these cuts will be achieved. But previous Republican plans for Medicaid – the joint federal and state health insurance program for lower-income people and children – would have been disastrous for millions of older Americans.

The centerpiece of the House bill is to nearly halve the corporate tax rate, from 35 percent to 20 percent, at a 10-year cost of about $2 trillion. I’m not sure that qualifies as a middle-class tax cut. Gary Cohn, the White House Chief Economic Adviser said in late September that the wealthy are not getting a tax cut under the proposed GOP plan. In an interview with CNBC on Thursday, Cohn softened his position, saying that if the wealthy do get a tax break under the new plan, that’s totally fine with him.

The emphasis on corporate tax cuts is a political consideration that risks making the rest of the plan a political embarrassment. There may be some benefits for the middle-class, but any potential benefits are based on trickle-down theory. This summer, the GOP fumbled “repeal and replace” as a procession of reports from the Congressional Budget Office dramatized the effect of kicking 20 million people off health care, contributing to the bill’s ultimate failure.

With “tax cuts,” another procession of analyses from the University of Pennsylvania, the Tax Policy Center, and the Joint Committee on Taxation strongly suggest that the House plan would ultimately raise taxes on middle-class families with children, while cutting taxes dramatically for rich, lay about heirs.

In short – there is still a ton of work to make this tax cut mess passable, and the clock is ticking. If progress is not made, the equity market should either pause or correct until meaningful progress is made, or not. Earnings, growth, Fed policy and a few other issues are all important to Wall Street, but tax cuts are foremost. The Senate Finance Committee will hold its hearing on the bill next week. Senators are aiming to pass it out of committee before the Thanksgiving holiday.

The Dow Industrial Average was down as much as 250 points this morning before recovering to close down 101. That should serve as a reminder that equities aren’t a one-way trade higher. Investors are unusually jittery these days, in part because it seems that everyone is betting the same way. Just to clarify – jittery, not panicky.

Another market getting hit hard is corporate debt rated below investment grade, or junk bonds. BlackRock’s $18 billion iShares iBoxx High Yield Corporate Bond ETF fell to its lowest level since March as the number of shares traded rose to more than five times the daily average.

More broadly, investors are demanding an extra 3.9 percentage points in yields to own junk bonds rather than Treasuries, up from 3.56 percentage points just two weeks ago. The selloff came on the same day that Goldman Sachs analysts released a report noting that while U.S. aggregate credit quality has reversed deteriorating trends, “the picture under the hood remains challenging.”

Due to rising leverage in recent years, the say the “ability of U.S. non-financial corporations to withstand any potential negative shock remains greatly diminished.” Three of the biggest junk-rated borrowers, IHeartMedia, CenturyLink and Community Health Systems, posted disappointing earnings that sent their bonds plunging.

Morgan Stanley analysts note that the House GOP tax plan would limit interest deductibility, which means that high-yield borrowers could face a higher after-tax cost of interest.

Disney reported a 2.8 percent drop in quarterly revenue after the closing bell, weighed down by the lack of any major box office releases, sending the company’s shares down about 3 percent in extended trading. Disney is banking on a new Star Wars movie, “The Last Jedi” in December and a Han Solo movie in May, to drive people to theaters. But that’s far from the end of the money-making opportunities.

Disney has drawn big profits from the strengths of its TV channels, but that growth is challenged as more people dump cable subscriptions. As people turn to online replacements, Disney is hoping to lure them with a streaming service planned for 2019. “Star Wars” movies will be a big part of that.

Also after the closing bell, Nvidia reported third-quarter net income of $838 million, or $1.33 a share, up from 83 cents a share, in the year-ago period and beating estimates of 95 cents. Revenue was also up. In after-hours trade, shares were up, down, up again.

Roku soared 53 percent after the video streaming device maker’s quarterly results and guidance beat expectations.

Macy’s jumped 10 percent after the department store operator’s profit came in above expectations, even though same store sales continued to slide. Macy’s raised their guidance and saw better gross margin performance primarily due to tighter control of their inventory.

Nordstrom reported quarterly earnings that beat analysts’ expectations on Thursday, but revenue missed and same-store sales disappointed. Nordstrom family members recently put off efforts to take the retailer private until after the holiday season. Its performance over the next several months will be key to determining whether it can raise financing.  Nordstrom shares were up 4.5 percent.

Kohl’s surprised investors by reporting that comp sales increased 0.1% last quarter. That marked a solid improvement from the 1.5% decline it posted for the first half of fiscal 2017. Kohl’s also had lower margins and missed on earnings, but offered up rosy guidance. Shares inched higher.

This was a tough day for traders short the retail sector.

Dish Network rose 3.6 percent after the satellite and internet TV provider added subscribers in the United States in the third quarter and reduced the rate at which it lost existing customers.

This week Waymo announced driverless cars will soon be coming to Phoenix for testing on the streets. Turns out Las Vegas rolled out a driverless shuttle bus today. It is slow – top speed 15 miles per hour – first day on the road – an accident. The autonomous shuttle was clipped by a human-driven truck pulling out into the road.

The driverless vehicle detected the truck and stopped, but didn’t back up to avoid the collision. None of the shuttle passengers were reported to be injured. One of the passengers on the bus described the accident, saying: “The shuttle just stayed still. And we were like, it’s going to hit us, it’s going to hit us. And then it hit us.”

Financial Review

Double Dog Dare

Sinclair Noe — August 10, 2017

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

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DOW – 204 = 21,844
SPX – 35 = 2438
NAS – 135 = 6216
RUT – 24 = 1372
10 Y – .03 = 2.21%
OIL – 1.00 = 48.56
GOLD + 8.90 = 1286.80
BITCOIN – 0.11% = 3441.49 USD
ETHEREUM + 0.43% = 301.57

The S&P 500 declined 1.45 percent, the worst decline since May. The Nasdaq composite dropped 2.1 percent, with Apple, Alphabet, Amazon and Netflix all trading lower. It was a broad-based decline on Wall Street. The CBOE Volatility Index (VIX), a gauge of fear in the market, soared more than 40 percent to trade at 15.98. It also hit its highest level since May.

President Trump said North Korea would face “fire and fury” if it threatened the United States. North Korea dismissed the warnings as a “load of nonsense”, and outlined plans for a missile strike near the Pacific territory of Guam.

And today, Trump ratcheted up his rhetoric, saying his “fire and fury” comments may not have been tough enough, and North Korea should be “very, very nervous”. China is the largest trading partner with North Korea and China has called for dialogue to end the crisis but has otherwise been quiet.

China’s interests do not include a unified Korean Peninsula.  When it comes to assessing global geopolitics like the situation with North Korea, we don’t know how this will play out. It could be a brilliant bluff or it could be very dangerous bravado.

Here’s what we might see in the marketplace: stocks tend to react badly to the prospect of war but the exact reaction varies significantly, Treasuries generally move higher – pushing yields lower (The yield on the benchmark 10-year note touched 2.20 percent Thursday, its lowest level since June, although it is worth noting that junk bonds have taken a hit recently – and that may be separate from concerns about war; the cost of protecting high-yield bonds against default in the credit-default swap market has climbed to the highest since mid-July), oil and other commodities tend to jump ahead of a geopolitical event and sell off afterwards.

And of course, gold has started to shine again.

Pimco told investors to pare U.S. equities and junk bonds, but keep exposure to real assets, such as inflation-linked debt, commodities and gold. T. Rowe Price cut its stock allocation to the lowest level since 2000. Morgan Stanley strategists said investors should consider betting against U.S. junk-bonds as recent price weakness may be the beginning of a correction.

Geopolitical turmoil tends to drive volatility but not necessarily trends. In other words, the contrarian play usually works. Warren Buffett has described the strategy as “stay calm when all hell breaks loose.”

Meanwhile, it is a big distraction from other issues such as tax reform, the debt ceiling and healthcare – which you probably thought was a moot point by now. Senate Majority Leader Mitch McConnell is refusing to sign-up for an ambitious White House timeline on tax reform that calls for legislation to sail through by fall.

And he’s now engaged in an extraordinary war of words with the Trump White House. McConnell said he thought Trump “had excessive expectations about how quickly things happen in the democratic process …” This drew a sharp rebuke from Trump and his senior aide Dan Scavino.

The White House is going to need good will from McConnell on tax reform. And they’ve already blown through the initial, absurd, August deadline. Increasing pressure and publicly ripping McConnell is going to make tax reform and the rest of Trump’s agenda even harder to pass.

Meanwhile, there is a very real deadline for a deal on the debt ceiling. Mark your calendar. You can see this one coming: The government will run out of cash on Sept. 29 and cannot borrow more money unless Congress raises the debt ceiling.

This is a perennial crisis, and markets have a well-rehearsed pattern of worry followed by relief. Lawmakers are on recess until Sept. 5, and they plan to take a week off in September. So that leaves 12 working days for Congress to raise the borrowing limit. It’s difficult to give Congress the benefit of the doubt on getting this done.

The White House is usually focused on this priority, but in the wake of the health-care defeat in the Senate, White House budget director Mick Mulvaney initially said that Congress should hold off on all other issues, including the debt ceiling, until it went back to health care. He later changed his position and said Congress should raise the debt ceiling.

McConnell and House Speaker Paul Ryan will push for a clean debt ceiling increase, but some number of more conservative members will vote against that, meaning Democrats will need to provide votes to ensure a successful vote. But it’s not clear what conditions Democrats will demand in exchange for their votes.

Senate Minority Leader Chuck Schumer said earlier this summer that Democratic votes may be hard to come by if Republicans insist on passing a large tax cut for the wealthy. And the White House is pushing for funding for a border wall with Mexico to be included in a debt bill, in exchange for lifting spending caps.

PredictIt has become the go-to prediction market for observing U.S. political events. PredictIt offers weekly debt ceiling markets through the end of October, and at the time of this writing, its participants give less than a 5 percent chance of the debt ceiling being raised by Sept. 15, and less than a 15 percent chance of it being raised by Sept. 22.

If the Trump administration’s Sept. 29 estimate is right, then we could be looking at another tense period for markets like we had in the summer of 2011, when the debt ceiling standoff caused Standard and Poor’s to lower the U.S. credit rating.

Of course, it’s possible the real deadline will be a week earlier or a couple weeks later, given volatility in tax receipts. So, if you mark your calendar, be sure to use a pencil.

Also, today, Trump declared the opioid epidemic a national emergency and said his administration was drafting papers to make it official – this comes about a week after a White House commission on the opioid crisis led by New Jersey Governor Chris Christie recommended the president declare it a national emergency.

The declaration could help unlock more support and resources to address the drug overdose epidemic, such as additional funding and expanded access to various forms of treatment, and it gives the government more flexibility in waiving rules and restrictions to expedite action.

National emergencies are typically declared for short-term crises, such as the Zika virus outbreak or a natural disaster. It is unclear what Trump’s declaration will mean for a complex, long-term public health problem.

Producer prices fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate hike. The Labor Department said its producer price index for final demand slipped 0.1 percent last month, weighed by decreasing costs for services. That was the largest decline since August 2016 and reversed June’s 0.1 percent gain.

In the 12 months through July, the PPI increased 1.9 percent after rising 2.0 percent in the year through June. Core PPI, which excludes food, energy and trade services was unchanged last month. The core PPI increased 1.9 percent in the 12 months through July.

Shares of retailers Macy’s and Kohl’s declined after quarterly results failed to assure investors that a comeback was taking hold. Same-store sales dropped 2.5 percent at Macy’s and 0.4 percent at Kohl’s. Dillard’s sank as much as 16 percent to $61.50 after posting a surprise loss in its second quarter.

Lots of people like to talk these days about how the retail industry is undergoing a structural shift due to changes in how consumers like to shop. But weakness in the retail sector is probably being impacted by consumer debt as well.

Household debt outstanding — everything from mortgages to credit cards to car loans — reached $12.7 trillion in the first quarter. Household net worth stands at a record $94.8 trillion, thanks to rebounding home values and soaring stock portfolios. But that increase has primarily benefited the nation’s wealthiest.

For most Americans, whose median household income, adjusted for inflation, is lower than it was at its peak in 1999, borrowing has been the answer to maintaining their standard of living. The average family of four is living paycheck to paycheck.

And just when you think you’ve got it all figured out. Nordstrom reported second-quarter earnings and sales that topped analysts’ expectations, sending shares of the stock higher after market close. Same-store sales were also positive, a rare outcome among department stores of late. Nordstrom said its results this period was fueled by more customers ringing up purchases online.

Nordstrom’s stock was last climbing more than 3 percent higher in after-hours trading on the news.

Graphics chipmaker Nvidia saw its stock fall more than 7 percent after it reported stronger-than-expected earnings for the second quarter. Earnings came in at $1.01 per share, topping estimates of 70 cents. Revenue was up 56 percent year over year and beat estimates. They raised guidance slightly.

A new international report has confirmed that 2016 was the hottest year for the planet in 137 years of record keeping. It was the third year in a row to break the record. The report was released by the American Meteorological Society.

Almost 500 scientists from more than 60 countries participated in the project. Global sea surface temperatures reached a new record high, and Arctic sea ice extent at the end of its annual growth season was at its lowest maximum level in the nearly 40 years of satellite records.

Every month, at least 12 percent of land surfaces were in severe drought conditions or worse — a record long stretch.

Financial Review

Until After the Fact

Sinclair Noe — January 25, 2016

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

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DOW -208 = 15,885
SPX – 29 = 1877
NAS –  72 = 4518
10 Y – .03 = 2.02%
OIL -2.36 = 19.83
GOLD + 11.90 = 1108.90

Stocks in Asia rallied overnight, with the Topix index in Tokyo increasing 1.3 percent, China’s Shanghai Composite Index rising 0.8 percent and the MSCI Asia Pacific Index adding 1.2 percent. Despite gaining in early trading, shares in Europe turned lower. US stocks were down all day, but the selling got worse into the close.

Oil gave up some of its recent gains after Saudi Arabia said it is keeping up investments in energy products and data from China showed that diesel consumption dropped for a fourth consecutive month. Also, Iraq’s oil ministry told Reuters that the country had record output in December, producing as much as 4.13 million barrels a day. A senior Iraqi oil official said separately the country may raise output even further this year. After posting a 21% gain in just 3 days last week, West Texas Intermediate closed down 7.3%.

Following the lifting of economic sanctions and the release of billions of dollars’ worth of frozen Iranian assets, Tehran is ready for business: The country just struck a provisional deal to buy eight A380 superjumbos, while an agreement for 100 more planes from Airbus and Boeing could be completed this week. Over the weekend, China and Iran also mapped out a plan to broaden relations and expand bilateral trade up to $600 billion over the next decade.

Market-based expectations point to a 96 percent chance of the Federal Reserve maintaining rates unchanged at its meeting on Wednesday. In other words, there is also most zero chance of a rate hike, because the Fed knows they can’t surprise the markets right now.

The April FOMC meeting still has about a 30% chance of a rate hike. Investors will be scouring the statement released afterward for hints that the Fed is backing away from its base case of four quarter percentage-point rate increases in 2016.  Roughly $2.5 trillion of stock market value wiped out in the past three weeks could throw the Fed off its course of gradual interest rate hikes.

The dollar has appreciated by some 2 percent since the central bank last met on Dec. 16. Coming on top of a 11 percent increase in the year prior, the latest advance will curb already slowing economic growth and put downward pressure on an inflation rate that the Fed judges is too low as it is. The Fed doesn’t want to appear to kowtow to the markets, so look for the statement to mention something about how the Fed remains “data dependent”.

One year ago, analysts at Bank of America Merrill Lynch drew a parallel between the subprime mortgage crash and the drop in oil prices. Fast-forward to today and the analysts provide an update to their previous thesis. Here’s what they say:

“The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages and, ultimately, the U.S. housing market. The ABX history suggests that oil will see more declines in the next couple of months and find a floor somewhere in the low 20s in the March-April time frame.

Both the duration of the decline (1.5+ years) and the scale of the decline are similar. Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective “bubble” bursting patterns are so similar.

“Consider how things tend to work. Denial on what constitutes fair value is a big component of bubbles, on the part of both market participants and policymakers. When perceived “bubbles” burst, markets take their time in steadily shredding views of the perception of fundamental value, as prices move lower and lower. Along the way, many will cite “technical factors” as the cause of the decline, which in some way suggests the price decline may not be real when in fact it is all too real.

In the end, the technicals drive the fundamentals, as credit flees and borrowers go bust, and a feedback loop lower kicks in. Lower prices beget accelerated selling, as asset owners need to raise cash. It could be margin calls or it could be producer selling needs, it doesn’t really matter: the selling becomes inevitable and turns into forced selling.”

The point here is not that oil is necessarily the new subprime per se but that the recent action in the price of crude resembles nothing if not the bursting of a bubble and the sudden realization that the asset has been overvalued for too long.

Meanwhile, the economists at Moody’s Capital Markets Research weigh in; they say, if you want to know where equities are going, look at junk bonds. Specifically, look at the spread in yield between junk bonds and Treasuries. That spread has been widening sharply. And look at the Expected Default Frequency (EDF), a measure of the probability that a company will default over the next 12 months. It has been soaring.

Moody’s Expected Default Frequency began spiking last summer and has nearly doubled since then to 8%, the highest since 2009. The average spread between high-yield bonds and Treasuries has widened to 813 basis points (8.13 percentage points). But at the lower end of the junk-bond spectrum (rated CCC and below), the yield spread is a red-hot 18.4 percentage points.

Here’s why the spread matters: A wider-than 800 basis-point high-yield spread reflects elevated risk aversion that will reduce capital formation and spending by non-investment-grade businesses. In addition, ultra-wide bond yield spreads favor a continuation of equity market volatility that should sap the confidence of businesses and consumers. How bad is it? That’s the scary part, they say we won’t know until after the fact.

California Insurance Commissioner Dave Jones is urging insurers to voluntarily divest from thermal coal, citing the risks of climate change and the danger of losses on assets backing policyholder obligations. California is the sixth-largest insurance marketplace in the world, and this is the first time a state insurance regulator has called for the divestment of such assets. The commissioner is also requiring insurers to annually disclose their carbon-based investments, including holdings in oil, gas and coal.

McDonald’s reported fourth-quarter profit and sales that beat expectations.  US same store sales were up 5.7% in the fourth quarter. Same-store sales across all regions rose 5% from a year earlier. The big reason for the turnaround is that customers are eating up the all-day breakfast menu.

Halliburton reported a fourth-quarter net loss of $28 million, or 3 cents a share, compared with $901 million, or $1.06 share a year earlier. Halliburton also said it expanded its list of assets to sell as it tries to convince antitrust authorities around the world that its purchase of rival Baker Hughes won’t impede competition. The cash and stock deal was valued at $34.6 billion when it was announced near the end of 2014, just as oil prices had begun their downward spiral. Shares of both companies have dropped more than 30 percent since then.

This week’s quarterly earnings announcements will include results from three of the tech sector’s most important companies: Apple reports on Tuesday, Microsoft and Amazon report on Thursday.

Alphabet has agreed to pay $185 million in a back-tax settlement with U.K. authorities, setting off a hostile response from opposition politicians questioning the government’s handling of the case. According to a panel in 2013, Google paid just $16 million in U.K. corporate tax from 2006 to 2011 on $18 billion of revenue. Separately, Apple is facing a European tax investigation that could force the iPhone maker to pay more than $8 billion in back taxes.

Johnson Controls and Tyco International have announced plans to merge, in a deal that values the combined company at $40 billion. Both firms have recently fallen on hard times – Johnson has dropped more than 20% over the past year, while Tyco is down more than 25%. The new company will change its headquarters to Ireland for tax purposes.  Tyco was one of the first big U.S. industrial companies in seeking tax relief by moving its legal residence offshore. The company moved its headquarters to Bermuda from New Hampshire in 2007, then to Switzerland in 2009, and to Ireland in 2014.

Siemens has agreed to buy CD-adapco, a privately held U.S. engineering software firm, for close to $1B in cash. The acquisition comes ahead of Siemens’ annual shareholders meeting on Tuesday.

Twitter CEO Jack Dorsey tweeted late Sunday night that 4 senior Twitter executives are leaving the media company, the biggest leadership changes since Dorsey returned as chief executive as he struggles to revive the company’s growth. Twitter’s stock has fallen nearly 50 percent since Dorsey’s return last year and is now trading below its IPO price.

U.S. health inspectors have found serious deficiencies at Theranos’ northern California laboratory that, if not fixed, could see the lab suspended from the Medicare program. Regulators did not detail the problems, but results of the inspection are expected to be made public soon. The findings could also lead Walgreens to take an even harder look at what remains of its partnership with Theranos.

Takata shares tumbled 10% in Tokyo overnight, hitting their lowest level since 2009, after U.S. regulators said recalls involving the company’s air bags would expand by around 5 million vehicles. Takata executives are also meeting automakers this week to discuss the company’s financial condition, including how to split recall-related costs that could climb into the billions of dollars.

Financial Review

Might Sound Crazy

Sinclair Noe — January 22, 2016

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

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DOW + 210 = 16,093
SPX + 37 = 1906
NAS + 119 = 4591
10 Y + .03 =  2.05%
OIL + 2.57 = 32.10
GOLD – 3.60 = 1098.80

Stock markets all over the world are in rally mode. European shares enjoyed the biggest two-day rally since 2011, while the euro approached a two-week low on the European Central Bank’s signal that it may bolster economic support as soon as March.

Asian stocks climbed the most since September on speculation Japan and China may also take steps to calm markets.  Japan’s Nikkei (+5.9%) paced the gains in Asia as it posted its biggest gain in 4 1/2 months. The Hang Seng in Hong Kong gained 3.5%, and the Shanghai in China was up 1.25%.

In Europe, France’s CAC (+3.1%) leads the charge. The Stoxx Europe 600 Index rose 3.1 percent, rallying 5.1 percent in two days.

The Dow posted its first weekly gain in a month; not much, just 105 points, or 0.6%. After dropping earlier this week to 2014 lows, the S&P 500 has recovered in the past two sessions to end the week 1.4-percent higher. But the index is still down 7 percent in 2016 and remains at levels touched last August.

The 2016 Treasuries rally slowed this week on concern yields that fell to within about half a percentage point from a record low made the market too expensive. Treasuries posted their first decline in three weeks. The likelihood of more Fed rate hikes took a hit yesterday after the European Central Bank indicated it may provide more economic stimulation at its next policy meeting in March.

The probability the Fed will increase its benchmark by its April meeting has dropped to about 32 percent, down from 56 percent at the end of last year. The central bank’s Open Market Committee is set to announce its next rate decision on Jan. 27.

Oil’s in a bull market. I know that sounds crazy, but check the numbers. West Texas Intermediate crude oil is back above $32 a barrel after today’s gain of more than 8%. Oil has staged a tremendous rally off Wednesday’s low of $26.19 climbing to $32.10 a barrel today; that’s a 21% gain, and the definition of a bull market is a 20% gain.

It certainly doesn’t feel like a bull market, and typically it takes more than 3 sessions to establish a bull market. And while it is possible that Wednesday marked the low price for oil, the rally feels more like speculators have jumped in, trying to time a low or covering short positions.

The rally has been too fast for the oil companies to catch up with the commodity. Over 99% of 559 oil and gas companies are in a bear market. Furthermore, one-third of those companies have fallen over 90% from their highs, which is an indicator of potential bankruptcy issues.

Earlier this week the American Petroleum Institute and the Energy Information Administration both reported inventories of crude oil increased by more than 4 million barrels over the past week. It seems counter-intuitive; more supply, no increase in demand, and the price moved higher this past week. The problem is that many of the US oil producers are adding supply even though they aren’t making money.

Oil drilling is a capital-intensive business. Many of the newer producers issued debt to fund operations, and now they are forced to keep pumping, even at a loss, in order to service the debt. Standard & Poor’s estimates that 50% of energy junk bonds are “distressed,” meaning they are at risk of default. Unless prices change soon, many are just postponing the inevitable.

Since the beginning of 2015, 42 oil companies have gone bankrupt and the ones that haven’t are feeling enough financial stress to slash spending and cut tens of thousands of jobs. And if we start seeing even more defaults, that will impact the banks.

In the past week, we saw the earnings reports from the big banks. Wells Fargo lost $90 million from its portfolio of oil and gas. JPMorgan nearly doubled its loss provisions in the fourth quarter, an extra $124 million, mostly due to bad energy loans, with a warning that reserves might need to be increased to $750 million. Citigroup set aside reserves of $300 million for bad energy loans, and they are bracing for losses up to $600 million in the first half of 2016; if prices hold around $25 a barrel, they reckon they will need to set aside $1.2 billion.

It doesn’t seem far-fetched that banks might want to prop up oil prices. Or, as JPMorgan CEO Jamie Dimon recently said, “To the extent we can responsibly support clients, we’re going to. And if we lose a little bit more money because of it, so be it.”

Now, here’s where it gets interesting for you. Since the beginning of December, the price of oil has mirrored the S&P 500. When oil goes down, the S&P 500 index drops; when oil goes up, stocks move higher in lockstep. This is not the norm. Typically, there is an inverse relationship; when oil goes higher, stocks tend to fall because businesses face higher energy costs which cut into the bottom line; when oil drops, businesses get a break on margins.

In the past, higher oil has acted as a drag on the economy. Look at any recession over the past 60 years and it was preceded by, or coincided with higher oil prices. So, what we are seeing now, with oil and stocks moving in lockstep, is an anomaly. Now, here is a further disconnect; demand for oil is still growing; yes, it has slowed, but it is still growing. One of the things the market is really good at is reversion to the mean.

The National Association of Realtors reports purchases of previously owned U.S. homes rose more than projected in December, helped in part by warmer weather and wrapping up the best year since 2006. Contract closings jumped 14.7 percent, the most on record, to a 5.46 million annualized rate, and for all of 2015, sales climbed to 5.26 million from 4.94 million.

The median price of an existing home rose 7.6 percent from December 2014 to reach $224,100. The number of previously owned homes on the market dropped to 1.79 million last month. At the current sales pace, it would take 3.9 months to sell those houses, the lowest since January 2005 and down from 5.1 months at the end of the prior month. Less than a five months’ supply is considered a tight market.

Now, the big question to start the year is whether low oil prices will drag the stock market down or subsequently if a falling stock market will drag the economy into recession. As I said earlier, low oil prices are an aftermath of recession, not a predictor. And when we look at existing home sales, this is another indicator of a strong economy.

Any discussion of the business cycle should pay close attention to consumer spending, and not just how many people are going to the local mall, but rather the big ticket items, such as automobiles, which just finished a record year for sales, and even more important, private investment in residential real estate.

Residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment lags the business cycle. Usually residential investment would turn down before a recession, and that isn’t happening right now. Instead residential investment is starting to increase.

A massive winter storm is barreling toward Washington D.C., with the system poised to drop near-record snowfall on the U.S. capital before walloping other cities with blizzard conditions. The National Weather Service described the storm as “potentially crippling” for a swath of the Northeast, with snowfall exceeding two feet in many metro areas.

We are already seeing snow and ice in North Carolina, and power outages in Charlotte. Airlines preemptively canceled more than 4,500 flights before the first snowflakes had even fallen, and now it looks like 6,000 cancelled flights for the weekend.

General Electric reported fourth-quarter before the opening bell. GE posted net earnings per share of $0.64 on revenues of $33.9 billion. In the same period a year ago, GE reported EPS of $0.56 on revenues of $42.0 billion.  A big beat on both earnings and revenue.

Apple is no longer the world’s largest public company, when defined by enterprise value, which includes debt and subtracts cash to give a more complete picture of a firm’s worth. Alphabet overtook Apple in December and is now valued at $420 billion compared with Apple’s $393 billion. Measured by market cap, Apple still remains bigger, at $560 billion versus Alphabet’s $498 billion. Meanwhile, Tim Cook made a surprise visit to Brussels yesterday, as EU regulators close in on a final decision about the company’s Irish tax deals.

Amazon is stepping up its investment plans across Europe this year, seeking to develop its digital media, grocery delivery and cloud businesses. Amazon hired a record 10,000 people across Europe in 2015 – taking its workforce above 41,000.

Regulators have temporarily banned health insurer Cigna from offering certain Medicare plans to new patients after a probe uncovered issues with current offerings. The insurer disclosed late Thursday in a public filing that the Centers for Medicare and Medicaid Services (CMS), had suspended the company from enrolling new customers or marketing plans for Cigna Medicare Advantage and Standalone Prescription Drug Plan Contracts. The sanctions, which took effect at the end of the day Thursday, do not affect patients who are already enrolled.

Automakers recalled a record 51.26 million vehicles in the United States last year. According to the NHTSA, that figure topped the 50.99 million vehicles called back in 2014, meaning that the recalls in each of the past two years surpassed any annual total logged by federal regulators in nearly five decades.

It's A Sea Of Red All Over The World As Markets Drop

Financial Review

Been to the Mountaintop

Sinclair Noe — January 15, 2016

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

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DOW – 390 = 15,988
SPX – 41 = 1880
NAS – 126 = 4488
10 Y – .07 = 2.03%
OIL – 1.52 = 29.68
GOLD + 10.30 = 1089.80

Let’s start with the good news: US stock and bond markets are closed Monday for the Martin Luther King Jr. holiday.

For the day the Dow dropped 2.4%, the S&P 500 dropped 2.1%, and the Nasdaq lost 2.75%. And even though it was a volatile week, almost all of the damage for the week came in today’s session. The Dow Industrials did take out the September lows but not the August lows of 15,370.

The Nasdaq composite knocked out the closing low from August but not the intra-day August low.

The S&P 500 hit an intra-day low of 1857, dropping below the August 24^th low of 1867. So we should wait for confirmation of a close below 1867 – at which point we have wiped out any reasonable support.

The Russell 2000 small-cap index dropped as much as 3.5 percent to its lowest level since July 2013.

The major S&P sectors all ended sharply lower. The energy sector dropped 2.87 percent as oil prices fell but the tech sector was the big loser, down 3.1%, with Intel down 9% following a weak earnings report after the close yesterday.

It’s a sea of red all over the world. China is in a bear market. China’s Shanghai Composite tumbled 3.6% on Friday. The country’s “National Team” was reportedly active but unable to stem the slide, even after injecting over $15 billion of funds into the market. Selling since the December 22 peak has dropped the index 20%, to levels last seen in December 2014.

The Euro Stoxx 600 tumbled 3 percent, and is now down 20% from its April high. The Euro Stoxx 50 Index of the region’s large caps also entered a bear market last week. The price of bearish contracts on the Euro Stoxx 50 Index rose to the highest since September versus that of options betting on a rebound.

Stocks worldwide have lost more than $14 trillion, or 20 percent, in value from a record last June. $14 trillion is a mountain of money. It took 2 years to add $14 trillion in value and 7 months to lose it. A long time to climb the mountain, and just a few moments to fall.

Crude futures are in the $20s, with the prospect of additional Iranian supply on expectations that Western sanctions will be lifted within days. China’s Sinopec has also purchased its first ever batch of U.S. oil for export, a landmark transaction after the ending of a four-decade ban on domestic exports. West Texas Intermediate is down 1.52 at 29.68, (- 4.8%), after hitting an intra-day low of $29.28.

The risk premium on a gauge tied to US junk-rated companies surged to the highest level since November 2012. The spread between junk rated energy debt and treasuries is at 16%, the widest spread ever. That means that if prices stay at these levels or get worse, we are almost certain to see more defaults in the oil patch. High yield is selling off, emerging-market debt is selling off, and investment-grade bonds are selling off.

Lipper reports investors pulled $2.1 billion from U.S. high-yield funds this past week after withdrawing $809 billion the week earlier. Yields on 10-year Treasury notes fell under 2 percent for the first time since October, while the dollar extended its longest rally since July. Gold surged with the yen on haven demand.

Now, consider that about 27% of the junk debt brought to market in 2014 came from oil companies, many of them riding the shale fracking boom. Then consider that Matthew Mish, global credit strategist at UBS, published a report Wednesday saying that most high-yield issuers’ business models “don’t work with oil in the $20-$40 range.” In this environment, even energy bonds that are trading at distressed levels, 20 cents to 30 cents on the dollar, could be worth “close to zero in reorganization.” For investors, another cause for worry is the relatively low levels of cash currently held by high-yield mutual funds to meet redemptions, on average less than 5% in cash reserves.

Wholesale prices in the US declined in December from the prior month, showing inflation is still well-contained as Federal Reserve officials weigh further increases in the benchmark interest rate. The producer-price index dropped 0.2 percent following a 0.3 percent gain in November. Over the past 12 months, wholesale prices fell 1 percent. The PPI excluding volatile food and fuel prices climbed 0.1 percent from the prior month.

For astute listeners, you might wonder why the consumer price index, or prices at the retail level grew by 0.5% over the past 12 months, while the PPI declined by 1%. The biggest reason is housing costs are included in the CPI, not the PPI. Yep, the rent is too damn high.

Industrial production fell 0.4% in December, the third straight monthly decline, led by cutbacks in utilities and mining (which includes the oil patch). Power plants had more slack in December than any time on record, and the reason is simple, it was the warmest December on record, 6 degrees Fahrenheit above average.

Business inventories fell 0.2% in November, as department stores and companies that sell building materials cut down on their restocking. Business sales also fell 0.2% in November after a 0.3% drop in October. Manufacturers and wholesalers posted sales declines in both months.

Sales at US retailers declined 0.1% in December to wrap the weakest year since 2009, raising concern about the momentum in consumer spending heading into 2016. For all of 2015, purchases climbed 2.1 percent, the smallest advance of the current economic expansion.

Wal-Mart plans to close 269 stores, including its experimental small-format Express outlets, in a push to streamline the chain that will eliminate 16,000 jobs. The move affects 154 locations in the US, plus 60 stores in Brazil.

General Electric agreed to sell its home-appliances business to China’s Haier for $5.4 billion after cancelling a $3.3 billion a deal with Electrolux last month, due to objections from US antitrust regulators. Haier, one of several bidders in the latest round, paid 10 times the division’s earnings over the last year. Louisville will still remain the headquarters for GE Appliances.

BHP Billiton will write down the value of its U.S. shale assets by $7.2 billion, cementing expectations it will be forced to cut its dividend for the first time in over 25 years. The company has also seen prices for its most important product, iron ore, collapse in the last few months due to the economic slowdown in China.

BHP, like many of its biggest competitors, has refused to rein in production. To make matters worse, the company is facing huge legal bills after a dam holding back waste water from a mine in Brazil that it jointly owns burst in December, causing a lethal flood and a trail of pollution hundreds of miles long. The Brazilian government has provisionally estimated the damage from that at $5.2 billion. BHP – 1.49 = 20.19

Citigroup is reporting fourth-quarter profit jumped as legal costs fell and revenue rose. Citi posted a profit of $3.3 billion, or $1.02 per share. That compares with the $344 million, or 6 cents per share, it reported in the same period of 2014. The 2014 numbers were hurt by legal problems at the Mexico subsidiary Banamex, a big mortgage-securities settlement with the Justice Department, and a failed stress test. Revenue edged up 3%, to $18.4 billion from $17.9 billion a year ago. Earnings were a penny better than estimates. Citigroup, once the largest US bank, has now slipped to the fourth largest, just behind number 3 Wells Fargo. C – 2.91 = 42.47

Wells Fargo’s fourth-quarter profit was flat compared with the year-ago period. Wells Fargo reported a profit of $5.7 billion, or $1.03 a share. That compares with $5.7 billion, or $1.02 a share, in the same period of 2014. Profit beat estimates, revenue missed. Last year, Wells Fargo acquired GE’s finance arm, including its commercial banking business; that also included commercial loans to energy companies. WFC – 1.82 = 48.82

Goldman Sachs has entered an agreement in principle to resolve investigations by a number of authorities relating to sales of faulty mortgages between 2005 and 2007, and deceiving investors about the quality of residential mortgage bonds they were peddling. Under the terms of the agreement, the bank will pay a total of $5.1 billion. The deal will also cut Goldman’s Q4 after-tax earnings by about $1.5 billion, which will pretty much wipe out Goldman’s earnings for the quarter.

Now, let’s dig deeper: out of that $5.1 billion, about $1.8 billion will be in the form of consumer relief, meaning they don’t really pay it, they just adjust some accounts to stop the rip-off. Then Goldman will have $2.4 billion in penalties, and $875 million in cash.

The bank has said that it securitized about $125 billion of home loans between 2005 and 2008, of which about $23 billion eventually soured. The penalty represents about 10 percent of investors’ losses. Goldman can deduct the rest of the settlement, about $2.7 billion, from its future tax bills. Goldman Sachs did not admit wrongdoing. GS – 5.78 = 155.61

Financial Review

Because it’s Friday

Sinclair Noe — August 14, 2015

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DOW + 69 = 17,477
SPX + 8 = 2091
NAS + 14 = 5048
10 YR YLD + .01 = 2.20%
OIL – .10 = 42.13
GOLD + .10 = 1115.80
SILV – .18 = 15.34

For the week, the Dow rose 0.6 percent, the S&P 500 added 0.7 percent and the Nasdaq gained 0.1 percent.

Wholesale prices climbed at a slower pace in July, as energy prices dropped. The 0.2 percent increase in the producer-price index followed a 0.4 percent gain in June. Even with the recent increases, producer prices dropped 0.8 percent over the past 12 months. Wholesale prices excluding food and energy rose 0.3 percent for a second month, and those costs were up 0.6 percent from July 2014.

Industrial production climbed 0.6% in July; there were also upward revisions of 0.1% each in February, May and June. Capacity utilization for the industrial sector increased 0.3 percentage point to 78%. The auto sector posted a 10.6% surge in production.

Looking to capitalize on rising demand, General Motors has increased its rate of production on larger trucks and SUVs, and added Saturday overtime shifts at a Texas plant. The move could see 48,000 to 60,000 additional vehicles for the 2016 model year. Make hay while the sun shines.

The University of Michigan’s consumer sentiment index edged slightly lower to a reading of 92.9 in August from 93.1 in July.

Secretary of State John Kerry is in Havana, where he helped raise the flag over the US embassy in Cuba for the first time in 54 years. The flag was raised by three men who as US Marines lowered it when the US embassy closed 54 years ago.

The Eurozone’s economic recovery unexpectedly slowed in the second quarter, as expansion in its three largest economies fell short of estimates. First quarter gross domestic product in the 19-nation region rose 0.3%, which was just short of estimates. On an annualized rate, the Eurozone grew at a 1.3% pace. For the quarter Germany’s economy grew 0.4%, Italy’s 0.2%, while France stagnated. With oil prices sharply lower, the euro at multiyear lows and the European Central Bank on a $1.3 trillion bond-buying spree to keep market interest rates low, there were hopes that the Eurozone had turned a corner after years of crisis. You can’t really blame the weakness on Greece. The Greek economy grew 3.1 percent, from only 0.1 percent at the beginning of the year. They are not out of the woods just yet.

Greek legislators have approved a new €86 billion-euro bailout agreement, which is said to include sweeping economic reforms and budget cuts mandated by the country’s creditors. The deal is expected to be cleared by Eurozone finance ministers today, but may face a harder challenge when Germany votes on it next week.

Ukraine and a group of its largest creditors have agreed to continue debt discussions after holding two days of negotiations in San Francisco.

The yuan halted a three-day slide after China’s central bank raised its reference rate for the first time since Tuesday’s devaluation and said it will intervene to prevent excessive swings.

Fifteen US states, led by coal-producing West Virginia, are seeking a stay order, or injunction, against President Obama’s Clean Power Plan, which calls for power plants to cut carbon emissions 32% (from 2005 levels) by 2030.

Earnings season marches on. JC Penney posted a smaller than expected second-quarter loss.

Nordstrom reported a better than expected second-quarter profit.

Chip equipment maker Applied Materials fell short of Wall Street expectation on both profit and revenue.

Restaurant chain El Pollo Loco missed Wall Street estimates on revenue for the quarter and same-store sales.

King Digital Entertainment posted a sharp slowdown in sales and bookings.

Aflac is increasing its stock repurchase program by 40 million shares, or about $2.5 billion.

Tesla Motors has boosted its stock offering to about 2.7 million shares, hoping to raise more than $640 million as it prepares to start selling its Model X sport-utility vehicle.

Nelson Peltz’s Trian Partners has taken a more than 7 percent stake in the food service company Sysco, worth around $1.6 billion, or about 42 million shares.

German prosecutors charged seven current and one former Deutsche Bank employees over a scheme to help the lender and clients evade taxes on carbon-emissions trades. The bankers are charged with being part of a group that tricked the authorities about value-added tax refunds on carbon-emissions trading in 2009 and 2010. If it’s not one thing it’s another; Bloomberg calculates Deutsche Bank’s bill for fines and legal settlements surpassed 11 billion euros in the second quarter.

The company said last month that the cost of litigation will “remain a burden in the coming quarters.” The lender has yet to resolve investigations into its role in attempts to manipulate foreign exchange markets as well as a probe of whether it broke US laws on processing payments for countries subject to trade sanctions. It also faces lawsuits that claim the company didn’t make adequate disclosures about US mortgage-backed securities. The bank said last month that it is cooperating with regulators in these matters.

After previously aiming for a fall launch, Apple is now looking to bring its Web TV service to market in 2016. The delay is blamed on slow-moving licensing talks with TV networks and the need for capacity upgrades. Sources suggest Apple wants to charge about $40/month for its service, in comparison to Dish’s Sling TV (which provides a limited number of channels) for $20/month and Sony’s more expansive PlayStation Vue service for $50-$70/month.

A US administrative judge has ruled that BP manipulated the Texas natural gas market in 2008 and then conducted an inadequate internal investigation, opening the possibility of more fines against the company.

US crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986. It even surpasses the decline of 2011, when prices fell as much as 21 percent over the summer as the US and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi. It looks even worse when you consider that summer is supposed to be peak season for oil. Total gasoline supplied to the US market rose to an eight-year high of 9.7 million barrels a day last month.

So, why is the price at the pump so high? One reason is that we export gasoline. In January 2010 the US exported 6.8 million barrels of gasoline. By January 2011 it had doubled. In January 2015 the US exported 16 million barrels of finished motor gasoline. Still, in 2004, the average price of oil was $37.66 a barrel.  In 2004, the average price of gasoline was $1.85 a gallon. So, if you think the price at the pump should be a bit lower, you are probably right.

Domestic equity funds surrendered $20.4 billion in July alone and have seen $158.6 billion in redemptions over the past 12 months. Meanwhile, international equity funds have attracted $179.3 billion. Don’t confuse international funds with emerging market funds. Depositors may be looking forward to an increase in Federal Reserve interest rates and the commodity bulls may be fearing it, but what about all those emerging markets that are heavily exposed to commodities as their principal export and heavily exposed to overseas borrowings in US dollars.

For them, the fall in commodity prices has been dramatic and damaging while the rise in the US dollar has started to increase debt repayments just when they can least afford it. The emerging markets have been clobbered over the last month. In July, China dropped 11.2%, Brazil tumbled 12.2%; South Africa, Colombia, Chile, Thailand, Taiwan, Turkey, Peru, and Korea all dropped by more than 5% on the month.

You might not have noticed but the junk bond market is looking a bit dicey. Average yields for low-rated companies have jumped to 7.3 percent and spreads between such debt and comparable duration Treasuries have widened dramatically. The average yield is the highest since mid-December and has risen 120 basis points, or 1.2 percentage points, just since June. Spreads are at 580 basis points, a level hit only twice in the last three years. Since the most recent lows in June, spreads have widened a full percentage point. Then again, maybe you have noticed; retail investors have been pulling money from US focused mutual funds – $155 billion in outflows over the past 12 months, and high yield corporate funds have watched billions walk out the door.

And it’s not just the junk; investors yanked $1.1 billion from US investment-grade bond funds last week, the biggest withdrawal since 2013. Dollar-denominated company bonds of all ratings have lost 2.3 percent since the end of January.

Once upon a time, Treasuries paid a high yield; 30 years ago to be precise. The last Treasury bond with a coupon above 10 percent was issued on August 15, 1985.

Social Security turns 80 today. President Franklin Delano Roosevelt signed the Social Security Act on Aug. 14, 1935. Last year, Social Security paid benefits of nearly $850 billion— about a quarter of all federal spending. The average monthly payment is $1,221. That comes to about $14,700 a year. For most retirees, Social Security accounts for the majority of their income.

Two Cows, because it’s Friday.

Financial Review

King v Burwell Plan B

Sinclair Noe — June 9, 2015

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DOW – 2 = 17,764
SPX + 0.87 = 2080
NAS – 7 = 5013
10 YR YLD + .04 = 2.42%
OIL + 1.81 = 59.95
GOLD – 1.60 = 1176.10
SILV – .04 = 15.92

Each month the Labor Department reports on nonfarm payrolls, usually that report comes out on the first Friday of the month; a few days later they release the JOLT survey, Job Openings and Labor Turnover from the prior month. Job openings at US workplaces rose to 5.3 million in April from 5.1 million in March. That’s the most job openings in 14 years, and those job openings were spread among industries, including health care, retailers and providers of professional services. Now, keep in mind that this is the Job Openings from April, and we just saw the May Jobs report, which showed that the unemployment rate ticked up from 5.4% in April to 5.5% in May; and the reason the unemployment rate was higher is because more people entered the labor pool. Most of the nearly 400,000 new job seekers were under the age of 25.

While the number of job openings soared, employers are still taking their time filling them. Total hiring in April fell to 5 million from 5.1 million. The disparity between more openings and flat hiring suggests employers are being picky about new hires. Many companies say they are having difficulty finding qualified workers. They may not be offering high enough wages. Average hourly pay rose just 2.3 percent in April from a year earlier, much lower than the roughly 3.5 percent gains typical in a healthy economy.

With 8.5 million unemployed people in April, there were about 1.6 potential job seekers per opening, below March’s ratio of 1.7. In April 2014, there were about 2.2 potential seekers per opening. The number of separations, such as quits and layoffs, dropped to 4.8 million in April from 5 million in March. This indicates that fewer people have confidence to quit their current job to find another job; in other words, people don’t necessarily think the grass is greener on the other side of the fence. In the year that ended in April, employers added a net 2.8 million jobs, representing 60 million hires and 57.2 million separations.

The Commerce Department reports wholesale inventories rose 0.4% in April. Inventories of durable goods, such as autos and machinery, increased 0.1%. Meanwhile, inventories of nondurable goods rose 0.8%. Wholesale sales rose 1.6% in April, following a drop of 0.3% in March. Inventories are a key component of gross domestic product changes. At April’s sales pace it would take 1.29 months to clear shelves. An inventory-to-sales ratio that high usually means an unwanted inventory build-up. Conversely, it could show confidence from businesses anticipating better sales in the second quarter.

If it sounds like a mixed bag of economic news, well it is. The economy is showing signs of improvement but not enough to achieve escape velocity. And the stock market can’t decide which way to go. Last week stocks traded in their tightest weekly range in 21 years. The S&P 500 index has not moved more than 1 percent in either direction in 14 of the past 15 sessions, and the spread between the highest and lowest close this year has been only 6.9 percent, the narrowest since 2006. About 59 percent of stocks closed above their 200-day moving averages at the end of last week, the lowest percentage in eight months. The lack of breadth is not an indicator of a market top, rather it is a sign of consolidation. At some point, the market will decide which way it is moving but for now it is just grinding sideways.

The bond market seems to have no trouble finding direction – it is going down. The global bond market has been sliding for a couple of months, and in the past couple of weeks, US Treasuries have joined in on declines. If you were waiting for confirmation, we now have it; speculative-grade notes (or junk bonds) tend to have shorter maturities and fatter cushions of extra yield over benchmarks than higher-rated bonds, features that can protect the market in periods of rising rates and climbing inflation. And so the high yield debt market has shown some resiliency until right about now. Investors are starting to flee, yanking $1.5 billion from the two biggest high-yield bond exchange-traded funds over the past week.

HSBC will cut costs by as much as $5 billion within two years, selling its units in Brazil and Turkey and laying off as many as 50,000 jobs, or about 20% of its workforce. It will cut its assets by a quarter, or $290 billion on a risk adjusted basis by 2017, and slice $140 billion from its investment bank. HSBC also pledged a new era of higher dividends.

German prosecutors have raided Deutsche Bank offices in Frankfurt in a search for evidence related to client securities transactions, as Germany’s largest lender struggles to break free of regulatory issues that contributed to an overhaul of its top leadership this week.
The raid was apparently tied to a tax rebate strategy by some of the bank’s clients known as “dividend stripping”, in which a stock is bought just before losing rights to a dividend, then sold, taking advantage of a now-closed legal loophole which allowed both the buyer and the seller to reclaim capital gains tax.

General Electric has agreed to sell its private-equity-lending unit to Canada’s largest pension fund in a deal valued at about $12 billion. GE is largely getting out of the banking business. With the deal, GE has unveiled $55 billion worth of asset sales, putting the company on track to reach its goal for $100 billion in sales by the end of the year.

Fiat Chrysler Automobiles’ CEO Sergio Marchionne is reaching out to hedge funds and other potential allies to prod General Motors into a merger. Marchionne has been emboldened by recent successes of activist investors at GM and sees them as a means to consolidate the fragmented auto industry. So far, GM has resisted all of Fiat Chrysler’s entreaties, including a merger appeal to Chief Executive Mary Barra earlier this year. GM’s annual shareholder meeting is taking place today.

Meanwhile, Federal prosecutors are reportedly weighing criminal wire fraud charges against General Motors over the company’s failure to recall vehicles equipped with faulty ignition switches. The Wall Street Journal reports US prosecutors in New York are considering other possible charges and have not made a final decision. Authorities hope to reach a settlement with the automaker by the end of summer or early fall.

You know about the extreme drought in California. Governor Jerry Brown declared a state of emergency and set aside $687 million to help households, farmworkers, and others struggling in drought-devastated counties. More than $320 million sits unspent in government bank accounts more than a year after lawmakers voted to use the money to provide water, protect wells from contamination and upgrade outdated water systems.

The Obama administration has announced it will forgive federal student loans owed by Americans who can prove their schools broke a state law, such as false advertising, fraudulent recruiting or other deception, to lure them to apply and borrow funds. The move, which could potentially involve billions of dollars, is designed to grant debt relief to former students of now-bankrupt Corinthian Colleges, which lied to prospective students about its graduates’ job success. The forgiveness push, though, will likely stretch far beyond the institution.

The Supreme Court is expected to hand down a decision sometime this month in the case of King v. Burwell, which challenges the availability of tax credits to discount the cost of health insurance in at least 34 states. Opponents of the law say it allows subsidies in no more than 16 states that created insurance marketplaces, called exchanges. An adverse Supreme Court ruling would throw insurance markets into disarray, and might spell the end of the Affordable Care Act, or Obamacare, at least in its current form. More than 6 million consumers risk losing discounts on their monthly premiums if the court rules against Obamacare.

And so today, President Obama made his case against King v. Burwell. Obama says the Supreme Court shouldn’t have taken up the case challenging the federal subsidies, and that Congress could settle the issue at the heart of the case with a “one-sentence” change to the law. The section states that subsidies will be available for those who purchase insurance through exchanges “established by the state.” This is an issue, because three dozen states refused to set up their own exchanges and left it up to the federal government. Republicans, however, see the lawsuit as an opportunity to undo what they view as Obamacare’s most onerous provisions, or undo Obamacare completely; and it might just happen.

If the court ruled against Obamacare, most experts believe the health insurance market would suffer what’s called a “death spiral” without the subsidies. Healthy people in states without subsidies would drop their coverage because it would start costing too much. Then insurance would become more expensive, because premiums would go up with healthier people dropping out of the pool. Then more people would drop their coverage as it got even more expensive. Then premiums would go up once again. This downward spiral could destroy Obamacare’s advances with respect to private health insurance. But the threat of this descent into chaos could also be what saves Obamacare. The Supremes are well aware that if they rule the subsidies are not allowed, the law would basically implode and millions of real people would lose their insurance coverage, and there is a good chance several health insurers would collapse, and that doesn’t even begin to cover the explosion in litigation that would follow.

It’s a fool’s game to predict how the Supreme Court will rule, and so it was most unusual to hear the president speak out against a case that has not yet been decided. I don’t think this was an attempt to sway the justices; they have likely made up their minds by now. Rather, after the decision is announced, no matter which way the Supremes decide, there should probably be a Plan B.