Financial Review

Quiet, Almost Too Quiet

Sinclair Noe — March 9, 2017

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DOW + 2 = 20,858
SPX + 1 = 2364
NAS + 1 = 5838
RUT – 5 = 1360
10 Y + .05 = 2.60%
OIL – .53 = 49.75
GOLD – 7.20 = 1201.80

Stocks dipped in afternoon trade but held on for minor gains, next to nothing really. Another quiet day. The S&P 500 and the Dow Industrials have not suffered a 1% decline in 102 trading sessions, dating back to October 11.

The longest stretch of trading days without a 1% decline since Dec. 18, 1995 for the S&P 500 and the longest since Sept. 20, 1993, for the Dow. It’s quiet, almost too quiet.

Another drop in oil prices weighed on energy shares while financial shares pared some of their early gains. When asked during a briefing whether President Donald Trump still backs his campaign pledge to restore the Glass-Steagall Act, White House spokesman Sean Spicer said that he did.

The law, which separated commercial and investment banking, was repealed in 1999 and, if reinstated, would mainly apply to larger banks, which have been market leaders in the past few months. Much of the gain for financials has been built on the idea of deregulation.

The European Central Bank left interest rates unchanged. The Governing Council left the main refinancing rate at 0%, while the rate on deposits parked overnight at the bank remains at minus 0.4%. The rate on the bank’s marginal lending facility remains at 0.25%.

In a statement, the bank repeated that it expects rates to remain “at present or lower levels for an extended period and well past the horizon” of its bond-buying program, which is scheduled to run through at least December. The ECB also repeated that it stands ready to extend the size or the duration of the bond-buying program if the outlook deteriorates.

The Labor Department reports imports rose 0.2 percent in February, above the expected gain of 0.1 percent, after climbing 0.4 percent a month earlier. Export prices, meanwhile, rose 0.3 percent.

Outplacement consultancy Challenger, Gray & Christmas reported employers announced plans in February to cut 36,957 jobs, a 19 percent decline from January. Per Challenger, employers said they would hire 166,266 workers in the first two months of 2017, the highest January-February on record.

The retail sector once again planned the most cuts as companies closed brick-and-mortar locations and steered business online. Retailers said they would cut 11,889 jobs in February. The energy sector saw a massive year-over-year drop in job cuts, announcing only 5,930 compared with 45,154 in February 2016.

The number of Americans who applied for unemployment benefits jumped by 20,000 to 243,000 in early March, but layoffs remained near a 45-year low. The four-week average of initial claims, meanwhile, rose by 2,250 to 236,500. Continuing jobless claims dropped by 6,000 to 2.06 million. Tomorrow, the government is expected to report a gain of about 210,000 new jobs in February.

Meanwhile, the Arizona Department of Labor published the state jobs report for January and it shows the Arizona unemployment rate unchanged at 5%, however the state lost 53,600 jobs in January. The biggest job losses per sector were in Trade, Transportation, and Utilities (-18,000 jobs); Professional and Business Services (-16,400 jobs); and Government (-13,700 jobs). Arizona Non-farm employment grew by 2.0% (53,700 jobs) over the year in January.

If you are looking for entertaining analysis of the markets, it’s tough to beat Bill Gross’ monthly investment letter. Gross, who runs the Janus Global Unconstrained Bond Fund, characterized the run-up as the “Trump bull market and the current ‘animal spirits’ that encourage risk.”

Details on Trump’s plans remain scarce, however, and equity gains have moderated on growing concerns that stock valuations may be high. The S&P 500 is trading at about 18 times forward earnings estimates against the long-term average of about 15 times.

Gross said the global economy has created more credit relative to GDP than that at the beginning of 2008’s great credit recession. Gross said: “In the U.S., credit of $65 trillion is roughly 350 percent of annual GDP and the ratio is rising,” adding, “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road.

One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.” It happened in 2008, Gross said, noting central banks could drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. “Today, central bank flexibility is not what it was back then.”

You may recall that back in January, Bill Gross said that if the yield on the 10-year Treasury note crossed 2.60%, that would be the critical level both to the bond market and to stock prices. “If 2.6 percent is broken on the upside … a secular bear bond market has begun,” Gross said.

“Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017.”

Gross said the 10-year yield has been in a downward trend line since 1987. If that channel is broken, look out. Today, the 10-year note closed at 2.60%.

House Democrats on the Energy and Commerce Committee staged a marathon fight to slow down the GOP’s Obamacare replacement, but ultimately failed to stop the bill. After a 27-hour delay, the Energy and Commerce committee approved the American Health Care Act in a party line vote. The bill will next be considered by the House Budget committee. The Congressional Budget Office is expected to score the bill next week.

As part of a plan to reshape its business, Royal Dutch Shell is selling its oil sands interests in Canada in a two-part deal worth $7.25 billion. It will offload stakes and reduce its share in the Athabasca Oil Sands Project for $8.5 billion in shares and cash, while jointly purchasing Marathon Oil Canada Corporation with Canadian Natural Resources for $1.25 billion.

Oil drops below $50. West Texas Intermediate crude oil plunged more than 5% on Wednesday after Department of Energy data showed US inventories swelled to a record-high 528 million barrels. That selling has continued day, with WTI dropping below $50 a barrel, its lowest since the end of November.

PPG’s bid to buy Dutch paints and chemicals rival Akzo Nobel was rejected. A deal would have created a global behemoth in specialty chemicals that would have made ingredients for products including skin creams, car paint and iPhone coatings. Akzo said the unsolicited $22.1 billion cash and stock offer undervalues the company and isn’t in the best interests of shareholders.

The French waste and water company Suez Environnement said it has partnered with a Canadian pension fund manager to acquire General Electric’s water treatment technology business in an all-cash deal that valued the business at about $3.4 billion.

GE put its Water and Process Technologies unit on the sales block in October after it agreed to merge its oil and gas division with a fellow services provider, Baker Hughes. The GE business provides water treatment and process services to industrial clients and reported revenue of $2.1 billion last year, with about half of that in North America.

Sears reported a narrower loss in the fiscal fourth quarter than the period a year earlier, but revenues continued to fall, as they continue to close stores and sales continue to decline at its remaining stores. The company’s long-term debt obligations nearly doubled from the prior year, despite the chain’s efforts to raise cash by selling off assets.

Sears took a $381 million charge during the quarter to write down the value of its trade name. Sears completed the sale of its Craftsman brand to Stanley Black & Decker for an initial upfront cash payment of $525 million with additional payments over time.

The Great Recession and the housing bubble left many homeowners underwater, with negative equity in their homes, they were stuck – under house arrest; they couldn’t sell, they couldn’t move, and many homeowners could not keep up important maintenance, much less upgrades. That’s good news for home flippers.

In 2016, the median age of a flipped home was 37 years, per a report out from Attom Data. That’s the oldest in the nearly two decades, and about double the median age of homes flipped before the downturn. The median size of flipped homes was the smallest on record in 2016, at 1422 square feet.

There were 3.1% more flips in 2016 than 2015, and 0.5% more flippers. And flippers could sell their properties for a median of $189,900 in 2016, offering a median gross profit of $62,624, or 49.2%, the highest on record. So, it looks like flippers still have legs.

Gallup-Healthways has released its  Community Well-Being Index . Researchers analyzed 350,000 interviews to rank 189 communities by physical, emotional, financial, community and social health; basically, a look at the happiest and healthiest cities in America. They found that living near the beach doesn’t guarantee your happiness — but it certainly doesn’t hurt.

Communities in the Southeastern US and industrial Midwest were generally ranked lower in well-being, partly due to health problems including higher smoking and obesity rates. Topping the list: Naples, Florida. Phoenix ranked 47 out of 189.

Financial Review

Waiting for the Storm

Sinclair Noe — October 6, 2016

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

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DOW – 12 = 18,268
SPX + 1 = 2160
NAS – 9 = 5306
10 Y + .03 = 1.74%
OIL + .73 = 50.56
GOLD – 11.30 = 1256.20

The number of people who applied for unemployment benefits fell by 5,000 to 249,000 at the end of September. This marks 83 consecutive weeks of initial claims below 300,000, the longest streak since 1970. Tomorrow the Labor Department reports on how many people found jobs in September; the consensus estimate is calling for about 170,000 new jobs in the last month.

With unemployment near the lowest level since before the last recession, employers are having to offer more incentives to attract skilled workers to blue-collar truck driving and construction jobs.

Tomorrow’s jobs report could provide clues to the timing of the Fed’s next interest rate rise. If the tight jobs market means average hourly earnings rose more than the projected 0.3 percent, the chances of a hike this year could easily increase beyond the current market-implied 61 percent.

Traders are taking the Fed’s November meeting off the table for two reasons: its closeness to the elections could have aggravated political and market consequences, and the Fed may want to avoid raising rates at meetings without scheduled press conferences. There will be two more jobs reports before the Fed’s December meeting. And so, reading the Fed tea leaves based on this report may be premature, unless we get a very dramatic number tomorrow.

Now, when we see the report that weekly claims for jobless benefits are at the lowest levels in 46 years, you might think that is a sure sign that the labor market is very strong. Not necessarily. The labor market is certainly much stronger than it was 5 or 6 years ago, but one reason why claims for unemployment benefits are so low is because fewer people are eligible to make claims, with just over one in four jobless workers (27 percent) receiving unemployment insurance benefits in 2015. Just since 2011, the proportion of jobless workers receiving unemployment insurance plunged from 67% to a measly 27%. From two-thirds to just one in four.

Global outplacement consultancy Challenger, Gray & Christmas reports employers announced plans to cut 44,324 jobs last month; that’s a 38% increase from August, but 25% less than September a year ago.

A fresh report from the Freelancers Union now shows that nearly 55 million Americans are freelancing. If you tally this up against the Labor Department data, it means that 35% of the work force is made up of freelancers. The view is that the number of freelancers is growing and that the freelance economy has added 2 million workers since 2014. The report also shows that these independent workers are “emerging as a powerful economic and political force” and that freelancers contributed $1 trillion dollars to the economy this year.

Consumer loan delinquencies fell to the lowest on record in the second quarter of the year. The American Bankers Association’s index, which tracks late payments in eight categories, fell 3 basis points to 1.35, a record low. Delinquency rates held below the 15-year average of 2.21% for the third year.

Hurricane Matthew, the fiercest Caribbean storm in nearly a decade, slammed into the Bahamas this morning. Haiti now reports more than 100 dead. Now, it is gathering strength and is expected to slam into Florida in the next 4 to 6 hours as a Category 4 hurricane with sustained winds of about 140 miles per hour and a storm surge up to 11 feet. It might even grow into a Category 5.

The National Hurricane Center extended its hurricane warning area farther north into Georgia and more than 12 million US residents are under hurricane watches and warnings. More than 1.5 million Floridians have been told to evacuate.   Efforts to prepare for the deadly storm have resulted in massive gas lines and empty store shelves as residents either get out of town or bulk up on supplies to ride out the storm.

Airlines have cancelled flights from Florida to the Carolinas. Airlines have cancelled more than 3,000 flights. Expect delays everywhere. Twelve U.S. power generators, including two nuclear plants, are in the storm’s path. The risk to Florida’s orange crop is “minimal” because the worst weather will be along the coast.

Evacuations could push storm damage to $10 billion to $15 billion in losses related to economic disruption, and total losses could top out around $50 billion. Shares of publicly-traded property and causality companies are taking it on the chin as Hurricane Matthew bears down on the Florida, Georgia, and South Carolina coasts.

Shares in Twitter fell hard this morning after technology news site Recode reported that Google doesn’t currently plan to make a bid for the company. Recode also said Disney and Apple are unlikely to bid. That leaves Salesforce.com as a possible suitor, although some analysts say an acquisition could hurt Salesforce more than it helps.

Snapchat has begun preparing filings for an initial public offering and is aiming to sell shares in the first quarter of next year. The Wall Street Journal estimates the social media site known for its disappearing texts and photos could fetch a market value of at least $25 billion.

Looking to gain an even more dominant position in retail, Wal-Mart is accelerating its investment in e-commerce. The company is on track to double the number of warehouses dedicated to online sales by the end of 2016 and has installed technology that for the first time puts them on par with Amazon’s robot-staffed facilities.

Wal-Mart tempered its profit forecast for the next two fiscal years due to investments in its online business. Wal-Mart said it expected flat earnings for the year ending on Jan. 31, 2018, with capital expenditures of about $11 billion. It had previously forecast profit growth. New store growth will slow significantly. The retailer expects to build 35 new supercenters in fiscal 2018, down from 69 last year. Even growth of the company’s smaller format Neighborhood Markets will slow, down to 20 new stores in fiscal 2018 from 161 built last year.

Mylan overcharged the government for the EpiPen. The drug company classified the EpiPen allergy treatment as a generic, allowing it to have inflation protections with Medicaid that are not available to branded drugs. Makers of brand-name drugs have to pay higher rebates to states than generics — 23.1% versus 13%. Also, they have to pay additional rebates if their price increases rise more than inflation. So by having EpiPen classified as a generic Mylan saved itself a bunch of money.

Back in 2009, Mylan paid a $124 million fine for misclassifying its drugs and under-paying rebates this way. It is the responsibility of the manufacturer to maintain accurate information of its drug’s status. From 2011 to 2015, government spending on EpiPen increased 463%, from $86 million to $487 million. As of now, the Centers for Medicare & Medicaid Services are unsure exactly how much they were overcharged.

Theranos fired 40% of its workforce. Life sciences company Theranos will close its clinical labs and fire 340 people, founder Elizabeth Holmes said in an open letter. The company said it is no longer focusing on blood-testing after serious questions were raised about the effectiveness of its novel method, but will develop products for outside labs.

One of Deutsche Bank’s problems might have gone away. German financial regulators say they found no evidence to date that the lender violated rules on money laundering in Russia. The stakes are still high for Deutsche Bank as German government officials quietly meet with U.S. regulators in Washington to broker a deal that would reduce the Justice Department’s $14 billion proposed settlement for mortgage backed securities mis-deeds dating back to the financial crisis. Last week, there was a rumor that the DOJ might accept a $5.4 billion fine. With talks ongoing, it looks like the two sides have not come up with a mutually acceptable resolution.

Southwest Airlines Flight 994 was scheduled to depart Louisville for Baltimore yesterday. The flight was cancelled and the plane was evacuated after a passenger’s Samsung smartphone caught fire. And we have all heard the stories of Samsung phones catching fire. The company, which is announced last month that it would replace 2.5 million of the Galaxy Note 7 phones because of a flaw in the battery’s cell that could result in the devices bursting into flames or exploding…, but this phone was a replacement. The passenger sent his old phone in to be replaced with a new battery, and it still caught fire.

The United Nations has organized the first international pact to reduce the airline industry’s carbon emissions. And the airline industry supported the deal. But there’s some fine print. The restrictions won’t even be set for several more years, and emissions will be capped at 2020 levels, and may indeed rise before then, and the standards won’t become mandatory until 2027. And airlines won’t necessarily have to burn less fuel; emissions beyond the 2020 levels could be offset with investments in renewable energy projects and environmental programs. Aviation contributes about 2% of the world’s carbon emissions.

The town of Summit, New Jersey has hired UBER to provide free rides for commuters to and from its train station under a new six-month pilot aimed at solving its downtown parking crisis. Uber is looking at similar arrangements with “another half dozen” towns along the NJ Transit rail line, and that the model could extend to other states in time.

Financial Review

$6 Battery

Sinclair Noe — May 5, 2016

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

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DOW + 9 = 17,660
SPX – 0.49 = 2050
NAS – 8 = 4717
10 Y – .04 = 1.75
OIL + .34 = 44.32
GOLD – 1.40 = 1278.60

The number of Americans filing for unemployment benefits rose more than expected last week, posting the biggest gain in more than a year. Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 274,000 for the week ended April 30. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2,000 to 258,000 last week.

Another report showed a 35 percent surge in planned layoffs by U.S.-based employers last month. Most of the announced job cuts were concentrated in the energy sector.  Challenger, Gray & Christmas said US-based companies announced 65,141 job cuts last month.

The jobs report for April due out tomorrow morning. Investors will be watching closely to see if it could have any impact on the Federal Reserve’s plans for raising interest rates at its next policy meeting in June. The report is expected to show jobs grew by 200,000 last month while the unemployment rate stayed at 5 percent.  A strong jobs report would be a possible indicator of Fed tightening. An early rally on Wall Street this morning faded into the close.

MetLife said it’s seeking to exit most of its hedge-fund portfolio after a slump in the investments. The insurer is seeking to redeem $1.2 billion of the $1.8 billion in holdings, a process that may take a couple of years to complete. The portfolio, which posted negative returns in the quarter, was cut by about $600 million in 2015. MetLife reported profit Wednesday that missed analysts’ estimates. Investment income fell 17 percent to $4.5 billion, hurt by both hedge funds and low bond yields.

American International Group posted a third-straight unprofitable quarter on losses from hedge funds and declines in the value of other investments. AIG is reshaping its portfolio, expanding bets on highly rated bonds and property lending while scaling back on hedge funds after the company was burned on those investments.

AIG also is among insurers that have large holdings of energy bonds that were pressured by declines in commodity prices. And it isn’t just the insurance companies that are abandoning hedge funds; the New York City Employee Retirement System, the city’s largest pension fund, announced last month it was liquidating its hedge fund portfolio, citing big fees and bad performance.

Hedge funds have been underperforming. A challenging trading climate in 2015 left a composite index of hedge funds down 0.9 percent for 2015. By comparison, the Standard & Poor’s 500 inched up 1.38 percent for the year. The market pain continued into the first quarter of 2016, when investors pulled $15.1 billion out of the hedge fund industry, the largest outflow since 2009.

It also looks bad for junk bonds. HYG, the high yield ETF, just experienced a 4 day, $2.3 billion outflow, which is the fastest and largest redemption it has ever experienced. Which could mean nothing or it could mean the nearly 60% bounce in crude oil prices from the 2016 low is just a temporary move.

Alibaba Group, China’s biggest e-commerce company, said fourth-quarter revenue rose 39 percent, beating Wall Street estimates, helped by growth in gross merchandise volume. The number of mobile monthly active users rose 42 percent to 410 million. Alibaba represents a big part of the spending by Chinese consumers and so a re-acceleration in volumes is an indication that the Chinese consumer continues to be strong.

Amazon.com could take as much as a 30 percent stake in a large cargo airline, its second such deal this year as the e-commerce giant steps up efforts to take control of its own delivery logistics. As part of the agreement, Atlas Air Worldwide Holdings will operate 20 Boeing 767-300 cargo planes for Amazon. The Seattle-based retailer is moving quickly to build up its delivery network, seeking to wean itself from dependence on United Parcel Service and FedEx.

Tesla Motors on Wednesday posted quarterly results that were just slightly better than Wall Street’s expectations. The electric automaker reported a first-quarter loss of 57 cents per share on $1.6 billion in revenue, but the big news was the guidance from CEO Elon Musk; Tesla delivered just over 14,000 cars in the first quarter; Musk said he expects production of 100,000 to 200,000 Model 3 vehicles in the second half of next year, and 500,000 cars in 2018.

If that sounds like a pretty outrageous promise, well… yes, except Tesla already has more than 400,000 pre-orders for the Model S. The challenge isn’t in the sales numbers, it will be the ability to transition from technology and design to manufacturing.

Merck reported lower-than-expected quarterly revenue, hurt by disappointing sales of its Januvia diabetes treatment and Remicade arthritis drug. But the second-largest US drug maker beat first-quarter earnings forecasts because of cost controls and a weakening dollar, and it slightly raised its full-year profit outlook.

The Consumer Financial Protection Bureau unveiled a proposed rule this morning to restrict the use of arbitration clauses in consumer financial contracts, a step that would shift power to consumers and away from companies for a wide range of financial products from credit cards to bank accounts to private student loans. The CFPB aims to prohibit financial companies from using mandatory-arbitration clauses in contracts with consumers as a way to block class-action lawsuits and force customers into private negotiations to solve disputes. The new rule does not require congressional approval.

Class action suits might not be the easiest way to get your day in court, and the big winners tend to be the lawyers. The argument for arbitration is that it is a quick, easy, and inexpensive way to resolve a dispute; the reality is that very few cases, only about 100 a year, for cases under $2,500, end up in arbitration after their path to class action is blocked. And of those cases that make it to arbitration, the customer typically loses, more than 95% of the time.

One reason why arbitration works so well for the companies is that they select the arbitrators. The arbitrators that are chosen to serve are not only screened to be big institution friendly; arbitrators that wind up ruling in favor of customers have this funny way of being moved to the bottom of the selection list. The result is that companies using arbitration clauses tend to act with impunity. Class actions are the only way that companies can be brought to heel.

California Governor Jerry Brown has signed a pack of bills that will raise the smoking age from 18 to 21, restrict the use of electronic cigarettes in public places and expand no-smoking areas at public schools. The new laws, which take effect June 9, are a big boost to a movement that is turning into the next major challenge for the $100 billion tobacco industry. Lawmakers in 10 other U.S. states are currently considering similar legislation.

Meanwhile, the FDA announced it will regulate e-cigarettes and vaporizers, also cigars and pipe tobacco. Congress gave the FDA authority to oversee tobacco products in 2009, but until now the agency had not finalized rules to regulate e-cigarettes and cigars.

The rules prohibit sales to minors, ban free samples, require package warning labels, and call for makers of products released after 2007 to seek FDA permission to remain on store shelves. Companies will have 24 months to file pre-market applications for their products, according to the rule. The FDA then has a year to review the submission, during which the products can remain on shelves.

YouTube is planning a paid subscription service. Alphabet’s YouTube is planning to launch a subscription-based bundle of streaming cable channels. The new service will be called “Unplugged,” and it is set to launch as soon as 2017. It is not yet clear what channels will be included.

The ECB is also discontinuing production of the €500-euro note due to concerns that it could facilitate illegal activities. Terrorists and drug cartels need cold hard cash to operate, and the European Central Bank is taking a big step to make it harder for them. The ECB will stop printing its 500 bill in the next two years, though it will still be in circulation.

Another oil and gas bankruptcy? SandRidge Energy is in discussions with creditors about reaching a restructuring deal ahead of a possible bankruptcy filing. According to its annual report, SandRidge had $3.6 billion in debt at Dec. 31.

My smartphone has more computing power than the first Apollo space mission that landed on the moon. I don’t use all that computing power. I send text and emails, take pictures, use the maps, and check out stuff on the interwebs. Sometimes I make phone calls. It’s a couple of years old and the battery started fading a couple of weeks ago. I went to Best Buy for a replacement battery; they didn’t have it in stock but the clerk suggested an upgrade to a new phone. I did not buy.

I went to Amazon.com and ordered a new battery for $6 dollars compared to a new phone at about 100 times that price. My old phone is working great again. Smartphone upgrades have been steadily declining over the last five years. For the first time, smartphone growth went into the negative for the first quarter. Seems people just aren’t upgrading like they used to.

Financial Review

Who Blinks First?

Sinclair Noe — February 4, 2016

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

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DOW + 79 = 16,416
SPX + 2 = 1915
NAS + 5 = 4509
10 Y – .02 = 1.86%
OIL – .52 = 31.76
GOLD + 13.00 = 1156.40

Equity markets were all over the place once again today as crude oil popped and then dropped.

Initial jobless claims rose in the last week of January but remained at a very low level. New claims rose by 8,000 a seasonally adjusted 285,000 in the seven days stretching from Jan. 24 to Jan 30. Any number below 300,000 is historically considered a sign of a robust labor market, but claims are no longer falling rapidly. In the last two weeks of January, for example, the number of new claims was slightly higher compared with the same two weeks in 2014. It’s the first time in three years that has happened for two weeks in a row.

The productivity of U.S. businesses fell at a 3% annual pace in the fourth quarter, marking the biggest decline in almost two years. Weak productivity growth has been a hallmark of the near-seven-year economic recovery. Productivity increased just 0.6% in 2015, less than one-third the average since the end of World War II. In the fourth quarter, employees put in more time on the job but output of goods and services barely rose. Output edged up a scant 0.1% while hours worked jumped 3.3%.

The European Commission trimmed its 2016 growth forecast for the euro area to 1.7 percent from 1.8 percent previously. At the same time, it slashed its 2016 inflation forecast, dropping it to 0.5 percent for the year, from 1.0 percent. In a speech at Germany’s Bundesbank this morning ECB president Mario Draghi said that weak global inflation would not stop the central bank from adding more stimulus at its March meeting. The euro currency did not seem impressed by his dovishness, rising to a three-month high versus the dollar.

Bank of England policymakers voted unanimously to keep interest rates on hold at 0.5%, raising the prospect that the UK’s record low rates will continue for at least another year.

The US Dollar Index was down again, for the fourth straight session; part of the recent dollar decline is due to soft economic data; part might be due to comments by Robert Kaplan, the new head of the Dallas Fed, who said the central bank should be “patient” on rate increases.

The recent weakness in the greenback has provided investors the incentive to take profits in successful trades against commodities and emerging markets, which had suffered after a run higher by the dollar. New York Federal Reserve Bank President William Dudley said that financial conditions have tightened since late last year and policy makers will take this into account when they meet next month to decide whether to raise rates again.

Analysts and strategists in a Bloomberg survey cut their forecasts for the Fed’s peak policy rate at the end of this tightening cycle, known as the terminal rate, to a median of 2.875 percent from 3.375 percent in a July poll. That compares with the Fed’s latest forecast of 3.5 percent published in December, down from 3.75 percent in June. That means the Fed’s rate outlook is out of sync with the markets. The question is who blinks first?

Small businesses stepped up hiring in January after taking a pause in December and many continued to point to difficulty finding qualified workers. The monthly survey of the National Federation of Independent Business showed that 52 percent of respondents said they were hiring or trying to hire, but a large share of those reported few or no qualified applicants for the jobs they were trying to fill. The average employment gain per firm was 0.11 workers compared with -0.7 workers in December.

The latest monthly report from the staffing firm Challenger, Gray and Christmas on planned layoffs showed that US employers in January reported 75,114 planned job cuts, up 42% year-on-year. Retailers moved the needle on this data point the most, particularly Walmart, which announced plans to close 269 stores across America. The staffing firm also said energy-sector layoffs continued to be a problem.

We see that in the latest earnings report from Royal Dutch Shell. They announced a near 60% slump in fourth-quarter profit, hit by sliding production and plunging global oil prices. Shell also announced it was cutting 10,000 jobs. Fourth-quarter profit dropped to $1.8 billion down from $4.2 billion a year earlier. Shell’s exploration and production business lost $5.7 billion last year, hit by write-offs, falling prices and lower volumes.

ConocoPhillips missed fourth-quarter profit expectations and lowered its dividend. The company reported a net loss of $3.5 billion, wider than a net loss of $39 million, or a loss of 3 cents per share, in the year-earlier period. The company lowered its 2016 capital expenditures and said: “While we don’t know how far commodity prices will fall, or the duration of the downturn, we believe it’s prudent to plan for lower prices for a longer period of time.”

Weatherford has announced in its fourth quarter earnings report that it’ll lay off another 6,000 employees and close nine manufacturing/service facilities before the end of the year. The latest round of cuts brings to 20,000 the number of workers who have been or will be released by the world’s fourth largest oilfield services supplier. Weatherford also set a capital expenditure target of $300 million for this year, about 56% lower than its 2015 spending.

Statoil slashed its capital spending budget but said it would keep its dividend steady after topping fourth quarter expectations.

Credit Suisse reported its first annual loss since 2008 as it wrote off billions of dollars in goodwill, set aside litigation provisions and suffered a trading downturn.

ING posted a better-than-expected Q4 and announced a full-year dividend.

AstraZeneca expects low to mid-single digit percentage drops in earnings this year, in part due to a flood of generic cholesterol drugs.

Vodafone met expectations with a 1.4% rise in revenue, its sixth consecutive quarter of growth.

Buffalo Wild Wings reporting light revenue. But the bigger problem, with Super Bowl Sunday just days away, the restaurant chain was blitzed with a potential crisis as 10 customers became ill after eating at one of its restaurants in Kansas.

GoPro’s quarter was ugly. The digital-camera maker announced an adjusted loss of $0.08 a share, worse than the $0.02 loss that was expected. Revenue for the crucial holiday quarter crashed 31.1%.

And Metlife reported earnings of $1.23 per share, missing analysts’ forecasts for earnings of $1.36 per share. Earnings during the fourth quarter were negatively impacted by lower variable investment income and a stronger dollar.

Philip Morris missed fourth-quarter revenue expectations and provided a downbeat profit outlook for 2016.

Yum Brands reported an 11 percent increase in adjusted earnings that topped analyst expectations, but its revenue came in just under Wall Street estimates.

Dunkin’ Brands posted better-than-expected results in its fourth quarter, despite declines in same-store sales, which dropped 0.8%. During the quarter the company opened 172 net new restaurants world-wide. Dunkin posted a loss of $8.9 million, or 10 cents a share, down from a profit of $52.5 million, or 50 cents a share, a year prior. You have to wonder if Dunkin is feeling pressure from McDonalds going to an all-day breakfast menu.

Sports Authority is preparing to file for bankruptcy. The retailer, once the biggest sporting-goods chain in the US, is in talks with lenders on a deal to reorganize in Chapter 11 bankruptcy proceedings. It’s also mapping out a plan to close as many as 200 of its more than 450 stores. Sports Authority skipped a $20 million dollar interest payment last month, and another $10 million payment is due in the next 10 days.

New tech acquisitions:  Cisco is purchasing “Internet of Things” service provider Jasper for $1.4 billion in cash, plus assumed equity awards and retention-based incentives.

Microsoft is buying iOS/Android keyboard developer SwiftKey for a reported $250 million. The company’s keyboard apps have over 300 million users and are declared to have “saved nearly 10 trillion keystrokes, across 100 languages” with the help of A.I. that learns a user’s typing tendencies to predict his/her next word.

There is a side story here. SwiftKey was started in 2008 by three young British guys: Jon Reynolds, Ben Medlock, and Chris Hill-Scott. It is tough to build a startup, and Hill-Scott grew weary of the long hours and low pay. He sold his stake to the other guys for a bicycle in 2008 and went to work for the British government. Reynolds and Medlock just pocketed about $35 million each for their shares.

Twenty-four hours after facing fraud charges in a federal court in Brooklyn, Martin Shkreli turned up in Washington after being subpoenaed by the House of Representatives oversight committee. Shkreli created and ran a firm called Turing Pharmaceutical, which is known for acquiring the rights to a drug called Daraprim, and then hiking the price 5,000% overnight, from $13.50 to $750 a pill.

The reason behind the hearing was to find out about the drug pricing. Shkreli did not provide answers; he invoked his Fifth Amendment rights, while smirking and smiling. Afterwards he tweeted “Hard to accept that these imbeciles represent the people in our government.”

Before invoking the Fifth today, Shkreli had said that he wasn’t alone in taking big price hikes on drugs. And that is true. A survey of about 3,000 brand-name prescription drugs found that prices more than doubled for 60 and at least quadrupled for 20 since December 2014.

Also at the hearing, Howard Shiller, interim CEO of Valeant Pharmaceuticals. Valeant has increased the price of numerous old drugs, but the House committee has focused on two heart drugs, Isuprel and Nitropress. Valeant acquired both a year ago and immediately raised the price of Isuprel by more than 500 percent and of Nitropress by more than 200 percent, provoking protest from the hospitals that buy these drugs.

FINANCIAL REVIEW

Taking on Water

Sinclair Noe — November 6, 2014

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

Financial Review
DOW + 69 = 17,554
SPX + 7 = 2031
NAS + 17 = 4638
10 YR YLD + .03 = 2.38%
OIL – .70 = 77.98
GOLD + 1.30 = 1142.30
SILV + .11 = 15.53

Record highs for the Dow Industrial Average and the S&P 500 index. Milk and cookies time.

Outplacement consultant Challenger, Gray & Christmas says layoffs increased by 51,000 last month. Layoffs are down 4% from a year ago, and the increase in October follows a 14 year low in September. Meanwhile, the Labor Department reports the number of Americans applying for new jobless benefits fell by 10,000 last week, to 278,000; the eighth straight week under 300,000. This is all part of the setup for tomorrow morning’s monthly jobs report.

The big news today comes from the European Central Bank; ECB president Mario Draghi announced the central bank will increase its balance sheet by €1 trillion, or about $1.2 trillion, over the next 2 years. Interest rates are already at record lows, and Draghi has said they can go no lower. The ECB has issued long-term loans to banks and started buying covered bonds in the hope of flooding the economy with enough liquidity to ease credit constraints. Purchases of asset-backed securities are due to start this month.

Exactly what the ECB will purchase remains uncertain, but they are likely to move into the €1.4 trillion market for investment grade non-financial corporate bonds next month. Corporate bonds still won’t be enough and the ECB will have start buying government debt early next year.

There was a minor brouhaha about Draghi’s announcement; Reuters reported that some ECB policymakers were upset that Draghi was being overly aggressive with monetary policy. Draghi squashed that when he gave the statement, he said the asset purchases had “been approved and underwritten unanimously.”

Meanwhile the Bank of England also met today, and said it would keep its benchmark interest rate at 0.5%, where it has been since March 2009. The bank also left unchanged a stimulus program of holding 375 billion pounds, or about $600 billion.

Meanwhile, an ignominious revelation as Irish newspapers printed a letter from former ECB president Jean-Claude Trichet to former Irish finance Minister Brian Lenihan back in November 2010 where the ECB explicitly threatened to cut off emergency funding from the Irish banking system, unless Ireland immediately applied for a bailout and agreed to a program of austerity and bank recapitalization.

So, it appears the ECB really did take notes from the Federal Reserve.

Let me take you back to 2008 to refresh your memory. The major financial institutions were looking into the furnace of a global financial meltdown; the Bush administration had cobbled together a 3 page plan to bail out the banksters; most politician, both Republicans and Democrats weren’t buying in. Then-senator Obama told reluctant Democrats that as president, he would pursue major foreclosure relief efforts, but it was important to keep the banks out of the furnace. With candidate Obama on board, the bailout passed with minimal Republican support. And then after the election of 2008, the new administration decided that changing bankruptcy laws would be too difficult. Obama and Geithner let the banksters run the administration’s mortgage modification program; truly putting the foxes in charge of the hen house; and as we all know now, the mortgage mod plan was an epic failure.

On Tuesday, voters voted with their middle finger. Republicans say the 2014 midterms were a referendum on Obama’s failed policies, and they are right; but these were also failed policies of the GOP. Following the financial crisis of 2008 the politicians saved Wall Street and spit on Main Street. As the voters left the polls they were surveyed; two-thirds said the US economic system “favors the wealthy”; about 80% said they were worried about the direction of the economy; about half said things will be worse for the next generation. The economy, as in every election, remained the top issue on voters’ minds.

There has been economic recovery from the near meltdown in 2008, but it has been uneven and insufficient for most people; a few drops of tepid water on a hot summer day in Phoenix; enough to keep you alive but not enough to quench your thirst; meanwhile, a cool waterfall for the lucky few who have it made in the shade. Both Republicans and Democrats share blame for the economic shortcomings, but the buck stops in the Oval Office; rightly so. Voters may or may not be aware of all the details, but they know the game is rigged.

Everything is rigged. The Libor is rigged. The foreign exchange markets are rigged. The metals markets are rigged. The stock market is rigged. The tax system is rigged. The justice system is rigged. And of course, Washington DC is rigged.

If you steal a soda from the corner grocer, you would probably go to jail, and rightly so; but a bankster can steal billions, forge signatures on documents (remember robo-signing), perjure, money launder, inside trade, cheat on taxes, lie on official documents and the worst that happens is a slap on the fine that is ultimately paid by shareholders and consumers, and the whole thing is tax deductible. And the regulator and prosecutor then shuffle through the revolving door to get paid off by corporate America.

There has been some economic recovery but the economy is still headed in the wrong direction. Consider that in 2005, for every $1 of financial wealth there was 66 cents of non-financial wealth, things like homes and family businesses. Ten years later, for every $1 of financial wealth there was just 43 cents of non-financial wealth. What happens to all this financial wealth? Over 90% of the assets owned by millionaires are held in low-risk investments (bonds and cash), the stock market, and real estate. Business startup costs made up less than 1% of the investments of high net worth individuals in North America in 2011. Small business is the backbone of America, the economic engine for new jobs, but that engine has run out of fuel.

On the corporate side, stock buybacks are employed to enrich executives and hedge fund activists rather than to invest in new technologies. In 1981, major corporations were spending less than 3 percent of their combined net income on buybacks, but in recent years they’ve been spending up to 95 percent of their profits on buybacks and dividends. Now you might say that corporations are just sitting on a hoard of cash anyway, so why not employ that cash somewhere; but what it really says is that we have run out of productive ideas and good old Yankee ingenuity is dead. I don’t believe that, I just think we need the right soil to grow small businesses again.

The Upper Middle Class of America Owns a Smaller Percentage of Wealth Than the Corresponding Groups in All Major Nations Except Russia and Indonesia. The upper middle class in the US, defined as everyone in the top half below the richest 20%, owns 11.9 percent of the wealth – that’s 11.9% for the upper middle class in the US. Indonesia at 10.5 percent and Russia at 7.5 percent are worse off, but in all other nations the corresponding upper middle classes own 12 to 27 percent of the wealth. The American Dream is dead.

America’s bottom half compares even less favorably to the world: dead last, with just 1.3 percent of national wealth. Only Russia comes close to that dismal share, at 1.9 percent. The bottom half in all other nations own 2.6 to 10.2 percent of the wealth; just 1.3% in America. A rising tide lifts all boats. And we keep hearing that the tide is coming in, but only a few yachts are rising, and the other boats are taking on water. Don’t get me wrong, I’m not talking about a handout. I’m talking about a hand up, in an economy that’s not rigged against you. It’s the idea of equality of opportunity, make of it what you will.