Financial Review

A Tight Range

Sinclair Noe — May 21, 2015

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DOW + 0.34 = 18,285
SPX + 4 = 2130.82
NAS + 19 = 5090
10 YR YLD – .07 = 2.18%
OIL + 1.71 = 60.69
GOLD – 3.00 = 1207.80
SILV + .05 = 17.23

The S&P 500 closed at a record high today.

We had a slew of economic data this morning. The leading economic index rose 0.7% in April, indicating the US economy is still expanding.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 274,000 for the week ended May 16. Despite last week’s increase, claims remained below 300,000, a threshold associated with a strengthening labor market, for an 11th straight week. The four-week average for jobless claims decreased to 266,250, a 15-year low.

The National Association of Realtors reports sales of existing homes fell 3.3% in April to a seasonally adjusted annual rate of 5.04 million. April’s sales pace was up 6.1% from a year earlier. The median sales price of used homes hit $219,400 in April, up 8.9% from the year-earlier period.

The jobless claims and existing home sales are pretty important because they are strong indicators for second quarter growth. We know the Fed is watching the labor market. It would be very difficult for the Fed to hike rates if the labor market starts showing signs of weakness. The housing data is important because this is how low interest rates provide stimulus to the broader economy. Housing is a long-term investment that is very sensitive to interest rates. It would be difficult for the Fed to hike rates if the housing market is showing signs of weakness. And so today’s economic data on jobs and housing would indicate a more accommodative monetary policy from the Fed.

The Philadelphia Fed’s manufacturing index dropped to a reading of 6.7 in May, down from 7.5 in April.

The flash reading of the Markit manufacturing purchasing managers index fell to 53.8 in May from 54.1 in April. New orders growth dropped to the slowest pace since January 2014. Export sales have declined for two straight months, adding to evidence that the strong dollar has been holding down the economy.

We know the markets are following the Fed and waiting for some direction, but for now the markets have shown very little as far as direction. The Dow Industrials have been trading in a range, a very tight range since the start of the year; and if this trend holds till the end of the quarter, it would mark the narrowest first-half trading range in the history of the Dow.

The Senate voted 62-38 on a procedural bill that sets up a vote, likely tomorrow, on the “fast-track” trade negotiating authority to complete the Trans-Pacific Partnership (TPP) trade deal. The TPP, which is near completion after more than five years of negotiations, would create a free trade zone covering 40 percent of the world economy. Trading partners have said they want to see fast-track enacted before finalizing the pact, a goal the administration has set for this year. Obama has campaigned aggressively for fast-track over objections from the left wing of the Democratic Party.

The bill must also pass the House of Representatives, where an even tougher fight is expected. Some conservatives oppose giving the White House more power, and many of Obama’s Democrats worry about the impact on jobs and the environment. Critics say the rules, currently part of the TPP, undermine governments’ ability to set domestic policy on issues such as health and the environment, although supporters argue they are essential to avoid discrimination against foreign investors.

An oil spill has caused California to declare a state of emergency. Houston-based Plains All American Pipeline has spilled as much as 105,000 gallons of crude oil on California’s coast. The spill has prompted California Gov. Jerry Brown to declare a state of emergency.

ISIS has captured the ancient Syrian city of Palmyra. The militant group seized the city in central Syria after a bloody battle with pro-government forces. The fall of Palmyra, which is home to 2,000-year-old Roman ruins, comes five days after ISIS captured Ramadi, a provincial capital in Iraq. Activists say that with the latest advance, the militant group controls more than half of Syria’s territory.

CVS Health Corp said it will buy pharmacy services provider Omnicare for $12.7 billion.  Omnicare delivers drugs and helps senior-living facilities manage residents’ medications. CVS is the nation’s second-largest pharmacy benefits manager, handling drug plans for health insurers and employers.  CVS said the deal will also help expand its presence in the rapidly growing specialty pharmacy business, which sells high-cost drugs to treat complex or rare conditions. Both CVS and Omnicare are big Part D players and there could be some scale benefits in negotiating with other payors.  According to the Centers for Disease Control and Prevention, the number of people aged between 55 and 64 having two or more chronic conditions that require medication grew 39 percent in the last decade.

Lumber Liquidators said Chief Executive Officer Robert Lynch unexpectedly resigned from his post. Company founder Thomas Sullivan is serving as CEO during the search for a permanent replacement. Lumber Liquidators is trying to win back customers after “60 Minutes” reported in March that it sold Chinese-produced laminate flooring with toxic levels of formaldehyde, a known carcinogen. While the company assured consumers its products are safe, sales have slid and the U.S. Consumer Product Safety Commission is probing the allegations. The surprise announcement today undermines all of the company’s denials; and although the resignation is not exact evidence, it raises the possibility that Lumber Liquidators knowingly poisoned customers with dangerous products. It also raises the possibility that regulators are close to taking action against the company.

What is going on in Hong Kong? With no immediate explanation, Goldin Financial and Goldin Properties, both controlled by billionaire Pan Sutong, plunged more than 60% in Hong Kong trading this morning. Before the rout, the two stocks surged more than 300% in 2015 for the biggest gains on the Hang Seng Composite Index. The tumble follows the mysterious 47% drop in 24 minutes by Hanergy Thin Film Power on Wednesday, which erased $19 billion in market value before trading was suspended.

Shopify has priced its IPO at $17, a mark above the e-commerce firm’s lifted range of $14 to $16. Shopify (Pending:SHOP) intends to list its shares on the Toronto and New York stock exchanges.

A U.S. bankruptcy judge has cleared the way for RadioShack to sell its trademark, as well as customer data and other intellectual property to a Standard General affiliate for about $26 million, rejecting a competing bidder’s claim that the auction process was unfair. RadioShack also resolved objections to the sale from several state attorneys general who were concerned the deal could threaten consumers’ privacy.

Radio Shack’s bankruptcy has left some creditors in the lurch. They owe thousand, in some cases, hundreds of thousands to a few hardware startups. For many hardware startups, or almost any kind of startup, it can be difficult to negotiate a strong contract for direct sales to large retailers, so many times the products are placed with the retailers in what is basically a consignment agreement. Radio Shack did pay one creditor, though; Apple received just north of $3.3 million. Obviously the Cupertino giant had a number of contractual clauses that required payment no matter what, a side-effect of having excellent lawyers. Other smaller players were paid portions of the money owed. Maybe they can convert to Shake Shacks.

Goldman Sachs has published its list of the stocks hedge funds like and a list of stocks they love to short. For a long time, Apple reigned “undisputed as the most popular hedge fund stock,” but a quick check of your Apple Watch will show you that times change. The most recent iteration of Goldman Sachs’ quarterly update on holdings of hedge funds shows that the drug company Actavis has taken over the top spot. Some 77 hedge funds reported having Actavis as one of their top 10 holdings. Apple is in second place, followed by Facebook, Valeant and Microsoft. The most shorted stocks by hedge funds are AT&T, Disney, IBM, Verizon, and Intel. You may recall that Apple replaced AT&T in the Dow Jones Industrial Average back in March, and since then, AT&T has gained about 6%, but for the funds it appears to be a case of guilt by lack of association.

The US Census has just released population stats for major cities. Ten US cities now have 1 million or more people; California and Texas each have three off those places. The big cities in Texas are Houston, San Antonio and Dallas. The big cities in California are Los Angeles, San Diego, and….San Jose, which just topped the one million population mark. Texas has been growing for a fairly simple reason – jobs, and many of those jobs are related to the oil industry. It remains to be seen whether the sharp decline in oil prices over the last year will jolt the growth train off the rails.

San Antonio had the fastest growth rate among US cities, up 7.7%. Phoenix has grown by 6% from 2010 through 2014. New York is the largest city in the country with 8.4 million; there are 3.9 million Angelinos; Phoenix comes in at the number 6 spot, and if current growth rates hold up, we should overtake Philadelphia for the number 5 spot sometime in late 2016.

FINANCIAL REVIEW

Skim Just a Little

Sinclair Noe — November 20, 2014

 

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

DOW + 33 = 17,719
SPX + 4 = 2052
NAS + 26 = 4701
10 YR YLD – .02 = 2.33%
OIL + 1.50 = 76.00
GOLD + 11.40 = 1195.50
SILV+ .12 = 16.35

Record high close for the Dow Industrials and the S&P 500 index.

The Consumer Price Index, or CPI, measures inflation at the retail level; prices that you and I pay for stuff. Prices were unchanged in October at an annualized rate of 1.7%. Lower gasoline prices offset increases in housing (up 0.3%), medical care (up 0.2%) and airline fares (which increased 2.4% despite lower fuel costs). The price of gasoline fell 3% last month. The cost of food edged up 0.1% in October, but that was the smallest gain in four months. Fruits, vegetables, dairy and beef increased in cost, but pork, chicken, fish and eggs all declined. Food prices are up 3.1% from a year earlier.

Excluding the up-and-down food and energy categories, core consumer prices rose 0.2%. Over the past 12 months the core rate of inflation has risen an unadjusted 1.8%.

Initial jobless claims fell by 2,000 to a seasonally adjusted 291,000 in the week ended Nov. 15. The number of people who applied for new unemployment benefits totaled fewer than 300,000 for the 10th straight week.

The National Association of Realtors reports sales of existing homes rose 1.5% in October to a seasonally adjusted annual rate of 5.26 million, the highest level since September 2013. October’s pace of sales was up 2.5% from a year earlier. The median sales price of existing homes hit $208,300 in October, up 5.5% from the year-earlier period. October’s inventory was 2.22 million existing homes for sale, a 5.1-month supply at the current sales pace.

The Conference Board’s index of leading economic indicators rose 0.9% in October. The leading economic index is a weighted reading of 10 different indicators.

The Philadelphia Fed reported its manufacturing index rose to a much-stronger-than-expected reading of 40.8 from 20.7 in October, marking the best level since 1993. Separately, the Markit Flash Manufacturing Purchase Managers Index fell to 54.7 in November from October’s final reading of 55.9. A reading above 50 signals expansion in economic activity. The index was at its lowest level since January.

A new Markit survey of the Eurozone shows output is still increasing very slightly, with weakness in the manufacturing and services sector. Perhaps most worryingly, a separate Markit survey focused on German factories suggested that Germany, Europe’s largest economy, has gone flat.

Construction on the $50 billion Nicaraguan Interoceanic Grand Canal is expected to begin December 22. The 172 mile canal would connect Atlantic and Pacific, in much the same way as the Panama Canal, but the Nicaraguan Canal would be longer, deeper and wider. Feasibility studies have been approved, even though the canal would pass through Lake Nicaragua, Central America’s largest lake, and a major source of freshwater. The construction is expected to last for 5 years and the canal would be operational in 2020.

The state of Arizona is suing General Motors, accusing the company of putting the public at risk by concealing safety issues related to defective ignition switches and delaying recalls. The suit seeks civil penalties of up to $10,000 per violation and affects hundreds of thousands of vehicles, suggesting a total potential penalty against GM of billions of dollars if courts rule in the state’s favor. Documents produced to Congress and federal safety regulators suggest GM may have been aware of issues with the switch for at least a decade before ordering recalls. The recalls have expanded to encompass 60 serious defects affecting 27 million vehicles. The company has set up a compensation program for victims of the faulty ignition switch. Arizona argued that consumers lost money because GM vehicles fell in value.

A Senate Committee also held a hearing on the safety of airbags made by Takata, and why more cars have not been recalled. The National Highway Traffic Safety Administration called on automakers to expand the recall nationwide; Takata has resisted expanding the recall. One senator said that cars with Takata airbags were simply too dangerous to be driven until replacement parts could be produced. And really, it just is a matter of money. Car companies and airbag manufacturers are betting that people dying will be cheaper than the price of a recall.

It’s time for today’s edition of “Banks Behaving Badly”.

The first story comes from the New York Times but it was easy to miss because the Times wrote about it in confusing ways; here’s the crux. This guy worked as a regulator for the New York Federal Reserve Bank for 7 years, and then he got a job working for Goldman Sachs, a bank he had supposedly been regulating. And then the guy got confidential information on another bank, one of Goldman’s clients from a buddy who was still working for the New York Fed. This has so many conflicts of interest that it is hard to count, and the leaking of confidential information is criminal, and is now under investigation by several regulatory bodies. What really makes the story galling is that Goldman executives knew this was going on, and did not take action until September 26th, the day ProPublica released tapes of a former regulator for the NY Fed talking about how Goldman prevented regulators from regulating. In other words, they only took action when they had been exposed.

Next, the Senate is holding two days of hearings into the practice of Wall Street banks holding physical commodities and engaging in related businesses such as power plants and warehouses. The Senate Committee also issued a report which says that banks such as Goldman Sachs, Morgan Stanley and JPMorgan Chase bought up large stockpiles of aluminum and copper and were able to influence prices by manipulating their holdings. According to the report, Goldman Sachs engaged in an elaborate scheme to delay aluminum shipments and jack up the price of aluminum.

Sen. Carl Levin, who heads the Senate’s Permanent Subcommittee on Investigations, said Goldman Sachs engaged in a “merry-go-round” of aluminum movement between its warehouses with no purpose other than to drive the price of the commodity higher; essentially they moved aluminum from one warehouse in the Detroit area to another warehouse, simply to avoid making physical delivery of aluminum, creating an artificial physical shortage. Goldman has denied any wrongdoing.

The report also alleges that banks exceeded US limits on the amount of commodities they were allowed to hold in order to manipulate prices. The banks involved had invested in oil, coal and power plants, as well as copper and other commodities. The scale of those investments put the bank’s financial health in jeopardy if they had been exposed to an environmental catastrophe such as the Gulf oil spill or a mine explosion. The Senate’s report made public a never-before-seen 2012 Federal Reserve report showing Goldman’s commodity operations had an extreme loss scenario that could exceed the bank’s reserves by $1 to $15 billion.

The Senate investigation found that JPMorgan amassed physical commodity holdings equal to 12% of its Tier 1 capital yet told regulators that it held far less. Morgan Stanley, meanwhile, was found to have controlled 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline. All 3 banks have been divesting their physical commodity operations. Banks entered the commodities markets to provide hedges for providers, traders and other market participants. They ended up with huge stakes and, according to the committee, were able to corner at least parts of the market.

Now, if you are wondering why this is important, other than the point that it is risky for the banks and could result in a catastrophic financial failure, consider the direct impact on you and the economy. Goldman’s manipulations of the aluminum market may seem like a small scale event; the aluminum market is not a big market, and aluminum is a fairly cheap commodity, but hundreds of millions of times a day in America we reach for an aluminum can, 90 billion times a year, and just a small increase off a tenth of a cent per can adds up; and add the tons of aluminum used in things like cars, electronics and house siding, and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years. Now we could accomplish better things with $5 billion than moving aluminum from one warehouse to the next. And remember, copper is a bigger market, and oil and electricity are even bigger markets, and foreign exchange markets are huge, and interest rate markets are huge; and all along the way, the banks have been skimming off, just a little here and a little there, while adding nothing of value in return.

FINANCIAL REVIEW

A Boatload of Economic News and Earnings Reports

Sinclair Noe — October 23, 2014

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

DOW + 216 = 16,677

SPX + 23 = 1950
NAS + 69 = 4452
10 YR YLD + .05 = 2.28%
OIL + 1.33 = 81.85
GOLD – 9.10 = 1232.90
SILV + .02 = 17.30

The S&P 500 has risen five times in the past six days, pushing the gauge up 4.9 percent since Oct. 15 and recouping about half the losses from a selloff that began in mid-September; the S&P is still down about 3 percent from a record.

The Federal Housing Finance Agency, which tracks deals involving mortgages backed by Fannie Mae and Freddie Mac, said home prices in August were up 4.8% from the year-earlier period; and up a seasonally adjusted 0.5% in August from July. The average rate for a 30-year fixed mortgage was 3.92 percent, down from 3.97 percent last week. The average 15-year rate dropped to 3.08 percent from 3.18 percent. Mortgage rates are now at the lowest levels since the summer of 2013. Refinancing applications jumped 23 percent in the week ended Oct. 17 to an 11-month high.

The number of people who applied for US unemployment benefits rose by 17,000 last week to 283,000, but initial claims remained below the key 300,000 level for the sixth straight week.

The Conference Board’s leading economic index rose 0.8% in September, after no change in August. The index points toward improving employment and income growth which are expected to support moderate economic expansion for the remainder of the year. The leading index is composed of 10 forward-pointing indicators. Nine of the 10 indicators showed strength in September, with the biggest positive contribution coming from a favorable spread of low interest rates. The only negative was average consumer expectations for business conditions.

The Chicago Fed’s national activity index rose to positive 0.47 from negative 0.25 in August. The three-month average stayed positive and accelerated, to 0.25 from 0.16 in August; indicating the economy grew at an above-trend pace in September, recovering after a slower August.

The Markit Economics flash manufacturing purchasing managers index for the US fell to a 56.2 reading in October from 57.5 in September. The index is at a three-month low. The rise in new orders was the slowest in nine months. A number of businesses expressed caution about export sales, perhaps due to the stronger dollar. Input cost inflation eased to its weakest level in six months.

Markit’s Eurozone Composite Flash Purchasing Managers’ Index rose to 52.2 in October from 52 in September. Germany’s private sector saw faster growth this month, France’s business slump deepened, with business activity hitting an eight-month low. In Britain, retail sales fell more than expected in September. Eurozone inflation slipped to its lowest for five years in September. The Flash Index is just a subset of the broader economy. For example, today, Spain reported the number of people without a job dropped by 195,000 in the third quarter, and the unemployment rate dropped to 23.7%, which is still incredibly lousy.

China’s flash HSBC/Markit manufacturing PMI edged up to a three-month high of 50.4 from a final reading of 50.2 in September.

Russian stocks have been falling sharply this week. Standard & Poor’s is scheduled to release a review of Russia tomorrow and it is widely expected that they will cut Russia’s credit rating to junk. Last week, Moody’s Investors Service cut Russia’s debt rating, citing concerns over the Ukraine crisis and the international sanctions.

The European Central Bank is scheduled to release the results of its stress test for Eurobanks on Sunday. The test of 130 lenders is aimed at answering the questions many investors still have about the health of the region’s banking system in the wake of the financial crisis. It is expected that most of the mega banks will pass the test but there are estimates that as many as 20 mid-sized banks might fall short.

The Federal Reserve will put US banks through a stress test, and the methodology was released today. US banks will have to show they can withstand a scenario where the unemployment rate jumps to 10%, the stock market dives by 60%, and oil prices reach $110 a barrel. The Dodd-Frank Act requires these tests of 31 of the largest banks, with $50 billion or more in assets, before the Fed signs off on stock buybacks and dividends. The 8 largest banks will also have to test for counterparty defaults, and 6 with large trading operations will have to test for a “global market shock scenario” that it hasn’t yet released. All the banks must submit these capital plans by January 2015.

Last year, Citi, Zions Bancorp and three foreign banks failed the tests, and Bank of America was forced to suspend a planned increase in its dividend and a stock buyback after finding it had erroneously reported $4 billion more in capital than it actually had.

After a sharp fall, crude oil seems to be finding support at $80 a barrel. Last week, the intraday price dipped below $80 but we have not seen a closing price under $80. Today, the price dipped down to $80.05 and then rallied. The past ten sessions have created a symmetrical triangle on the charts, and within the next few days, we should see a break from that pattern. Whichever way the market breaks out, or breaks down from that triangle pattern could be the way the trend goes for a long period. There is a tendency to go out of this pattern the same way we came in, which would be going down; but right now the prudent move is to wait and let the market tell us whether it can hold this important level of support.

General Motors disclosed in a Securities and Exchange Commission filing that its GM Financial unit was served with additional investigative subpoenas to produce documents from state attorneys general and other governmental offices relating to its subprime auto finance business and securitization of subprime auto loans.

General Motors said it earned $1.4 billion in the third quarter on strength in North America and China, where newly introduced models are more profitable than the ones they replace. That’s up from $700 million, or 45 cents a share, in the 2013 third quarter. Revenue was $39 billion, down slightly from the year-ago $39.3 billion. The earnings equaled 81 cents a share, lower than the 97 cents analysts expected. But the 81 cents is minus a special charge of 16 cents primarily for repairing flood damage at the Technical Center in Michigan and charges in Russia for lost value of long-term assets.

It is earnings reporting season.

3M reported strong growth in US sales and raised its full-year earnings forecast higher. In the latest quarter, profit totaled $1.30 billion, or $1.98 per share, up from $1.23 billion, or $1.78 per share. Sales grew 2.8% to $8.14 billion. Wall Street had expected earnings of $1.96 per share.

Caterpillar reported third-quarter net income rose to $1.63 a share from $1.45 a year earlier. Excluding one-time items, profit was $1.72, surpassing the $1.35 average of estimates compiled by Bloomberg. Caterpillar said per-share earnings excluding one-time items for this year are expected to be $6.50, 30 cents more than previously projected.

In a sign that earnings do still matter to the stock market, just look at 3M and Caterpillar today. 3M was up $6.10 at $145.05; that added about 25 points to the Dow Industrial Average. Caterpillar was up $4.97 at $99.27; adding about 45 points to the Dow. Two stocks, about one-third of the Dow movement.

Microsoft reported earnings of 54 cents per share on revenue of $23.2 billion, beating Wall Street estimates of 49 cents per share on revenue of $22 billion. Microsft was up about 4% today.

Amazon reported a third-quarter loss and revenue that missed analysts’ expectations; and then salt on the wound, Amazon projected weaker-than-expected sales for the important holiday quarter. The company posted a loss of 95 cents per share, compared to a loss of 9 cents per share in the year-earlier period. Three months ago, analysts thought the company would lose 7 cents a share in the third quarter. Then, after Amazon ratcheted down expectations, the estimated loss swelled tenfold, to 74 cents; and today, they missed that by 21 cents. Revenue for the quarter came in at $20.58 billion, against the comparable year-ago figure of $17.09 billion. Amazon tanked in after-hours trading, down about 13%.

Even with Amazon likely to hit $100 billion a year in revenue in 2015, it is having a hard time making a profit. It is getting to be a familiar story. The last time Amazon made a profit in the third quarter was in 2011.

Sears is closing 77 Sears and Kmart stores and cutting 5,300 jobs. And that’s not even the worst news. Most of the store closures will happen before Christmas, which makes it look like Sears is just throwing in the towel. Even the stores that won’t close until after the holidays are already holding going out of business sales rather than gearing up for seasonal promotions. Sears Holdings was up 4.4% on the news today. Go figure.

American Airlines, earned a $942 million profit in the third quarter. The company said it was its biggest profit ever for a quarter, and it was an 87 percent increase over the amount that American and US Airways earned separately last year before their December 2013 merger. Doug Parker, the airline’s chief executive, predicted more records for fourth-quarter and full-year earnings.

United Continental posted net income of $924 million, up from $379 million a year earlier. Excluding one-time items, its adjusted profit was a record $1.1 billion. Southwest profit rose 27 percent to $329 million.

All three companies beat Wall Street expectations for earnings. The airlines increased ticket prices back in April, and since then fuel prices have dropped by about 20%, and that works out to millions in savings: United cut its fuel bill by $13 million. Southwest saved $64 million. And the airlines are likely to save even more on fuel costs in the fourth quarter.

But if you are thinking those fuel savings will be passed along to fliers in the form of lower fares, well, that’s just hilarious. Recent mergers have reduced competition and helped the airlines limit the number of flights, making it easier to increase fares. And the big airlines have just pushed through a fare increase on domestic routes.