Financial Review

Still Too Hot

Sinclair Noe — June 21, 2017

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DOW – 57 = 21,410
SPX – 1 = 2435
NAS + 45 = 6233
RUT – 3 = 1399
10 Y + .01 = 2.16%
OIL – 1.06 = 42.45
GOLD + 3.70 = 1247.30
BITCOIN – 0.11% = 2709.21 USD
ETHEREUM – 2.77% = 328.37

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

BITCOIN – 0.83% = 2755.74 USD
ETHEREUM – 3.89% = 355.93

The Energy Information Administration reports American crude stockpiles fell by 2.45 million barrels last week and gasoline supplies slid by 577,999 barrels. Meanwhile, oil production rose to 9.35 million barrels a day, the highest level in almost two years.

The report did nothing to sway oil traders from their bearish positions. Brent crude dropped below $45 for the first time in 2017.  West Texas Intermediate dropped 1.06 to 42.45 a barrel. Potentially bullish factors failed to lift prices, including Tropical Storm Cindy halting service at a major oil terminal in the Gulf of Mexico, a shake-up in the Saudi royal family, and Iran’s Oil Minister saying that OPEC may decide to make deeper cuts.

That sent energy shares in the S&P 500 Index to the lowest level in two months. Chipmakers helped lift tech stocks. Healthcare and Biotech shares helped lift the Nasdaq to positive territory. The Nasdaq Biotechnology Index is up 8% this week.

A draft of an executive order on drug prices appears to give the pharmaceutical industry much of what it has asked for — and no guarantee that costs to consumers will drop. The four-page document, obtained by the New York Times, contains several proposals that have long been championed by the industry, including strengthening drug makers’ monopoly power overseas and scaling back a federal program that requires pharmaceutical companies to give discounts to hospitals and clinics that serve low-income patients.

The proposed order does little to specifically call out the drug industry and instead focuses on rolling back regulations.

Senate Republicans have been working for weeks behind closed doors on legislation aimed at repealing and replacing major portions of the Affordable Care Act. Tomorrow, they are expected to unveil their plan. The Republican-controlled House of Representatives narrowly approved its version of repeal last month. An estimated 23 million people could lose their healthcare under the House plan, according to the non-partisan Congressional Budget Office.

The Senate proposal cuts off Medicaid expansion more gradually than the House bill, but would enact deeper long-term cuts to the health-care program for low-income Americans. Senate Majority Leader Mitch McConnell said on Tuesday the Senate healthcare bill would be different from the House version, but he did not elaborate.

Given the opposition of all Senate Democrats to repealing Obamacare, Republican leaders will need the support of at least 50 of the chamber’s 52 Republicans to ensure passage. The bill will be brought to the Senate floor once the CBO has assessed its cost and impact, likely next week. Even if the Senate measure does pass the upper chamber, it will still have to pass muster with the more conservative House before any legislation could be enacted.

A Roper Center analysis shows the proposal with just 29 percent support, making it the most unpopular piece of legislation Congress has considered in decades. There is no state in the union where a majority of voters support the bill.

Meanwhile, a new report, released by the Agency for Healthcare Research and Quality (AHRQ), says the coast-to-coast opioid epidemic is swamping hospitals, showing 1.27 million emergency room visits or inpatient stays for opioid-related issues in a single year.

The report puts Maryland at the very top of the national list for inpatient care. The state, already struggling with overdoses from heroin and prescription opioids, has seen the spread of the synthetic opioid fentanyl, which can be mixed with heroin or cocaine and is extraordinarily powerful. Opioid-related deaths in Maryland had nearly quadrupled since 2010, and deaths from fentanyl had increased 38-fold in the past decade.

Baltimore City saw 694 deaths from drug and alcohol-related overdoses in 2016 — nearly two a day, and a big spike from 2015, when 393 people died from overdoses. Drug overdoses, which range from prescription painkillers to heroin and fentanyl, cause most of the fatal overdoses. In 2015, opioid overdoses killed 33,039 Americans, according to data that the Centers for Disease Control and Prevention.

The sharpest increase in hospitalization and emergency room treatment for opioids was among people ages 25 to 44. The new report shows that women are now as likely as men to be admitted to a hospital for inpatient treatment for opioid-related problems. The report identifies big increases in hospitalizations among people older than 65, but those cases predominantly result from reactions to prescription medication, rather than from overdoses or the use of heroin or other illegal drugs.

The National Association of Realtors reports  existing home sales were up 1.1% in May, at a seasonally adjusted annual 5.62 million rate.  April’s sales stood 2.7% higher than a year ago, and marked the third-highest selling pace of the past year. The median number of days a property spent on the market dropped to a fresh low of 27 days.

There were 1.96 million homes for sale at the end of the month, 8.4% lower than in the same period a year ago. Lower supply amid sturdy demand nudged prices higher again. The median sales price in May was $252,800, a new all-time high and 5.8% higher than a year ago. May marked the 63rd straight month of yearly price gains.

The Realtors called the pace of price appreciation “unsustainable” and noted that “some would-be buyers are having to delay or postpone their home search” because of low supply.

Confidence and business activity have climbed since the election. The economy seems to be muddling along. This would typically be good for banks, as demand for loans should be higher. However, bank lending has fallen significantly since last year. Total bank loans have grown just 4.6% since February 2016, the weakest showing since 2014. Business loans rose 3.9%—the slowest growth rate in nearly six years—and were the worst-performing segment.

The main reason for the tepid economic growth over the last eight years has been a lack of business investment. Many thought improved consumer confidence and business activity were signs that this trend had reversed. So far, it appears the opposite has happened.

America leads the world when it comes to access to higher education. But when it comes to health, environmental protection, and fighting discrimination, it trails many other developed countries. The Social Progress Index released this week is compiled from social and environmental data that come as close as possible to revealing how people live. America came in at number 18.

The Trump administration made its final plea to the U.S. Supreme Court to allow its proposed ban on travelers from six Muslim-majority countries to go into effect as the justices weigh how to handle the hotly contested dispute. The court papers filed today complete the briefing on the government’s emergency application asking the justices to block lower court injunctions in favor of challengers to the ban.

Lawyers for the state of Hawaii and individual plaintiffs in Maryland urged the high court not to allow the ban go into effect. The Supreme Court could now act at any time.

Travis Kalanick has resigned from his job leading Uber, giving up on his effort to hold onto power as self-inflicted scandals enveloped him and the company he co-founded. Pressure from investors, who have poured more than $15 billion into the company, ultimately did what the board could, or would, not: It convinced the 40-year-old chief executive to step aside. Uber is now in need of a new CEO.

The world’s largest sportswear maker and the world’s largest online retailer might finally work together. According to analysts at Goldman Sachs, Nike will start selling directly on Amazon.com. Nike’s shoes, apparel, and accessories are already sold on Amazon, but from third-party sellers and unlicensed dealers that purchased the product wholesale from Nike.

Selling directly on the site eliminates a layer between Nike and the consumer, allowing the company to better control pricing and presentation. It’s not quite direct to consumer, but it’s a lot closer. Goldman sees it as a deal worth potentially up to $500 million of revenue yearly — an additional 1% of global sales for the Nike.

Nike’s biggest competitors — Adidas and Under Armour — already sell directly on Amazon, and they both have fancy splash pages that highlight the newest and best product the companies offer. Dick’s Sporting Goods and Foot Locker, some of Nike’s biggest retailers, were both down on the news of the increasing competition. Dick’s neared an 18-month low, while Foot Locker fell below a three-year-low.

Sears Canada is preparing to seek court protection against creditors in a move that will likely lead to a liquidation, according to reports by Bloomberg and Reuters. The company was spun off in 2012 from Sears Holdings, which owns Sears’ US business. Sears Holdings still holds 12% of the Canadian business’s stock.

Eddie Lampert, the CEO of Sears Holdings, owns 45% of Sears Canada’s shares. Sears Canada said earlier this month that it had “significant doubt” about its ability to stay in business, and was looking at a possible restructuring or sale.

UPS said today that, for the first time, it will assess a surcharge on peak holiday season deliveries in the US to recoup the higher costs that come with managing the peak surge.

Wal-Mart is telling some technology companies that if they want its business, they can’t run applications for the retailer on Amazon’s cloud-computing service, Amazon Web Services.

Bruno Iksil, the former JPMorgan Chase trader at the center of the “London Whale” trading scandal, has accused the bank’s Chief Executive Jamie Dimon of laying the ground for the $6.2 billion loss. In an account on his website, Iksil, who traded credit derivatives for JPMorgan in London, also blamed senior executives at the bank.

Financial Review

The Case Has Strengthened

Sinclair Noe — August 26, 2016

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

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DOW – 53 = 18,395
SPX – 3 = 2169
NAS + 6 = 5218
10Y + .06 = 1.62%
OIL – .04 = 47.29
GOLD – .90 = 1321.70

Federal Reserve chair Janet Yellen delivered a speech at the Jackson Hole Economic Symposium this morning. Here’s what she said, the key point: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Yellen said the Fed expects “moderate growth” in gross domestic product, additional strengthening in the labor market and inflation rising to 2% over the next few years.  She said that any decision on interest rates “always depends on the degree to which incoming data continues to confirm the Fed policy committee’s outlook.” Yellen spent the bulk of her speech discussing the potential need to add new tools to the Fed’s toolkit to combat the next recession given that interest rates remain so low. Yellen said the “U.S. economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.”

In the past, Yellen has been dovish; in no hurry to raise rates; and she wasn’t exactly pounding the table, and she didn’t give a specific date when the Fed might make a move. And even though Yellen was making a case for action, the markets kind of shrugged it off initially. So, vice-chair Stanley Fischer came along later and removed any ambiguity, saying: “Yellen’s comments are consistent with a possible September hike.”

That is not a guarantee of a rate hike but if the Fed takes action in about 3 weeks, you can’t say you weren’t warned. Stocks, bonds and commodities were all sporting nice gains following Yellen’s speech, then Fischer provided clarification and selling ensued, while at the same time the dollar moved higher and the VIX spike 4.5%.

U.S. economic growth was a bit more sluggish than initially thought in the second quarter as businesses aggressively ran down stocks of unsold goods, offsetting a spurt in consumer spending. Gross domestic product expanded at a 1.1 percent annual rate, down from the 1.2 percent rate reported last month. The revision also reflected more imports than previously estimated as well as weak spending by state and local governments. The economy grew at a 0.8 percent pace in the first quarter. It grew 1.0 percent in the first half of 2016.

The government also reported that after-tax corporate profits fell at a 2.4 percent rate last quarter after increasing at an 8.1 percent pace in the first quarter. Weak profits could limit an anticipated rebound in business spending. With profits declining, an alternative measure of growth, gross domestic income, or GDI, increased at only a 0.2 percent rate in the second quarter, the weakest since the first quarter of 2013.

Masked in the latest quarter is a very strong 4.4 percent annualized growth rate for consumer spending which is 0.2 percent higher than the first estimate. Inventory draw is the quarter’s culprit, pulling down GDP by a very steep 1.3 percentage points. But, in a counter-intuitive twist, lighter inventory in times of slow economic growth is a major positive for future production and employment and is a major plus for the ongoing quarter. The line of thinking is that there’s no pony in here now, but at some future point, there will be a pony, because ponies have always appeared in the past.

The Commerce Department reports the trade gap narrowed to a seasonally adjusted $59.3 billion in July from $64.5 billion in June. Exports rose by $2.9 billion during the month while imports shrank $2.4 billion. A surge in food exports helped cut the nation’s goods gap. Exports of foods, feeds & beverages rose 31 percent in the month though export prices of agricultural goods actually dipped slightly in the month. Other export readings are less favorable including a decline for capital goods, reflecting weak global investment in new equipment, and a small dip for consumer goods.

The University of Michigan’s consumer sentiment index for August slipped to 89.8 from 90.0 in July. The index is 2.3% lower than a year ago.

A very good article by Rex Nutting in Marketwatch asks a key question: Who’s preparing the United States for the 21st century? Nobody, really. Not the 22 million private businesses, not the 118 million households, and not the 90,000 state, local or federal government agencies.

Since the recession, investments have fallen sharply, and they haven’t gotten back up again. It seems that everyone is still scarred by the Great Recession, and by the collapse of asset bubbles in 2000 and 2006. Gross domestic investment totaled about $3.6 trillion in the second quarter of 2016, about 20% of gross domestic product.

That may seem a large sum, but it’s the lowest share of GDP, except during recessions, since 1947. But when you consider depreciation, the actual number is probably closer to $750 billion in the second quarter, or 4% of GDP, about half of the average over the post-war period. In fact, net investment has been running at the lowest rates since the Great Depression of the 1930s.

Business fixed investment has fallen for three quarters in a row, the first time that’s happened outside of a recession or its immediate aftermath since the mid-1980s. Net investment by state and local governments dropped to 0.6% of GDP in the second quarter, about half the average over the post-war period.

We have an economy that’s underperforming, but no one is willing or able to invest the sums needed to build the offices, factories, mines, computers, machinery, roads and airports we’ll need in the future. Business leaders don’t see a quick payoff in long-term investments, and public officials can’t fill the gap because the public thinks austerity now is better than growth tomorrow.

A U.K. sentiment index from YouGov and the Centre for Economics and Business jumped to 109.8 from 106.6 in July. The July print was a three-year low, and the rise in August was the largest in three years. It looks like the panic that gripped the public in the immediate aftermath of the Brexit vote has subsided, but the Centre warns it could all change though as details of the Brexit start to become reality.

If you have an Apple iPhone, you need to fix it. Apple issued a patch to repair a dangerous security flaw in iPhones and iPads after researchers discovered that a prominent United Arab Emirates dissident’s phone had been targeted with a previously unknown method of hacking. The hack is the first known case of software that can remotely take over a fully up-to-date iPhone 6. The researchers said they had alerted Apple a week and a half ago, and the company developed a fix and distributed it as an automatic update to iPhone 6 owners.

Adding another twist to the drama over Herbalife, investment bank Jefferies has been looking for the past month to find buyers for Carl Icahn’s 18% (roughly $1 billion) stake in the company. As if the idea of Herbalife’s largest shareholder exiting wasn’t enough of a story, the report also says Bill Ackman was among a possible group of buyers. Ackman has been shorting the stock for years. 

Icahn’s sale would come just weeks after he expressed renewed confidence in the company following the FTC settlement. Ackman kicked off the fight in 2012 with a widely watched presentation and a $1 billion bet that the stock would collapse. Icahn joined the battle a few months later and soon after got several Herbalife board seats.

Since then, the men have screamed at each other on live television and they and the company have traded legal accusations amid multiple investigations and a feature-length documentary. If Ackman really wanted to crush Herbalife, one way would be to get rid of the largest holder and then sell.

Apollo Global Management said it would buy cloud services provider Rackspace Hosting in a deal valued at $4.3 billion. The $32 per-share-offer represents a premium of 6 percent to Rackspace’s Thursday closing price. It’s also a 38% premium to Rackspace’s closing price on August 3. There was a very large short interest in Rackspace, more than $400 million. Ouch.

This exit from the public market can be laid squarely at the feet of Amazon Web Services. Amazon and Rackspace used to be such fierce competitors in cloud computing that Rackspace spearheaded a project called OpenStack to give itself and other IT vendors a chance to compete with Amazon. And OpenStack was successful, just not as successful as Amazon. It says something that the company went private instead of being bought by its partners, Amazon, Microsoft or any IT firms looking to jump start their cloud revenues; and what it probably says is that Amazon is crushing it in the cloud.

The Surgeon General of the United States, Vivek Murthy, has sent an electronic letter to 2.3 million doctors asking for their help to curb what’s being called an “unprecedented” epidemic of opioid painkiller overdose deaths. It’s the first time in history that a surgeon general has sent a letter directly to American physicians. Despite being home to 5% of the world’s population, America consumes 80% of its opioids. Between 2013 and 2014, deaths from synthetic opioids skyrocketed by 79%, according to a new Centers for Disease Control and Prevention report released Thursday.

A 2014 report from the American Academy of Neurology estimates that more than 100,000 Americans have died from prescribed opioids since the late 1990s. Those at highest risk include people between 35 and 54, the report found, and deaths from opioids in this age group have exceeded those from firearms and car crashes.