Financial Review

Shut Up

Sinclair Noe — February 24, 2017

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DOW + 11 = 20,821
SPX + 3 = 2367
NAS + 9 = 5845
RUT – 0.1 = 1394
10 Y – .07 = 2.32%
OIL – .42 = 54.03
GOLD + 7.60 = 1257.90

11 days of record breaking closes, the best streak of positive sessions since 1993. The longest streak of record breaking sessions is 14 in a row – back in 1897.

For most of the day, the major indices were in negative territory; Dow futures dropped more than 100 points early in the morning, and then, in the final 17 seconds, buyers jumped in again. The Dow Industrial Average is up more than1,000 points since January 1 and almost 3,000 points since the election.

This was the third up week in a row for the Dow, and the fifth straight positive week for the S&P and Nasdaq. The 10-year Treasury note has its best week since last June. Gold is up 8 of the last 9 weeks and at its highest level since October.

In economic news, U.S. new home sales rose 3.7 percent in January, below the expected increase of 6.3 percent. Meanwhile, consumer sentiment in the U.S. hit 96.3 in February, slightly above an estimate of 96. Earnings season, which is coming to an end, has been much stronger than anticipated.

Per Thomson Reuters, fourth quarter earnings growth is tracking about 7.5%. It seems US equity funds are where the world is parking its money for the time being, with over $25 billion coming into market coffers since January 1.

President Trump spoke before the Conservative Political Action Committee today, and he ramped up his attack against the news media, charging that “fake news” outlets are “the enemy of the people.” And later in the day, the White House fired a shot across the bow, blocking CNN, the New York Times, the Los Angeles Times, Politico and BuzzFeed from an off-camera White House press briefing conducted by White House press secretary Sean Spicer.

The Associated Press and Time magazine boycotted the briefing because of how it was handled. The White House Correspondents Association also protested the move.

Spicer only allowed in reporters from a handpicked group of news organizations that, the White House said, had been previously confirmed. The press session, known as a gaggle, was scheduled as a no-camera event, less formal than his usual briefings that are carried live on cable news. But past administrations have not hand-selected outlets that can attend such sessions.

Two of the barred outlets, CNN and The Times, have been a focus of Mr. Trump’s ire. And during the presidential campaign, some journalists from BuzzFeed News and Politico were prohibited from attending Trump rallies. Representatives of the barred news organizations made clear that they believed the White House’s actions were punitive.

Oil investors have placed the biggest bet in history that prices will rise. Fund managers now hold more Brent oil futures and options contracts than at any time on record, equivalent to some 480 million barrels of oil and nearly double the amount held just two months ago.

The Brent April contract now commands a premium of $1.50 over the December 2018, a condition known as backwardation. Crude inventories held in the world’s richest nations are still high, but they have begun to drain, and traders expect demand for oil to improve to the point where it overtakes supply.

Meanwhile, industry executives, analysts and investors sizing up Saudi Aramco say it may be worth nowhere near the $2 trillion that’s been touted. For example, Wood Mackenzie came up with a rough valuation of Aramco’s core business of $400 billion.

While that is significantly more than Exxon Mobil, with a market cap just under $340 billion; it is not enough to provide the capital the Saudis require to run the national budget. That’s just a guess at valuation because Saudi Aramco has never revealed financial statements.

For the Saudis, the writing is on the wall. Demand for oil will peak in the next 10 to 12 years, according to Royal Dutch Shell projections, as alternative fuels and electric cars gain popularity, putting Middle East energy producers on shakier footing.

Saudi Aramco valuations are premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields, and multiply by $8 (a benchmark used to value reserves). By that logic, though, Russian producer Rosneft’s market capitalization would be $272 billion instead of $64 billion, and the valuation of Exxon Mobil would be 53 percent smaller than it is.

Another factor for valuation – those reserves might not be all that they’re cracked up to be. Consider that Exxon Mobil just lost 4.3 billion barrels of reserves this week. Not lost really, just removed from their books. The reserves are still under the ground and controlled by Exxon Mobil but for accounting purposes, they no longer meet the SEC’s criteria for being economic to produce anytime soon, chiefly because oil prices have collapsed. Higher prices could push those reserves back onto the books, but lower demand could keep prices much lower for much longer.

Exxon Mobil CEO Darren Woods (he’s the guy who replaced Rex Tillerson) – Woods is calling for a nationwide carbon tax to discourage use of polluting fuels. In a blog post, Woods writes: It “would promote greater energy efficiency and the use of today’s lower-carbon options, avoid further burdening the economy, and provide incentives for markets to develop additional low-carbon energy solutions for the future.”

In a memo signed Feb. 21 but published late on Thursday, US Attorney General Jeff Sessions rescinded a six-month-old order that was to phase out the use of private prisons by the federal government. CoreCivic and Geo Group, two of the largest for-profit prison operators, both rose in after-hours trading. The companies have more than recovered the steep losses their shares suffered after the former administration’s September directive.

JC Penney will shutter two distribution centers and 130 to 140 stores. The closures announced Friday represent 13% to 14% of the company’s store portfolio, less than 5% of total annual sales and 0% of net income. The company is starting an early retirement program for about 6,000 eligible associates. Chief Executive Marvin Ellison said closing stores will allow Penney to adjust its business to “effectively compete against the growing threat of online retailers.”

Department store operators Kohl’s and Macy’s are betting on a potential money-spinner – carving out prime space within their sprawling stores and leasing them to other retailers. The move underscores the pressing need for the two chains to better monetize their real estate assets at a time when fewer people are visiting malls.

Meanwhile, retailers have been lobbying against a border-tax proposal that would increase the tax bite on any company that imports goods into the US. Retailers would be among the biggest losers if such a proposal were implemented in full, as much of their sales are of imported goods.

Retailers and other critics say the planned 20 percent tax on imports could be passed along in higher prices to consumers, including manufacturers that rely on imported goods to make their products. Some critics have warned of a potential global trade war which would sharply curtail US and world economic growth.

Advocates say U.S. exporters will gain as their revenues will be excluded from federal taxes. They say the tax on imports will encourage domestic production and cause the already strong dollar to rise, offsetting upward pressure on import prices. Yesterday, Trump spoke positively about a border-tax.

Today, Gary Cohn, the president’s chief economic adviser, told a group of executives at a private event in Washington that the White House does not support this initiative. If the administration can’t find unanimity in a tax plan, imagine what happens when an actual plan is subjected to public scrutiny.

Royal Bank of Scotland reported a sharp rise in losses, $8.8 billion for the full-year, marked by higher legal penalties and restructuring costs. RBS took charges to set aside money to cover legal cases in the US where analysts expect it to pay the biggest regulatory penalty in its history for mis-selling US securities backed by toxic mortgage loans.

RBS was the only British lender to fail the Bank of England’s stress test in 2016. The British government, which owns more than 70 percent of RBS, has said it will not resume selling its stake until the bank settles its US fine and resolves its state aid requirements.

MacDonald Dettwiler and Associates has agreed to buy US-based DigitalGlobe for about $2.4 billion to strengthen its position in the satellite imagery market.

China’s state-owned Sinochem is in early talks to buy an equity stake in Noble Group. And now, Iceberg Research has issued critical report that raises concerns about Noble’s accounting practices, claiming the commodity firm is not worth its book value. Noble shares are down about 17% on the news.

Google and Uber started off as friends, then became competitors, and are now adversaries in a bitter legal fight to control the future of transportation. Waymo, the Google self-driving-car group, has accused Uber of using stolen technology to advance its own autonomous-car development. Google filed a lawsuit, claiming that a team of ex-Google engineers stole the company’s design for the lidar laser sensor that allows self-driving cars to map the environment around them.

A software bug leaked encrypted personal data from hundreds of thousands of web-pages hosted by Cloudflare. The company said the bug was fixed quickly and there was no sign that the leak was exploited by hackers.

Foot Locker reported better-than-expected earnings in the fourth quarter despite a slowdown in the retail industry. Same store sales were up 5%, topping expectations.

HP Enterprise’s revenues drops 10%. Sales fell in the first quarter, which ended January 31, with sluggish demand for its storage equipment and servers.

Samsung Electronics is tightening board oversight on donations, as the conglomerate struggles with the fallout from a graft scandal. The flagship of South Korea’s top conglomerate Samsung Group has been at the center of an influence-peddling scandal that led South Korea’s parliament to impeach President Park Geun-hye in December.

Jay Y. Lee, leader of Samsung Group and Samsung Electronics’ vice chairman, was arrested last week after being named a suspect by the South Korean special prosecutor’s office. The Samsung board of directors will now vote on any financial payment of $886,000 or more and disclose any such payments publicly.

Financial Review

Count Your Pants and Shirts

Sinclair Noe — February 23, 2017

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

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DOW + 34 = 20,810
SPX + 0.99 = 2362
NAS – 25 = 5835
RUT – 9 = 1394
10 Y – .03 = 2.39%
OIL + .77 = 54.36
GOLD + 12.10 = 1250.30

The Dow Industrial Average hit another record high close, its 10^th record in a row, its longest run of record closes since 1987. Not counting record closes, the last time the Dow logged gains for 10 straight sessions was March 2013. The S&P 500 finished up a fraction of a point and just short of Tuesday’s closing record of 2,365. The benchmark index set an intraday record of 2,368.00 before retreating.

Treasury Secretary Steven Mnuchin said today that he has asked his staff to explore having the U.S. government issue debt maturities as long as 50 years or 100 years. In an interview on CNBC, Mnuchin said he was not ready to make a “formal announcement” of a 50-year or a 100-year bond.

Mnuchin repeated it was the Trump administration’s goal to have Congress complete work on a tax-reform package by August. Trump has promised a “phenomenal” tax plan by early March to cut business taxes. Paying for that “phenomenal” tax plan could require an equally phenomenal rate of economic growth that experts, including the non-partisan Congressional Budget Office, say may not be possible.

Mnuchin said the administration is aiming for a 3% or higher annual growth rate, but said it make take a couple of years, probably 2018, before we see an “engine of growth” from tax reform and regulatory relief.

Mnuchin says the Treasury has no plans now to label China a currency manipulator. Later in the day, Trump called China a “grand champion” in currency manipulation.  Mnuchin also agreed with the sentiment that the stock market is a report card for how the Trump administration is doing. “Absolutely,” he said, “It’s a mark-to-market business.”

And in the first month, the administration gets the grade of a solid A. Of course, it still has a long way to go to match the 17.4% annual gains sported by the Clinton Administration. And Mnuchin should be wise enough to realize the market is fickle.

Axios reported that President Trump‘s infrastructure plans may be pushed back until 2018. Axios, citing Republican sources, said that putting off any consideration of these plans would give lawmakers on Capitol Hill more breathing room to deal with a legislative calendar that already includes a Supreme Court nomination, tax reform and repealing Obamacare.

Several construction stocks did not fare well today. Shares of Fluor, Eagle Materials, Quanta Services and Vulcan Materials all dropped at least 1.5 percent. U.S. Steel’s stock dropped more than 7 percent.

The Justice Department has rescinded a memo issued by the Obama administration that phased out the use of private contractors to run federal prisons.

The president met today with company executives to discuss how to create jobs, which is nothing unusual, except that five of those companies are laying off thousands of workers as they shift production abroad. Those companies include General Electric, Caterpillar, 3M, United Technologies and Dana. The big idea from the execs was to cut the business tax rate.

The number of Americans filing for unemployment benefits rose slightly more than expected last week, but the four-week average of claims fell to its lowest level since 1973. Initial claims for state unemployment benefits increased 6,000 to a seasonally adjusted 244,000 for the week ended Feb. 18. The four-week moving average of claims, which smooths out week-to-week volatility, fell 4,000 to 241,000 last week.

The American Petroleum Institute reported an 884,000-barrel decline in U.S. crude supplies last week, a 893,000-barrel decline in gasoline stocks and a 4.2 million barrel decrease in distillate inventories.

Official inventory data from the U.S. Energy Information Administration shows a build of 600,000 barrels, that was less than expected. Last week, EIA’s report put crude stockpiles at a record high of 518.1 million barrels. This week’s figures were for a total inventory size of 518.7 million barrels, still above seasonal limits.

Oil producers, in and outside of OPEC, have largely kept their promise to reduce collective output by 1.8 million barrels a day starting in January to tackle a global supply glut. However, a steady increase in US crude production and inventories is stoking concerns that global supply remains bloated despite these cuts.

The United States is expected to become a net exporter of natural gas on an average annual basis by 2018, per a recently released Annual Energy Outlook update from the U.S. Energy Information Administration.

The transition to net exporter is driven by declining pipeline imports, growing pipeline exports, and increasing exports of liquefied natural gas (LNG). The United States is also projected to become a net exporter of total energy in the 2020s, in large part because of increasing natural gas exports.

Low energy prices during 2016 forced Exxon Mobil to lower its estimate of its proved oil and gas reserves. The company had to shave off nearly 15%, or 3.3 billion barrels of oil equivalent, of untapped crude. It comes a day after ConocoPhillips de-booked more than a billion barrels of its oil sands bitumen reserves, citing weak global energy prices.

Wind plant manufacturing is the fastest growing job sector in the U.S. economy — and this employment has been concentrated in the “Rust-Belt” states, pivotal in swinging the presidential election. Similarly, domestic solar companies are growing 12 times faster than the overall job creation rate in the U.S. economy.

In total, renewable energy sector employment in the United States grew 6 percent in 2016 to 769,000 jobs, while employment in gas, coal and oil exploration and extraction combined fell 18 percent, to 375,000 jobs.

European budget carrier Norwegian Air Shuttle said it would begin flying single-aisle planes nonstop from the U.S. to Europe starting in June. The initial flights will connect Edinburgh, Scotland to Stewart International Airport in New York, Green Airport in Providence, Rhode Island, and Bradley International Airport near Hartford, Connecticut.  The airline is promising fares as low as $65.

McDonald’s diners will soon be able to quench their thirst for as little as a dollar. Starting in April, soft drinks of any size will cost a buck, while McCafe specialty drinks will sell for $2. McDonald’s has been looking for ways to boost profits and sales, making its popular breakfast items available all day, and recently rolling out a smaller and jumbo-sized version of its iconic Big Mac.

Jack In The Box missed estimates by 7 cents with adjusted quarterly profit of $1.18 per share, and the restaurant chain’s revenue fell short of forecasts as well.

The Model 3 electric sedan remains on schedule and will reach production of about 5,000 units per week by the end of the year. Tesla reported a wider-than-expected loss of 69 cents per share, compared with the consensus estimate for a 43-cent loss. CEO Elon Musk also announced he will likely seek more capital from investors.

Carlos Ghosn, longtime CEO of Nissan who saved the automaker from near-collapse, will leave his current post to oversee Nissan’s alliances with Renault and Mitsubishi Motors.

Square lost 4 cents per share for its latest quarter, smaller than the 9 cents forecast by analysts, while the mobile payments company’s revenue came in slightly above estimates. Square saw a better than 34 percent jump in payment volume compared with a year earlier.

Nvidia shares closed down 9.3% after a round of bearish analyst comments prompted investors to take profits from the high-flying chip maker, which has more than tripled over the past 12 months. Instinet downgraded the stock to reduce from buy, while BMO Capital Markets cut its price target to $85 from $100.

Shares of HP Inc. rallied 8.6% after quarterly results topped Wall Street estimates.

Also, shares of First Solar led S&P 500 gainers, rising 11%.

Shares of L Brands sank 16% after the Victoria’s Secret parent late Wednesday issued weaker-than-forecast guidance for 2017. Might be feeling the pain from slowing mall traffic.

Hormel Foods shares lost 5.4% after the food company cut its earnings forecast for the year following a sharp decline in profit from its Jennie-O turkey brand.

Kohl’s Corp. shares, which had traded higher earlier after earnings beating forecasts, closed down 2.1%.

The Powerball lottery jackpot reached $435 million last night. A winning ticket was sold in Indiana. For the rest of us – back to work.

Financial Review

New Ways to Hail a Taxi

Sinclair Noe — August 18, 2016

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

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DOW + 23 = 18,579
SPX + 4 = 2187
NAS + 11 = 5240
10 Y – .02 = 1.53%
OIL + 1.44 = 48.23
GOLD + 3.70 = 1353.10

The US stock market hit all-time highs this week despite the second quarter of 2016 being another quarter with negative earnings growth. While there are still a few more earnings announcements to be released before the quarter is closed out, it looks as if earnings were down approximately 5% from the same quarter a year ago. This will be the sixth consecutive quarter with declining earnings – not the stuff of which record high stock prices are made.

The stock market continues to sleep walk. The S&P 500 finished up 0.2% today at 2187, making today our 29^th straight day without a 1% move. Energy stocks led the way. The Russell 2000 outperformed by a significant margin, and transports also impressed.

On August 3^rd, oil hit a low of $39.96 per barrel; since then it has gained more than 20% – technically a bull market in oil. Although it should be noted that bull and bear markets in oil are becoming the norm; we’ve seen 20%-plus swings in January, April and June this year. We have seen an oil glut push prices lower, pushing some producers out of business, shutting down rigs in the oil patch; we have heard OPEC jawbone about freezing output.

When we hear about production cuts we also hear that Saudia Arabia has increased output to an all-time high to gain leverage in those OPEC talks. You might be forgiven if you believe the wild swings in oil are a result of supply-demand changes, but the fundamentals haven’t changed enough to justify the dramatic price changes.

It seems like everyone forgot that OPEC disappointed at the June meeting, when many market observers were looking for a production freeze. Traders remain encouraged by the Fed’s dovish twist yesterday, which is pushing down the dollar. But at the heart of the big price moves in oil, is pure speculation – gambling.

Still, the price of oil is approximately half what it was 2 years ago, and that is having some very real repercussions. During the second-quarter earnings season, several companies that aren’t in the energy sector continued to mention declines in their businesses in oil-producing areas.

Harley Davidson saw a jump in the number of people in oil-heavy regions who were defaulting on loan payments. Caesars Entertainment said a lot of weakness was in the southeastern US. And Popeyes demonstrates that it’s not only consumer spending on big-ticket items that has fallen. Seems workers in the oil patch are less likely to buy fried chicken and biscuits. It’s a pretty good excuse anyway.

The Fed is worried about a couple of things. The minutes from the July FOMC meeting had a little bit of everything, suggesting the Fed still wasn’t sure when the next rate hike would occur. While there were numerous positives, the Fed suggested it was particularly worried about banks in Italy and stretched valuations in the US commercial real estate market. That left Fed fund futures implying balanced odds that there’ll be a rate hike by the end of 2016 — a probability that’s not much changed from before the minutes.

Jobless claims last week fell by 4,000 to 262,000, representing a one-month low, marking the 76th straight week that claims have been below 300,000 – that hasn’t happened since 1970, when the economy and the population was much smaller.

Employment figures for Arizona for the month of July showed the state lost 14,800 jobs and the unemployment rate increased two-tenths of a percentage point from 5.8% in June to 6.0% in July; the national rate is at 4.9%. Still, Arizona Nonfarm employment grew by 3.0% (76,100 jobs) over the year in July.

Meanwhile, the Federal Reserve Bank of Philadelphia’s barometer of regional manufacturing activity rebounded slightly into positive territory in August.

Five years after the housing recovery began, 5.9 million borrowers still owe more on their mortgages than their homes are worth. The negative equity rate is falling, now at 12 percent of all mortgaged homeowners, according to Zillow, down from more than 14 percent a year ago and more than 30 percent at the worst of the crisis. The numbers, however, are still well above normal levels and equally spread across urban and suburban communities.

Walmart got even bigger during the second quarter, as the company’s revenue and earnings topped Wall Street forecasts, and it reported its biggest same-store sales gain in four years. Walmart raised its full-year outlook in wake of the strong results after reporting earnings of $1.07 a share in the fiscal second quarter, slightly lower than last year’s $1.08 a share. Revenue grew 0.5 percent to $120.85 billion.

Cisco is cutting jobs. The company announced adjusted earnings of $0.63 a share on a 2% jump in revenue to $12.64 billion. Both numbers were ahead of estimates. Additionally, Cisco said it would eliminate 5,500 jobs, or 7% of its workforce, well below the job cuts of 14,000 job that were reported on Tuesday.

Nestlé had a distinctly average first half. The Switzerland-based maker of Kit-Kat candy and DiGiorno frozen pizza reported first-half revenue of $45 billion, and 3.5% organic growth. Net profit fell to $4.2 billion, missing estimates despite healthy sales in North America.

Lenovo had a stellar first quarter. The world’s biggest PC maker enjoyed a 64% leap in profit from the same time a year ago, boosted by $132 million from the sale of some Beijing real estate. It’s not all sunshine: Lenovo reported a 30% slowdown in global smartphone sales, and doesn’t expect its mobile division, which includes Motorola handsets, to make a profit before October 2017.

Just six months after it emerged from Chapter 11 bankruptcy, American Apparel has hired investment bank Houlihan Lokey to explore a sale. At least eight teen apparel retailers filed for bankruptcy this year amid fierce competition and stagnating sales, including Aeropostale, PacSun and the Wet Seal.

As earnings season winds down, you may have noticed that earnings reports are almost impossible to decipher. The Securities and Exchange Commission also noticed and they are cracking down on made-up numbers and vague language in U.S. companies’ earnings filings, sending the first of what is expected to become a steady flow of letters to finance heads requesting more information for investors.

The new letters also address issues regarding how metrics are defined by individual companies, as well as violations of rules about the kind of metrics allowed. The SEC updated its guidelines after becoming concerned that the proliferation of non-GAAP metrics and difficult-to-follow releases was confusing investors.

Shares of private-prison providers plunged in trading on Thursday following news that the Department of Justice plans to end the use of such facilities. Corrections Corporation of America, the largest publicly traded prison provider, fell 50% before trading was halted. Geo Group, a Florida-based provider of corrections facilities, also tanked by as much as 40% and was halted.

Deputy Attorney General Sally Yates instructed officials in a memo to withdraw or not renew contracts for private-prison operators when they expire. The goal is to scrap their use completely because the Justice Department found them to be less safe than those run by the Federal Bureau of Prisons and the private prisons are not cost effective.

The move won’t dislodge private prisons altogether from the American criminal justice system because they can still contract with states. Also, the Department of Homeland Security runs more than 100 immigration detention centers around the country, many of which are owned and operated by the same companies that run private prisons.

Sixteen banks, including JPMorgan, Citigroup and Morgan Stanley, are being sued by funds in the U.S. for allegedly manipulating a key Australian interest rate benchmark to generate hundreds of millions of dollars in illicit profits. The class action claims they sought to fix the bank bill swap rate, the local equivalent of Libor, which is used to price floating-rate bonds and syndicated loans.

The Department of Justice and the Environmental Protection Agency announced that motorcycle manufacturer Harley-Davidson has agreed to pay a $12 million civil fine after selling illegal after-market devices, called super tuners, that increased vehicles’ emissions. The settlement also requires that Harley-Davidson pay $3 million in a deal with the EPA to help mitigate air pollution caused by the super tuners, buy them back from its dealers, and destroy them.

Starting later this month, Uber will allow customers in downtown Pittsburgh to summon self-driving cars from their phones, crossing an important milestone that no automotive or technology company has yet achieved. Uber’s Pittsburgh fleet, which will be supervised by humans in the driver’s seat for the time being, consists of specially modified Volvo XC90 sport-utility vehicles outfitted with dozens of sensors that use cameras, lasers, radar, and GPS receivers.

Aerospace giant Airbus is designing a flying driver-less taxi that you can summon via an app on your smartphone. Airbus believes the global demand for the “flying cars” will run in to millions of vehicles and that demand will help reduce development costs. Airbus chief executive Tom Enders says, “In a not too distant future, we’ll use our smartphones to book a fully automated flying taxi that will land outside our front door – without any pilot.”

The vertical-takeoff-and-landing (VTOL) air taxi would use electric propulsion and multiple-ducted propellers, and would be piloted initially, before transitioning to fully autonomous operations. The prototype is scheduled to take flight sometime next year. Meanwhile, Airbus said it was also developing a drone-like helicopter which could ferry multiple passengers around a city. CityAirbus is slated to have a pilot on board at first but would switch to full autonomous operations when the technology developed.