Financial Review

Believe Me

Sinclair Noe — April 12, 2017

DOW – 59 = 20,591
SPX – 8 = 2344
NAS – 30 = 5836
RUT – 17 = 1359
10 Y – .01 = 2.29%
OIL – .68 = 52.72
GOLD + 12.60 = 1287.60

The S&P 500 closed below its 50-day moving average for the first time since Nov. 8. The 50-day moving average is a good indicator of the intermediate-term trend.

The dollar slumped and Treasury bond yields dropped to the lowest level this year after President Donald Trump said he will not brand China a currency manipulator and added that the greenback was getting too strong.

Trump also told the Wall Street Journal that he would prefer the Federal Reserve keep interest rates low. Trump also told the Journal he’d consider re-nominating Yellen to chair the Fed’s board of governors, after attacking her during his campaign. “I like her. I respect her,” Trump said, “It’s very early.”

Trump also voiced support for the Export-Import Bank, which helps subsidize some U.S. exports, after opposing it during the campaign.

Finally, Trump said NATO is “no longer obsolete” during a press conference today with NATO Secretary General Jens Stoltenberg, backtracking on his past criticism of the alliance. During the campaign, he frequently called the organization “obsolete,” saying it did little to crack down on terrorism and that its other members don’t pay their “fair share.”

And that is all within the past 24 hours.

U.S. stocks declined for a second day as volatility climbed again across asset classes. Rising tensions with Russia, North Korea and Syria after U.S missile strikes in Syria last week and escalating posturing with North Korea, have kept investors cautious.

Today, Russia blocked a Western effort at the U.N. Security Council on Wednesday to condemn last week’s deadly gas attack in Syria and push Moscow’s ally President Bashar al-Assad to cooperate with international inquiries into the incident. It was the eighth time during Syria’s six-year-old civil war that Moscow has used its veto power on the Security Council to shield Assad’s government.

Secretary of State Rex Tillerson met Putin in the Kremlin after talking to the Russian foreign minister, Sergei Lavrov, for around three hours. The White House claims Russia tried to cover up the Syrian chemical attack. Putin said trust had eroded between the United States and Russia. Tillerson said relations with Russia are “at a low point”.

Meanwhile, a U.S. Navy strike group is steaming toward the western Pacific in a show of force, and North Korea is warning of a nuclear attack on the United States at any sign of American aggression.

Even if geopolitical hotspots do not boil over, they require attention that is not being put toward pro-business policies such as tax cuts, simpler regulations and higher infrastructure spending, promises that helped power Wall Street to record highs.

The S&P financial index (SPSY) was down 0.9 percent a day ahead of results from three major banks in what will mark the start of the corporate earnings season. Analysts are expecting earnings to have risen 10 percent for all S&P 500 companies in the first quarter. Wells Fargo, Citigroup and JPMorgan are due to report results on Thursday, the last trading day of the week ahead of the Good Friday holiday.

Berkshire Hathaway is dumping 9 million shares of Wells Fargo worth around $480 million, to get around possible Federal Reserve regulations. Warren Buffett’s company owned more than 10% of the bank after Wells repurchased a large chunk of its shares in 2016.

Any entity owning more than 10% of a bank like Wells is subject to increased regulation from the Fed. Berkshire consulted with the Fed regarding the additional regulations and decided it did not want to deal with the trouble. Additionally, the company said it has no plans to sell any more Wells shares “beyond the quantity required to provide a small safety margin below 10%.”

The Labor Department said import prices fell 0.2 percent last month, the largest drop since August, after a 0.4 percent increase in February. That lowered the year-on-year increase in import prices to 4.2 percent from 4.8 percent in February.

The cost of petroleum declined in March, but the underlying trend points to a moderate rise in imported inflation as the dollar’s rally fades. Prices for imported petroleum fell 3.6 percent last month, the biggest drop since August, after increasing 1.3 percent in February.

Import prices excluding petroleum increased 0.2 percent after rising 0.3 percent the prior month. Import prices excluding petroleum have now increased for three straight months, in part reflecting an ebb in the dollar’s rally.

Prices for imported capital goods edged up 0.1 percent in March after rising 0.2 percent in February.

The drop in import prices is unlikely to be sustained with oil prices pushing higher in recent days following last week’s U.S. missile strike on Syria and reports that Saudi Arabia wants to extend production cuts enacted in January for another six months.

Despite weak imported price pressures, domestic inflation is rising. Most consumer inflation measures have pushed above the Federal Reserve’s 2 percent target. A report on Thursday is expected to show producer prices unchanged in March, but rising 2.4 percent on a year-on-year basis.

The U.S. government had a $176 billion budget deficit in March as spending outstripped revenue. The budget deficit was $108 billion in March 2016, according to Treasury’s monthly budget statement. The fiscal 2017 year-to-date deficit was $527 billion compared with $459 billion in the same period of fiscal 2016.

President Trump is issuing a presidential memorandum that will call for a rethinking of the entire structure of the federal government, a move that could eventually lead to a downsizing of the overall workforce and changes to the basic functions and responsibilities of many agencies.

The order, which will go into effect Thursday, also will lift a blanket federal hiring freeze that has been in place since Trump’s first day in office almost three months ago and replace it with hiring targets in line with the spending priorities the administration laid out in March.

The move is a part of Trump’s campaign pledge to “drain the swamp” and it is expected to hit strong resistance in Congress. The budget already is facing opposition in Congress, and many programs the administration would like to target could only be eliminated through legislation.

Brazil’s President Michel Temer is trying to push ahead with business as usual, a day after a Supreme Court justice ordered corruption probes into 98 politicians, including leading legislators and a third of his cabinet.

Temer avoided commenting on the unprecedented wave of investigations triggered by plea bargain testimony from executives at engineering group Odebrecht, but he made clear the government was committed to implementing its ambitious reform agenda, which includes an overhaul of Brazil’s pension system. The investigation includes eight government ministers, the heads of both chambers of Congress and dozens of senior lawmakers.

Fewer Americans own homes than ever before, and rising consumer confidence does not appear to be changing that. The nation’s home-ownership rate dropped to a record low in 2016 from a record high in 2004, and even as home sales improve, first-time buyers are still missing out on much of the recovery.

Some renters are staying put by necessity and some by choice — it depends on who is asking them. The number of renters who said they don’t know when they expect to move rose to 37 percent in March compared with 30 percent in a survey conducted last September, according to a survey released this week by Freddie Mac, which helps finance the multifamily apartment market.

Survey respondents who said they expect to move during the next two years fell to 33 percent from 38 percent since September. In addition, 55 percent of all respondents, and 60 percent of 35- to 49-year olds, said they like where they live and don’t plan to move even if their rents rise.

A separate survey by Zillow, a real estate company which lists both rental and for-sale properties, found more than two-thirds of renters said that saving for a down payment was keeping them from buying a home. With home prices hitting new peaks in many markets, a 20 percent down payment on a typical home costs more than two-thirds of about $56,000, the national median annual household income, according to Zillow.

United Continental Holdings will compensate all passengers for the cost of the flight in which a man was forcibly removed by security officers. A spokeswoman for the airline, declined to say if the payment would be in cash, frequent-flier miles or some sort of weird voucher that nobody knows how to redeem.

After the blunder of the initial incident was compounded by a series of botched public responses, United is stepping up the effort to get back in consumers’ good graces. The passenger who was dragged from the plane was treated at a Chicago hospital and his lawyers sought a court order in Chicago to preserve evidence, including surveillance videos, crew lists and other information, that could be used in litigation. A lawsuit hasn’t been filed but it looks like it is on the way.

The city of St. Louis, Missouri — where the Rams were based for two decades before jilting it for Los Angeles last year — filed a lawsuit Wednesday claiming the team and the NFL failed to use proper protocol when the Rams were relocated.

The complaint also claims that moving the team “improperly” enriched Rams executives. It notes that Forbes estimated the value of the team more than doubled after it moved to Los Angeles. St. Louis is seeking $1 billion in damages.

I’ve seen the Rams play. No way the loss of that team is worth $1 billion.

Financial Review

Brexit Day

Sinclair Noe — June 23, 2016

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

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DOW + 230 = 18,011
SPX + 27 = 2113
NAS + 76 = 4910
10 Y + .05 = 1.74%
OIL + .96 = 50.11
GOLD – 9.60 = 1257.30

The highly anticipated Brexit referendum is underway in Britain, where citizens across the country are casting their vote on whether to ‘Remain’ or ‘Leave’ the EU. Two polls conducted on Tuesday and Wednesday found “Remain” was in the lead, although the overall picture from the last few days of polling was of a vote that was too close to forecast. Traders across London are still bracing themselves for an all-night vigil, while the G7 nations are poised to take “all necessary steps” to calm markets in case of a Brexit.

The polls in Britain closed at 10 PM, which is 2 PM here in Arizona. Unlike normal general elections there weren’t any exit polls when the voting stations closed. We may start to get a smattering of early results over the next hour or two. The final result is expected around “breakfast time” in London on Friday morning, according to the Electoral Commission, but the outcome may become clear earlier than that as the bigger electoral regions start to announce their votes. Bottom line, you might get results sometime after midnight (here in Arizona), or just wait until tomorrow morning.

As EU members await the results of the U.K. vote, the latest preliminary data on Eurozone business activity revealed yet another slowdown in growth for the single currency area. The composite flash PMI showed that services and manufacturing in the bloc tumbled to a 17-month low in June, falling to 52.8 from a revised figure of 53.1 in May.

The markets are weighing in on the Brexit vote. Blue-chip stocks in the U.K. rallied to a nine-week high. The Financial Times Stock Exchange, or FTSE-100 index, roughly comparable to the Dow Industrial in the US, rallied 1.2% today. The index marked a fifth straight gain and logged its highest close since April 21. At the same time, the British bank Barclays stopped accepting clients’ currency stop loss orders in an effort to limit its exposure to losses that could follow the results of the referendum.

Fewer Americans filed for jobless benefits in the week ending June 18. There were 259,000 initial claims, a decline of 18,000 from the prior week. It marked the 68th consecutive week in which claims were below 300,000, the longest such streak since 1973.

The Commerce Department reports new home sales declined in May, an expected pullback after an outsize jump in April.  Sales ran at a seasonally adjusted annual rate of 551,000. New home sales data are volatile and often subject to hefty revision, but the broad trend is up. May figures were 8.7% higher than in May 2015, and sales so far in 2016 are running about 8% higher than the same period a year ago. The median price of a new home was $290,400, 1% higher than a year ago. Supply is outpacing demand. It would take 5.3 months to exhaust all inventory if sales continued at the current pace.

Prices for entry-level homes in the U.S. are rising at twice the pace of the costliest properties as competition among first-time buyers intensifies.  According to an analysis by Zillow, values in the top third of the market climbed 4 percent in May from a year earlier, compared with an 8 percent increase for the least-expensive houses, Zillow said in a statement Thursday. The supply of starter-home listings plunged 9 percent, while the number of top-tier offerings was little changed.

We keep hearing that in many cities, high home prices are locking out young buyers, and then you have a growing number of people forced to rent at ever higher rates as demand overwhelms supply. Add in stagnant wage growth and it is tough for many wannabe first time home buyers. Some 26 percent of U.S. renters paid at least half their income to landlords in 2014, up from 20 percent in 2001, according to the State of the Nation’s Housing report, published by Harvard’s Joint Center for Housing Studies.

On the other hand, the number of homeowners who are severely cost-burdened by mortgage payments (paying 50 percent or more of their income) or moderately cost-burdened (paying 30 percent to 50 percent) actually fell from 2013 to 2014. The median rent-to-income ratio has hovered between 22.9 percent and 23.3 percent since 2010. While rents increased over that period, so did the median income of market-rate renters, which rose from $44,000 in 2010 to almost $58,000 so far this year. That’s partly because incomes have risen faster for more affluent renters, and that is partly because changing home-buying behavior has kept higher earners in the rental pool longer. Plenty of renters remain cost-burdened, and some of them earn good salaries.

Farther down the income spectrum, there’s simply not enough supply to meet demand: More than 10 million renter households earned 30 percent or less of the area median income in 2014, and only about 5 million apartments were cheap enough for those renters to afford. More than 1 million new households were created in 2015, compared with 620,000 new homes built. The shortfall of 430,000 units put more pressure on housing prices, especially at the bottom of the market.

The flash manufacturing purchasing managers index rose to a reading of 51.4 in June from 50.7 in May, the weakest reading since September 2009. The June reading was the best in three months. The manufacturing sector still looks to have acted as a drag on the economy in the second quarter. Still, today’s economic data on manufacturing, jobs, and home sales points to modest second quarter growth.

Helping breathe life into Greece’s struggling economy, the ECB will start accepting junk-rated Greek government debt as collateral for its regular bank lending operations. The decision to open a funding facility that had been shut for 16 months could lead to the partial lifting of capital controls in the coming days.

The casino operating unit of Caesars Entertainment can begin seeking creditor votes for a plan to exit its long and contentious $18 billion bankruptcy. The move will set a final courtroom showdown for early next year between the casino and bondholders who say they’re being shortchanged.

Sumner Redstone’s plan to replace five directors at Viacom is on hold until it can be determined if the 93-year-old is mentally capable of making decisions. The news came at a hearing on Wednesday, where a Delaware judge said he wanted to wait until another case regarding the media mogul’s competency was through its discovery process before ruling on the proposed board changes.

Cloud communications startup Twilio went public today. The deal, is the first Silicon Valley tech IPO of the year, and is being closely watched as a bellwether to test whether the market will be receptive of future tech IPOs this year. So far so good; shares were priced at $15 each, above the target of $12 to $14, and finished at $28.79, up 91%.

Volkswagen will pay owners of its polluting diesel cars up to $7,000, and agree to fund a grant program to offset air pollution, under a $10 billion settlement being negotiated for submission to a federal judge next week. Bloomberg reports VW will provide cash payments worth between $1,000 and $7,000, depending on the vehicle’s age and other factors, to compensate consumers. VW isn’t expected to be able to repair all of the cars affected to the satisfaction of the EPA, which may result in buybacks or extra payments to an environmental remediation fund.

The Supreme Court handed down a couple of decisions this morning. In the Case of the United States v. Texas, the court split 4-4 over President Obama’s plan to spare millions of immigrants in the country illegally from deportation and give them work permits, leaving intact a lower-court ruling blocking the executive action on immigration, which was never implemented. Obama’s 2014 plan was tailored to let roughly 4 million people – those who have lived illegally in the United States at least since 2010, have no criminal record and have children who are U.S. citizens or lawful permanent residents – get into a program that shields them from deportation and supplies work permits. The case was viewed as an important test of the limits of presidential powers.

In the case of Fisher v. University of Texas, the court upheld the practice of considering race in college admissions, rejecting a white woman’s challenge to a University of Texas affirmative action program designed to boost the enrollment of minority students. In the ruling, Justice Anthony Kennedy wrote that “considerable deference” is owed to universities when they are seeking to determine student diversity. He said that “it remains an enduring challenge to our nation’s education system to reconcile the pursuit of diversity with the constitutional promise of equal treatment and dignity.” But in the Texas case, the challengers had failed to show that the university could have met its needs via another process, he said. Kennedy noted that the university “tried and failed to increase diversity” through other race-neutral means.

An airplane powered solely by the sun landed safely in Seville in Spain early this morning after an almost three-day flight across the Atlantic from New York in one of the longest legs of the first ever fuel-less flight around the world. The Solar Impulse 2 touched down after 71 hours aloft, averaging about 43 miles per hour.

An electric racing car built by Swiss student engineers has broken the world record for acceleration by battery-powered vehicles. The “grimsel” car took only 1.513 seconds to reach 62 miles per hour (or 100 kilometers per hour) – slashing about a quarter of a second off the previous record time. So far, no petrol-powered production car has managed to hit the same speed in a comparable time. The grimsel needed only 98 feet of track to reach the landmark speed.

FINANCIAL REVIEW

Good Luck With That

Sinclair Noe — January 29, 2015

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

DOW + 225 = 17,416
SPX + 19 = 2021
NAS + 45 = 4683
10 YR YLD + .02 = 1.75%
OIL + .09 = 44.54
GOLD – 25.20 = 1259.10
SILV – 1.04 = 17.02

Yesterday, the Federal Reserve said it would remain “patient” on raising rates, but indicated it saw the U.S. economy getting stronger. The Fed also said it has seen inflation decline, and it may decline further, but that low oil prices are probably temporary. The FOMC statement said that economic activity has expanded “at a solid pace” and that labor market conditions have improved.

That was certainly the case last week. The fewest Americans in almost 15 years filed applications for unemployment benefits during a holiday-shortened week that typically makes the data more volatile. Jobless claims dropped by 43,000 to 265,000 in the week ended Jan. 24, the lowest since April 2000. No state reported an increase of more than 1,000 in claims for the week ended Jan. 17.

The National Association of Realtors reports its index of pending home sales fell 3.7% in December, though the year-on-year gain was 11.7%, the highest since June 2013. Pending sales measures contracts signed but not yet closed.

The Census Bureau reports the number of owner-occupied households fell by 354,000 from a year earlier as the homeownership rate dropped to its lowest level since 1994. The ownership rate for people under age 35 fell to 35.3%, down 1.5 percentage points from a year earlier and the lowest level in Census data going back to 1982. The number of renter-occupied residences grew by 2 million last year. Vacancy rates for rentals fell to 7% in the fourth quarter, the lowest since 1993. Total households increased 1.66 million. This means that younger people are finally entering the housing market, even if it is as renters rather than owners. That’s good news for landlords, better news for parents.

Denmark’s central bank cut interest rates today to negative 0.5%. Denmark’s rates were already negative, now more so. Denmark operates a currency peg with the euro, which has come under increasing pressure as the single currency has weakened with the recently announce quantitative easing plan.

The German economy has slipped into deflation for the first time in more than five years, and may not see inflation again before the year is out. Prices dropped by 0.3% in the year to January. Eurostat is due to publish inflation figures for the euro area as a whole on Friday. Economists expect these will show prices have fallen faster still, at 0.5% in the year to January.

The Bloomberg Commodity index, which tracks the global prices of 22 different commodities such as gold and oil, dropped to the lowest level since August 2002. The strength of the US dollar has hit commodity prices hard. Because most commodities traded in international markets are quoted in US dollars. When the dollar rises they become more expensive and this hits demand. The US dollar index, which tracks the price of the US dollar against the world’s currencies, has increased by more than 18% within the past six months.

Oil is near a 6-year low as stockpiles surge. The Energy Information Administration reported record-high inventories in the U.S. and raised more anxieties about the global oil glut. Domestic crude inventories rose by almost 9M barrels last week to reach nearly 407M, the highest level since the government began keeping records in 1982.

At the same time that oil price has been declining, we’ve also observed big drops in the price of other commodities like copper, the yield on 10-year US Treasuries, and the value of other currencies relative to the dollar. Certainly part of the reason for the decline in oil is because global demand has dropped, even as supplies remain high, but that isn’t a full explanation for the other commodities dropping.

Markets have been volatile in January. The S&P 500 dropped 1.4 percent Wednesday, bringing its slide this month to 2.8 percent, the most since January 2014. The Chicago Board Options Exchange Volatility Index jumped 32 percent in the previous two days, its biggest gain in almost seven weeks. Earnings season is in high gear as 52 of the S&P 500 companies post results today. Of those that have reported profit so far, 76 percent have exceeded estimates, while 57 percent topped sales projections.

Google posted fourth quarter numbers after the close of trade. They missed on the top line and the bottom line. Revenue (minus traffic acquisition costs) was $14.4 billion versus $14.6 billion estimates. Adjusted EPS was $6.88 vs $7.08 expected. Google’s share of the online-ad market is coming under pressure as more users spend time on smartphones and tablets. The average price of ads fell 3% in the quarter, following a decline of 2 percent in the previous period.

Also after the close, Amazon reported fourth quarter profits. That’s right, a profit not a loss of $214 million, or 45 cents per share, beating estimates of 18 cents. Revenue came in at $29.3 billion, missing estimates of $29.6 billion. Amazon forecast first-quarter sales of $20.9 billion to $22.9 billion, falling short of analysts’ average projection of $23 billion.

Alibaba Group’s quarterly revenue fell short of analysts’ expectations, showing signs of a slowdown in the Chinese e-commerce company’s growth during the holiday shopping season. Revenue rose 40% to $4.2 billion in the December quarter, missing the average analyst estimate of $4.4 billion. But margins increased to 58% from 50% in the prior quarter.

ConocoPhillips, the largest independent oil and gas company, reported a quarterly loss and again slashed its 2015 capital expenditures, citing lower crude prices. ConocoPhillips said its fourth-quarter loss was $39 million or 3 cents per share; excluding one-time items related, ConocoPhillips had a profit of 60 cents. In December, ConocoPhillips announced plans to cut spending 20% including eliminating a $6.5 billion plant in Qatar; now they say they expect to spend $11.5 billion, down from a prior projection of $13.5 billion.

Royal Dutch Shell posted Q4 profit of $4.2 billion, compared with $2.2 billion for same quarter a year earlier, although it said it would lower capex in 2015 and curtail overall spending by a total of $15 billion over the next 3 years.

More than 30,000 job cuts have been announced across the oil industry as companies shrink budgets. Exploration and production spending is expected to fall by more than $116 billion, or 17%.

Qualcomm reduced its outlook for fiscal 2015, saying it expects its newest Snapdragon mobile chip to not be used in a “major customer’s” flagship smartphone. The company also blamed increased competition in China for the reduced guidance. Still showing surprising growth for its latest quarter, Qualcomm reported that first-quarter net income rose 5% from a year ago to $2 billion.

Nokia reported stronger-than-expected quarterly profits this morning lifted by robust sales of latest-generation wireless telecom equipment in North America. Net profit in the three months to end-December quarter was €443M. However, the company stuck to a forecast for weakening profitability.

Confirming the firm’s first annual earnings decline in three years, Samsung Electronics said that October-December profit fell 28% from a year earlier, as strong chip earnings failed to make up for weakness in its mobile division (its fifth consecutive quarter of decline). Samsung issued a statement saying: “Uncertainties for global business conditions will likely grow further in 2015 due to the slowing Eurozone economy and financial risks in emerging countries.”

Deutsche Bank, has a boatload of legal problems and even more investigations but they posted a surprise Q4 net profit today after cutting the reserves it set aside to cover upcoming legal action and on higher investment banking revenue. Net profit of €438M beat expectations of a €289M loss forecast by analysts.

One of those legal investigations involves rigging the $5.3 trillion-a-day foreign exchange markets. Deutsche Bank and 11 other major banks are under investigation. A judge in Manhattan says investors can proceed with their anti-trust lawsuit accusing the big banks of a long running manipulation of closing spot prices, also known as the Fix. According to the 2013 lawsuit, these banks have held an 84 percent global market share in currency trading, and were counterparties in 98 percent of U.S. spot volume. The lawsuit is separate from criminal and civil probes worldwide into whether banks rigged currency rates to boost profit at the expense of customers and investors.

If you go to a restaurant today, chances are the food came from either Sysco or US Foods. The approval for an $8.2 billion Sysco-US Foods deal is being delayed again after the FTC sent a subpoena to a third-party food distributor this week asking for more information. Antitrust concerns are focused on whether the Sysco deal will drive up costs, as the two are the only ones with geographic reach to offer nationwide contracts for a wide variety of goods.

The FCC voted today to classify broadband internet as connections that provide download speeds of at least 25 megabits per second (Mbps) and upload speeds of 3 Mbps. That’s a good move. Those speeds are a lot faster than many people probably get from their internet provider (ISP). By definition, ISPs won’t be able to say they provide broadband unless they can give you at least those speeds.