Financial Review

Suicide is Painless

Sinclair Noe — March 6, 2017

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DOW – 51 = 20,954
SPX – 7 = 2375
NAS – 21 = 5849
RUT – 9 = 1384
10 Y flat = 2.49%
OIL – .12 = 53.21
GOLD – 8.80 = 1226.50

On this date in 2009, the S&P 500 hit an intraday low of 666; the closing low was 3 days later but the intraday low was 8 years ago.

On Friday, Fed chair Janet Yellen signaled that an interest rate hike would likely come when Fed leaders meet next week. A March rate hike is now being priced into the markets. About the only thing that could change the Fed’s plan is weak economic data, giving extra significance to Friday’s jobs report.

In January, according to DOL’s Bureau of Labor Statistics, the economy added 227,000 jobs; unemployment was at 4.8 percent; and hourly earnings rose 0.1%. The US probably created a healthy 200,000 new jobs last month, keeping the unemployment rate below 5%.

North Korea fired four ballistic missiles early today. Three landed within a couple hundred miles of Japan, in what Japan considers an exclusive economic zone. The United States has about 28,500 troops and equipment stationed in the South, and plans to roll out the Terminal High Altitude Area Defense anti-missile defense system by the end of the year. And the ongoing provocative actions by North Korea insinuate that somehow that country is skirting sanctions.

The United Nations Security council recently issued a report claiming Malaysian companies are acting as a front in an arms sales operation, and requesting suspect companies’ assets be frozen. Malaysia has denied the claims but otherwise not responded to the UN claims.

China recently announced it would stop all imports of coal from North Korea but the UN report raises concerns about front companies operating in China continuing to do business with North Korea. As early as December 2016, China had blown past a UN-imposed ceiling of 1 million metric tons on coal imports, purchasing twice that amount.

China then shrugged off a requirement to report its North Korean coal imports to the UN Security Council sanctions committee. North Korean banks and firms, meanwhile, have maintained access to international financial markets through a vast network of Chinese-based front companies, enabling Pyongyang to evade sanctions.

President Trump signed a revised executive order today banning citizens from six Muslim-majority nations from traveling to the United States but removing Iraq from the list, after his first attempt was blocked in the courts.

The new order keeps a 90-day ban on travel to the United States by citizens of Iran, Libya, Syria, Somalia, Sudan and Yemen. Iraq was taken off the banned list because the Iraqi government has imposed new vetting procedures, such as heightened visa screening and data sharing, and because of its work with the United States in countering ISIS militants.

Secretary of State Rex Tillerson told reporters after Trump signed the new order that, “It is the president’s solemn duty to protect the American people.” The new order spells out detailed categories of people eligible to enter the United States, such as for business or medical travel, or people with family connections or who support the United States. Trump’s original ban resulted in more than two dozen lawsuits in US courts.

Today’s revised order is likely to face legal challenges as well.

Demand for travel to the United States over the coming months has flattened out following a positive start to the year, with uncertainty over a possible new travel order likely deterring visitors, per ForwardKeys, a travel analysis company which analyses 16 million flight reservations a day from major global reservation systems.

Overall, bookings for travel to the United States over the next three months are 0.4 percent down on last year, whereas they had been 3.4 percent ahead the day before the travel restrictions were imposed. Per travel search site Kayak, searches from Europe for flights to the U.S. are down by 12 percent since the elections.

However, Germans, some of the world’s biggest spenders on travel, have not been deterred, with searches up 10 percent in that period.

General Motors has agreed to sell its European division to Peugeot. The deal will total $2.3 billion and consist of GM’s sales of its unit containing Opel and Vauxhall for $1.3 billion and its European GM Financial arm for $1 billion. GM will take a $4 billion charge on the sale. The Opel deal continues a business theme for GM. Earlier, the company had pulled out of Russia and discontinued its Chevrolet brand in Europe. It had also ended auto manufacturing in Australia.

Deutsche Bank is raising cash. Shares of the German investment bank are down by more than 6% after the company announced it would tap the markets for $8.5 billion to help improve its financial health after two years of heavy losses. Germany’s biggest bank announced plans for the huge share sale on Sunday along with another overhaul of its strategy.

CEO John Cryan said in a release: “The new three-pillar structure of our operating business should position us for significant growth, both in revenues and earnings.” This marks the fourth time Deutsche has raised capital since 2010. The four add up to a total of about $32 billion, more than the bank’s current market value.

Standard Life and Aberdeen Asset Management are merging. The deal to combine the two investment firms values the combined entity at about $13.4 billion. The merger will create the largest asset manager in Britain.

Wells Fargo execs may face criminal charges, (don’t hold your breath); but Reuters reports the US Department of Justice is investigating whether Wells Fargo executives hid details of the company’s recent scandal from the company’s board and regulators.

Wells Fargo disclosed in a $190 million settlement with regulators in September that staff opened as many as 2.1 million checking, savings and credit card accounts without customer consent over several years to satisfy management’s sales quotas.

Officials are seeking to find out if executives shared everything they knew about the phony accounts to the Wells Fargo board of directors and the Office of the Comptroller of the Currency, the lead regulator for national banks.

Greece’s economy suffers a setback. Greece’s economy shrank by 1.2% in the fourth quarter of 2016, per the latest data from the country’s statistical service Elstat. That was worse than the previous estimate of a 0.4% contraction.

Alphabet, Google’s parent company, is suing Uber for theft of trade secrets, alleging that one of the top engineers in its self-driving car program decamped with thousands of confidential files, including designs that helped him start self-driving truck company Otto and then quickly sell it to Uber. Uber denies those claims.

Hope you enjoyed yourself with that Snapchat IPO, because the fun’s just about over, at least for now, according to a weekend feature on Barron’s .  You can start by trying to justify this crazy number: A market cap that surged at one point to $37.8 billion means 93 times its 2016 revenue of $405 million, with no profits expected until at least 2019. Several analysts initiated coverage of Snap as a “sell.” And many shareholders apparently felt it was a good time to pocket profits, as shares slid 7% today.

TG Therapeutics said a late-stage study testing a combination of its experimental cancer drug, in combination with an existing drug from AbbVie proved superior in high-risk patients with a common form of leukemia. The trial involved adult patients with high-risk chronic lymphocytic leukemia, who had undergone at least one prior therapy. TG Therapeutics more than double in share price intraday.

A strain of bird flu has been detected in a chicken breeder flock on a Tennessee farm contracted to Tyson Foods. Tyson, the biggest chicken meat producer in the United States, said in a statement it was working with state and federal officials to contain the virus by euthanizing 73,500 birds on the contract farm. In 2014 and 2015, during a widespread outbreak of bird flu, the United States killed nearly 50 million birds, mostly egg-laying hens.

The Arizona state Supreme Court is scheduled to hold a hearing Thursday on a challenge to a minimum wage increase. Last year, voters passed a measure to raise the state’s hourly minimum to $12 by 2020, up from $8.05. Under the measure, the minimum increased to $10 in January. In a court order issued last month, Chief Justice Scott Bales said “the court will limit arguments to whether [the measure] violated a state constitutional provision that requires ballot measures to identify a funding source.”

Even though the state is exempted from the measure, the Arizona Chamber of Commerce and other business interests argue it will be impacted because of increased wages for private sector employees under state contracts. Any relief from the court would appear to be limited to state contractors and not private employers, unless the court agrees with the business groups’ arguments that the entire measure is unconstitutional.

The chamber and other business interests went to court after Prop. 206 passed with support from 58 percent of voters. The measure gradually raises the state’s minimum wage to $12 an hour by 2020 and requires employers to provide paid sick leave. The first step — an increase to $10 per hour — took effect Jan. 1. The sick-leave provision is scheduled to begin July 1.

Just 6% of U.S. adults who expect to receive a tax refund this year plan to splurge on something such as a vacation or shopping spree. According to a new Bankrate.com report, the most popular uses for the money are much more practical: save or invest it (34%), spend it on necessities such as food or utility bills (29%) and pay down debt (27%). Approximately 47% of all taxpayers anticipate a refund this year. Millennials are the most likely to receive refunds, the most likely to save/invest them and the most likely to have filed early.

Financial Review

Hack Attack

Sinclair Noe — December 29, 2016

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

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DOW – 13 = 19,819
SPX – 0.66 = 2249
NAS – 6 = 5432
RUT + 2 = 1363
10 Y – .03 = 2.48%
OIL – .29 = 53.77
GOLD + 16.70 = 1159.40

As expected, the Obama administration is fighting back against Russia for its hacking efforts to influence the election. The operation was broad, involving not only hacking the Democratic National Committee but scanning and intruding into state voter databases. The hackers leaked the pilfered e-mails in a bid to damage Clinton’s campaign, per U.S. intelligence agencies.

The administration sanctioned 2 Russian intelligence services, ejecting 35 Russian intelligence operatives from the US. The FBI and Homeland Security Department also released a report with technical evidence intended to prove Russia’s military and civilian intelligence services were behind the hacking to expose some of their most sensitive hacking infrastructure; a more detailed report will be released in 3 weeks, including malware and computer addresses.

Members of both parties in Congress have expressed alarm about the campaign hacking and vowed to conduct hearings into Russia’s role.

The number of Americans who applied for unemployment benefits in the week before Christmas fell by 10,000 to 265,000 – the lowest levels since last summer. Initial claims have been under 300,000 for 95 straight weeks, the longest streak since 1970. Just a reminder, the December Non-Farm Payroll report from the Department of Labor will be published on Friday, January 6; with early estimates running around 170,000 net new jobs in December.

Jobs are the lifeblood of the economy, and will give direction to the Federal Reserve moving into the New Year. We remember that last year the Fed was predicting 4 rate hikes for 2016; we ultimately got one increase in December. Now the Fed is predicting 3 rate hikes for 2017 as the economy inches toward full employment. So, the jobs reports are crucial data.

The trade deficit increased 5.5% in November to a seasonally adjusted annual $65 billion. Exports rose 1.0% to $121 billion, while imports totaled $187 billion, up 1.2% from October. Wholesale inventories edged up 0.9% to a level of $594 billion; that was 1.2% higher than a year ago. A bigger trade deficit is negative for GDP growth.

Sprint confirmed it would “create or bring back to America” 5,000 jobs, mostly in customer care and sales. President-elect Trump campaigned on bringing jobs back to the US but the 5,000 Sprint jobs confirmed Wednesday aren’t exactly new — they are part of a previously announced initiative led by Japan’s Softbank to create 50,000 jobs in the US.

Splitting from an earlier ruling, a federal appeals court has found that in-house courts at the Securities and Exchange Commission are unconstitutional. That marks a heavy setback for the agency’s enforcement efforts as it uses five administrative-law judges to handle most routine cases. A spokesman said the SEC is reviewing the decision and wouldn’t immediately have further comment.

The Food and Drug Administration released cybersecurity recommendations today for companies that manufacture internet-connected medical devices. The FDA says unsecured devices are subject to hacking and could prove fatal.

Alere is appealing a decision by the Centers for Medicare and Medicaid Services to revoke Medicare billing privileges for the health-care provider’s Arriva Medical diabetes business. CMS had alleged that Arriva submitted Medicare claims for patients who had died. Alere has denied an impropriety.

Sears just announced a fresh round of store closures. The company told employees on Tuesday that it will close 30 Sears and Kmart stores in early 2017. Most of the stores will start liquidation sales on January 6 and go out of business between late March and mid-April. This latest round of closures will bring the total number of stores that Sears has closed this fiscal year to more than 200.

That means the retailer will have fewer than 1,500 stores left by early 2017. That’s down nearly 60% from 2011, when Sears had more than 3,500 stores. The unofficial list of new store closures does not include Arizona stores. CEO Eddie Lampert, a hedge fund manager and Sears’s biggest investor, will offer a $200 million letter of credit to the department-store chain through affiliates of his firm, ESL Investments Inc. The amount could be expanded to as much as $500 million with the consent of lenders.

Apple and Samsung dominated Christmas wish lists this year but both had a luckluster holiday season. Yahoo’s Flurry Analytics looked at new phone and tablet “activations” between Dec 19 and Dec 25. Both Apple and Samsung still dominated but Apple saw a fall in share while Samsung saw a slight increase.

This year, 44 percent of activations globally were Apple devices, a decline from the 49 percent seen in a similar period in 2015, and 51 percent in 2014. Meanwhile, 21 percent of activations were Samsung devices, a tiny rise from 19.8 percent last year.

AirPods remain in short supply. If you want to buy a pair of the wireless earbuds from Apple, you won’t find them in the local Apple store; there is a 6-week waiting list. That’s what happens when you eliminate the headphone jack on the iPhone. During a visit to the New York Stock Exchange yesterday, CEO Tim Cook called the wireless earbuds “a runaway success,” and said Apple was “making them just as fast as we can.”

Meanwhile, Indian officials are meeting early next week to evaluate the incentives sought by Apple to manufacture its products in the country. The government is trying to promote local manufacturing under Prime Minister Narendra Modi’s “Make in India” campaign, but it remains to be seen whether they would agree to more concessions for Apple.

Toshiba shares dropped another 17% in Tokyo on worries about the company’s financial stability. The stock has fallen by more than 40% after the firm warned this week it’s expecting billions of dollars in losses from its takeover of a US-based nuclear construction business.

Toshiba cannot raise cash by issuing shares because of restrictions imposed by the stock exchange after last year’s accounting scandal. It looks more and more likely that the only solution is to sell off the core of the company. Meanwhile, share price is in a death spiral.

German pharmaceutical company Boehringer Ingelheim agreed to divest five types of animal health products to settle charges that a proposed asset swap with Sanofi would harm competition. The proposed asset swap involved Boehringer Ingelheim’s acquisition of Sanofi’s $13.5 billion animal care subsidiary and Sanofi’s obtaining the Germany company’s consumer health care business unit, valued at nearly $8 billion, plus $5.5 billion in cash.

The City of Madrid says all privately-owned cars with even-numbered registration plates will be banned from the Spanish capital’s roads today to curb rising air pollution. The move follows a dry, sunny stretch of weather which sent levels of nitrogen oxide, a poisonous gas which can cause respiratory problems such as asthma, soaring above European-Union-set limits. The restriction could alternate between odd and even number plates if high levels of contamination persist.

The World Economic Forum (WEF) has determined that in many parts of the world, solar energy is now the same price or even cheaper than fossil fuels for the first time. While the average global LCOE [levelized cost of electricity] for coal and natural gas is around $100 per megawatt-hour, the price for solar has plummeted from $600 a decade ago to $300 only five years later, and now close to or below $100 for utility-scale photovoltaic. For wind, the LCOE is around $50.

According to the WEF, more than 30 countries have already reached grid parity—even without subsidies. (“Grid parity” is the point when an alternative energy source, say solar, can generate power at a LCOE that’s equal or even less than the price of traditional grid power.)

The WEF highlighted how the unsubsidized LCOE for utility-scale solar photovoltaic—which was not competitive even five years ago—has declined at a 20 percent compounded annual rate, making it not only viable but also more attractive than coal in a wide range of countries.

Countries that have already reached grid parity include Chile, Mexico, Brazil and Australia with many more countries also on the same track. The WEF projects that two thirds of the world will reach grid parity in the next couple of years, and by 2020, solar photovoltaic energy is projected to have a lower LCOE than coal or natural gas-fired generation throughout the world.

This means that we have reached a tipping point for renewable energy, which is reflected in new installations. Through the end of September, solar accounted for 39 percent of all new electric generating capacity brought on-line in the U.S. Both utility-scale installations and residential installations grew strongly.

The United States solar market shattered all previous quarterly solar photovoltaic (PV) installation records. One megawatt of solar power was installed every 32 minutes in the U.S. from July to September, for a record total of 4,143 megawatts. That brings total installed solar capacity in the U.S. to 35.8 gigawatts, enough to power 6.5 million homes.

Financial Review

A Spidey Monday

Sinclair Noe — June 22, 2015

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

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DOW + 103 = 18,119
SPX + 12 = 2122
NAS + 36 = 5153
10 YR YLD + 9 = 2.36%
OIL + .07 = 59.68
GOLD – 14.40 = 1186.90
SILV + .09 = 16.27

The Nasdaq Composite set a new closing and intraday record, topping the highs set on Thursday. The Russell 2000 gained 7 to close at 1292, a record high. The S&P 500 is a stone’s throw from record highs at 2130.

Eurozone leaders are held an emergency summit today to “urgently discuss the situation of Greece at the highest political level.” The summit comes just eight days before Athens needs to make a crucial €1.6-billion-euro payment to the IMF. Over the weekend, Greek PM Alexis Tsipras submitted a new reforms package to foreign creditors, signaling eleventh-hour concessions to avoid a possible default. The Greek government said its proposals included steps to eliminate early retirement options, hike the sales tax, increase tax surcharges that middle- and high-income earners pay and to introduce a levy on companies with annual net income of more than about $570,000.

Eurozone finance ministers welcomed the Greek proposals for a cash-for-reform deal but said they required detailed study and it would take several days to determine whether they can lead to an agreement to avert a default. The ministers agreed to reconvene later this week. And even if there is a deal between Greece and the Troika, Tsipras still faces a hard sale with his own parliament and Greek voters.

The European Union has extended sanctions against Russia by six months to the end of January, keeping up pressure on the Kremlin to bring peace to eastern Ukraine. The restrictions outlaw financing for major Russian banks, ban the export of sophisticated energy-exploration equipment, and prohibit the sale of weapons and some civilian goods with military uses. Debt-stricken Greece, which has been courting Russian economic aid, shied away from a veto.

The National Association of Realtors reports existing home sales increased 5.1 percent to an annual rate of 5.35 million units, the highest level since November 2009. The increase unwound April’s surprise drop in purchases. First-time buyers accounted for 32 percent of transactions, the largest share since September 2012. Relatively low borrowing costs are still supporting would-be buyers who can qualify for credit. The average rate for a 30-year fixed mortgage reached 4.04 percent in the week ended June 11. While that was the highest rate this year, it’s below the average 4.17 percent for all of 2014.The NAR said the median price of an existing home rose 7.9 percent from May 2014 to $228,700.

According to the NAR, sales of U.S. residential real estate to overseas buyers between April 2014 and March 2015 reached a record $104 billion, or about 8 percent of total existing home sales. While the number of properties sold slowed to 209,000 from 232,600 last year, buyers acquired more expensive properties, which brought up the sales total. Chinese were far and away the top foreign buyers of real estate last year, accounting for $28.6 billion in sales. Canada ranked second, with $11.2 billion, followed by India with $7.9 billion. Florida was the top state for overseas real estate buyers, accounting for 21 percent of all U.S. sales to foreign buyers. California ranked second, with 16 percent, followed by Texas with 8 percent and Arizona with 5 percent.

The Senate is scheduled to end the debate on “fast-track authority” for trade deals tomorrow, with a vote that will likely send the Trans-Pacific Partnership to the President’s desk. TPP would create a free trade zone covering 40% of the world economy – making it the largest trade deal since NAFTA.

Big decisions from the US Supreme Court. Rulings on 11 cases are expected to be announced this week, as the highest court in the US approaches the end of its spring term.

The Supreme Court this morning denied Google’s appeal and Google will have to defend claims that its Street View mapping software violates patents held by Vederi. The high court’s decision not to hear the case leaves intact a March 2014 ruling by the U.S. Court of Appeals for the Federal Circuit, which threw out a district judge’s finding that Google had not infringed on four different patents. The case will now return to lower courts for further proceedings.

In another case, the Supremes sided with a renegade raisin farmer in his battle against a federal program designed to keep excess raisins off the market. A majority of justices ruled that the Agriculture Department program, which seizes excess raisins from producers in order to prop up market prices during bumper crop years, amounted to an unconstitutional government “taking.” But they limited their verdict to raisins, lest they simultaneously overturn other government programs that limit production of goods without actually seizing private property.

In a 5-4 decision the Supremes boosted privacy rights by striking down as unconstitutional a Los Angeles city ordinance requiring hotel operators to show a list of registered guests to the police on demand.The court held that the guest-registry law violated the Fourth Amendment’s protection against unreasonable searches because the legislation gave hotel managers no chance to seek a ruling from a judge or magistrate before complying with a police request.

And in the case of Kimble v Marvel, aka, the Spider Man case, the court ruled that patent holders may not collect royalties on a patent after it expires. The case dealt with a toy that shoots out fake webs, à la Spider-Man. Justice Kagan, writing for the majority said, the parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can). Patents endow their holders with certain superpowers, but only for a limited time.

Things will get more serious later in the week with big announcements on the fate of gay marriage and Obamacare.

There is a merger and acquisition scramble going on in the healthcare insurance sector. Cigna’s board of directors has rejected a $47 billion takeover offer from Anthem, saying in a letter Sunday they were “deeply disappointed” in Anthem’s actions. The Cigna board was unanimous in their decision, which they called “inadequate” in their letter. Anthem announced its $184 a share offer on Saturday.

Others have been quietly maneuvering as well. UnitedHealth Group, the biggest American health insurer by revenue, recently made a preliminary approach to Aetna. And a number of companies (including Cigna) have indicated their interest in buying Humana, one of the smaller major insurers but one with a valuable Medicare franchise. It is still early to say how this will play out, but there is a good chance the Big 5 health insurers will soon be the Big 3.

Williams Companies has rejected an unsolicited buyout offer worth $48 billion from Energy Transfer Equity, but has hired banks to explore alternatives, including a merger, a sale of the company or simply continuing on its current path. Williams said the $64/share bid, a 33% premium to Friday’s closing price, “significantly undervalued” the company and would not deliver value commensurate with what it “expects to achieve on a standalone basis.”

Sequential Brands Group has reached a deal to acquire Martha Stewart Living Omnimedia for $353 million. The deal marks the end of Martha Stewart’s run as an independent company. (It went public in a 1999 IPO.) In recent years, it has suffered from sagging sales related to its core publishing business, as licensing and merchandising emerged as the company’s prime driver.

Over the last year, Facebook’s stock has jumped roughly 30% as the broader S&P 500 has barely managed to keep its head above water. The climb has added more than $65 billion to Facebook’s market value, and it is now bigger than Walmart. Market cap leapfrogging like this happens all the time. But this one might feel particularly ridiculous to many. If we size up Facebook and Walmart, there’s no contest as to which one has the larger economic footprint. By revenue, Walmart is the largest company in the world, with annual sales clocked in at $476 billion last year. Facebook recorded revenue of roughly $12.5 billion, bringing its market cap to more than $236 billion, just above Walmart’s $235 billion.

It represents a shift in the economy, from brick and mortar and industrial to technology. Of the 5 largest US companies in terms of market cap, 3 are tech companies; in order: Apple, Microsoft, Exxon Mobile, Berkshire Hathaway, and Google. The information sector’s share of economic output has stayed remarkably flat, at about 5% of GDP in 2014, roughly where it was in 1997. This is largely because GDP, the benchmark measure of “the economy”, is calculated by adding up monetary transactions. So while Facebook’s advertising sales contribute to GDP, the millions of users logging on for free each day don’t register at all. (The same goes for Google searches and visits to Wikipedia.) That benefit is what’s known as a “consumer surplus,” a benefit to well-being that’s not captured in traditional economic statistics.

Apple is about to launch a new $9.99 monthly music subscription service, Apple Music, on June 30, and to get folks to try it out, Apple will offer free three-month trial subscriptions. At the same time, Apple has told musicians it won’t pay royalties during this period because no money is coming in. At least that was the deal until Taylor Swift stepped up. Swift wrote a blog to Apple, saying: “We don’t ask you for free iPhones. Please don’t ask us to provide you with our music for no compensation.” Apple changed its tune and now says it will pay artists during the free three-month trial.

FINANCIAL REVIEW

Flowers for Angela

Sinclair Noe — January 26, 2015

Podcast: Play in new window | Download (Duration: 13:19 — 6.1MB)

DOW + 6 = 17, 678
SPX + 5 = 2057
NAS + 13 = 4771
10 YR YLD + .01 = 1.83%
OIL – .49 = 45.10
GOLD – 12.80 = 1282.30
SILV – .39 = 18.01

It’s snowing in New York; this is a really, really big blizzard and it could dump up to 3 feet of snow across the northeast, with winds up to 60 miles per hour. The storm has already caused more than 1,800 flight cancellations, roads are closed in New York City except for emergency vehicles, rail traffic is also shut down, and schools are closed, and expect power outages across the Northeast. The Super Bowl will be this weekend in Glendale, and temperatures are expected to be mid-70’s. The folks at the Phoenix Chamber of Commerce are doing their happy dance.

This week’s economic calendar is packed, plus we are in earnings reporting season and some big names will post results this week. Microsoft reported after the close today, and we’ll get to that in just a moment. Apple reports tomorrow. Shell, Europe’s largest oil company, reports results on Thursday; it could be an early indicator of the damage being done to company earnings by lower oil prices. Ford Motor, the nation’s second-largest automaker, reports fourth-quarter earnings on Thursday.

On Wednesday, the Fed will end its two-day policy meeting with a statement but without the usual news conference, so investors don’t expect any big changes; they like to match that with the news conference; instead we’ll be digging through the written statement for any subtle change in wording. The FOMC meeting will probably be the biggest non-event of the week, unless they pull a Swiss National Bank on us.

On Friday, the Commerce Department releases its first estimate of economic growth in the fourth quarter of 2014. The consensus view is that the economy expanded at an annual rate of about 3% in October, November and December, down from the blockbuster 5% rate in the third quarter, but still a healthy pace. There are a few things that might skew the GDP number up or down; a slumping global economy appears to have done little to slow down the US economy, but it doesn’t mean we are completely insulated. We’ve seen good job growth (nearly 3 million net new jobs last year) but wage growth has lagged. Lower oil prices have been disinflationary but every time we go to the gas station it’s like we get to stuff a few extra dollars back into our wallets. The flip side is that means less investment in the energy sector. Oil services firm Baker Hughes published data on Friday that showed the number of US oil rigs fell for a seventh straight week to 1,317, the fewest since January 2013.

Meanwhile, government spending is down. The federal government will run a budget deficit of $468 billion for 2015, according to a new estimate released today by the Congressional Budget Office; that represents 2.6% of gross domestic product. A big surge in military spending was a significant contributor to that 5% GDP growth in the third quarter.

After the close, Microsoft reported revenue rose to $26.5 billion from $26.3 billion but earnings per share came in at 71 cents, down 9% from a year ago. Last year, Microsoft got a boost from the end of Windows XP support for enterprises, which essentially forced many companies to upgrade operating systems. Microsoft still gets a big chunk of revenue from commercial licensing of software and services, resulting in $10.7 billion in revenue for the quarter. But Microsoft isn’t just software. They generated $1.1 billion in revenue from sales of the Surface tablet, and $2.3 billion from the sale of 10 million phones. That’s a lot of phones, but it puts the sales price at $230, compared to about $600 for an Apple iPhone. Microsoft was down about 2% in after-hours trading.

Today was a merger mania Monday. We have a few deals to talk about. Energy Transfer Partners agreed to buy fellow pipeline owner Regency Energy Partners LP for about $18 billion including debt, making it the second-largest master-limited partnership. The cash-and-stock deal values Regency at $26.89 a unit based on the Jan. 23 closing price.

PartnerRe and Axis Capital merge in $11 Billion Deal. PartnerRe and Axis, both of which are based in Bermuda, have agreed to merge to create a new reinsurer with a combined market capitalization of nearly $11 billion. Together, the two companies will have more than $7 billion in combined gross premiums written and over $14 billion in capital, and will also have a specialty insurance arm with $2.5 billion in gross premiums.

Two big makers of packaging materials, Rock-Tenn and MeadWestvaco, agreed to merge, creating a $16 billion manufacturer of cardboard cartons and other types of boxes. Together, the two will create a stronger competitor to International Paper, with $15.7 billion in combined net revenue and $2.9 billion in adjusted earnings. The transaction comes after an activist shareholder campaign at MeadWestvaco by the hedge fund Starboard Value, which pushed the company to spin off its chemicals business.

Aer Lingus is considering an improved €1.3 billion takeover proposal from International Consolidated Airlines Group, the third attempt by the owner of British Airways and Iberia to buy its Irish rival.

AT&T has agreed to buy Nextel Mexico for nearly $1.9 billion. It’s the second AT&T acquisition in wireless in Mexico since November.

Not only is Google preparing a new cellphone service that will dial up pressure on the wireless industry’s business model, Cablevision is also prepping one. Google’s new package will hunt through cellular connections provided by Sprint and T-Mobile and WiFi “hot spots,” picking whichever offers the best signal to route calls, texts and data. Meanwhile, Cablevision will start offering Freewheel next month, a WiFi-only mobile-phone service.
And while we’re talking about mobile phones, there are reports that Samsung Electronics will be the main supplier of processors powering Apple’s next handset model. Samsung will likely supply 75% of the chip production for the iPhone 7. Samsung was the company behind the A7 that powered the iPhone 5S, although it was ditched in favor of TSMC for the iPhone 6 and iPhone 6 Plus.

Next we go to Europe, where Syriza won the Greek election yesterday. They captured 149 of the 300 seats in parliament, and then allied with a far-right fringe party to secure a majority. Syriza campaigned on an anti—austerity platform. Today, the reaction in the markets was muted. The euro fell, then recovered. Greek stocks fell about 3%. Greek bonds were down just slightly. Together with last week’s decision by the ECB to pump billions of euros into the euro zone’s flagging economy, Syriza’s victory marks a turning point in the long Eurozone crisis; what remains to be seen is how hard the turn will be. Likely the Euro Union will just deal with Greece, and come up with some sort of deal that is less hard line austerity, which the Germans have been preaching since the inception of the euro.

Syriza and the new Greek Prime Minister Alex Tsipras have said they would like to essentially default on Greek debt, and they don’t want to follow a bailout plan laid down by the Troika. IMF head Christine Lagarde said the Fund would continue supporting Greece, and they wanted to work with the new government. Irish Finance Minister Michael Noonan said there could be some room for a deal to adjust debt maturities and cut interest rates rather than writing the debt off. In an interview, Finland’s prime minister said he would give a “resounding no” to any move to forgive Greece’s debts and warned that a new government in Athens would have to stick to the terms of the existing bailout. Tsipras pledged to end budget cuts and heavy tax rises that have helped send the jobless rate over 25 percent and pushed millions into poverty. Standard and Poor’s sent an early warning shot to Greece’s new government, saying it could downgrade its credit rating even before its next planned review in mid-March if things go badly.

Tsipras can expect strong resistance to his demands from Germany in particular and a series of European policymakers urged Syriza not to renege on previous governments’ commitments. The current Greek bailout expires at the end of February. Greece has €10 billion of debt repayments due over the summer and has €7 billion of aid that is on hold unless and until it negotiates a new bailout deal. The Germans and also the Finns are convinced that the periphery countries are lazy, immoral beggars who deserve to have their economies crushed if they cannot or will not pay their debts. Eurozone officials are convinced that the EU holds all the trump cards in the coming clash with Greece’s new anti-austerity government, including the nuclear option of letting Greek banks collapse. They believe Mr. Tsipras knows his weakness. The hardline approach will be sugared with offers of flexibility on the detail of austerity measures, and a move to allow Greece more time to meet an end of February deadline for renewal of key EU loans that are keeping the country’s economy afloat. A more hardline EU stance might just force a more hardline Greek response. And the more unreasonable the demands of Greece and the Syriza party are, the more likely they will be able to force change.

And so, in a symbolic move, Tsipras’ first action as prime minister was to commemorate Greek resistance fighters with red roses at a memorial in Athens to those executed by Nazis. This is going to be interesting.

Meanwhile, S&P cut Russia’s sovereign credit rating to junk status today, bringing it below investment grade for the first time in a decade. The Russian ruble dropped 6% against the dollar. Russia’s economy is expected to slide into recession this year as low oil prices depress export revenues, and the sanctions over Ukraine cut some of its biggest companies off from Western funding. Pro-Moscow rebels, backed by what NATO says is the open participation of Russian troops, pressed on with their offensive on Sunday after restarting the war in eastern Ukraine. The EU has called an emergency meeting of foreign ministers, and is considering tightening sanctions against Russia.

The Brute Economic Power of Oil

Financial Review with Sinclair Noe — September 12, 2014

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

 

DOW – 61 = 16,987
SPX – 11 = 1985
NAS – 24 = 4567
10 YR YLD + .08 = 2.61%
OIL – .58 = 92.25
GOLD – 11.90 = 1229.30
SILV – .06 = 18.71

For the week, the Dow was down 0.9%, the S&P 500 was down 1.1% and the Nasdaq was down 0.3%.

Let’s start with the economic data: Business inventories rose 0.4 percent in July vs a 0.8% rise in business sales that keeps the stock-to-sales ratio unchanged at a healthy and lean 1.29. In a separate report, retail sales and consumer sentiment pointed at an improving economy. The preliminary September reading on the University of Michigan/Thomson Reuters consumer-sentiment index rose to the highest level since July 2013 and topped consensus expectations. Sales at US retailers rose in August by the largest amount since April, sales were up 0.6%; raising confidence in the economic outlook for the second half of the year. Retail sales would have been higher, but the price of gas dropped; after excluding gasoline, spending rose 0.7% in August.

Of course, one of the reasons Americans spent more money going out and eating and shopping is because the price of gasoline has been low. Spending at gas stations declined an estimated 0.8% in August. That followed a flat July and another 0.8% drop in June. A separate report from the Labor Department on Friday showed that prices of fuel imports fell 4.6% in August, the largest monthly drop in more than two years. If you can save $10 or $20 at the gas station, you’re more likely to spend that money at the mall or a restaurant.

So, in a very strange twist, the volatile situation in Ukraine and the Middle East has actually been a good thing for American consumers as we go to the gas pump. And in another strange twist, the International Energy Agency noted another reason for the lower prices: demand is remarkably low, and falling; and this is due to the weak economic prospects, especially for Europe and China. The Financial Times concluded: The world’s appetite for crude oil slowed at a “remarkable” pace during the second quarter because of weak economic growth in Europe and China, prompting the International Energy Agency to revise lower its demand forecasts for 2014 and 2015. In its widely followed monthly report, the west’s energy watchdog said that global oil demand growth had slowed to below 500,000 barrels a day in the three months to June – the first time it has reached this level in two-and-a-half years. Slowing demand and plentiful supplies have together pushed down the price.

The United States has imposed new sanctions on Russia’s largest bank, and a major arms maker; also there will be sanctions on arctic, deepwater and shale exploration by its biggest oil companies.

Energy stocks were pressured after the Treasury department announced the new sanctions, designed to punish the country for its intervention in Ukraine. The S&P oil sector fell 1.4% today, continuing a downtrend that has taken the group down 3.6% this week.

The sanctions target companies including Sberbank, Russia’s largest bank by assets, and Rostec, a conglomerate that makes everything from Kalashnikovs to cars, by limiting their ability to access the US debt markets. They also bar US companies from selling goods or services to five Russian energy companies to conduct deepwater, Arctic offshore and shale projects. The Russian firms affected are Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft.

The energy sanctions are not designed to curb Russia’s current oil production but to hit future production by depriving Russian firms of the expertise of companies such as Exxon Mobil and BP. Exxon has a $3.2 billion deal with Rosneft to develop Arctic oil fields. BP owns 18% of Rosneft and has signed a deal to explore oil shale fields in the Volga and Urals.

The Euro-union has also imposed new sanctions restricting financing for 15 Russian owned companies, plus asset freezes against 24 Russians, mainly politicians. The combined US and EU sanctions effectively shut Russian banks out of the capital markets of the US and Europe for everything except short-term debt.

The United States stressed that the sanctions could be removed if Russia took a series of steps including the withdrawal of all of its forces from Ukraine. Russia denies sending troops into eastern Ukraine and arming the separatists. Russian President Putin called the new economic penalties “strange,” given his backing of peace efforts in eastern Ukraine, and Russia’s Foreign Ministry said it would respond quickly with retaliatory measures against what it criticized as another “hostile step.”

So, today, oil prices continued moving lower to the lowest levels in 2 years, but that might not be the case if the sanctions are extended. Russia’s ruble currency has already fallen to a historic low against the dollar as its economy is hit by sanctions. That increases the price Russians must pay for many imports, from vegetables to luxury goods. And the price of oil might be an even bigger economic weapon than sanctions.

Russia is heavily reliant on oil sales and faces budget shortages at current price levels. It is estimated that the cost of production combined with what the Russian government siphons off to prop up its budget, results in a breakeven price for Russian oil at about $110 to $117 a barrel. Russia may have designs on Ukraine but if they are locked out of the financial markets and if they can’t turn a profit in the global oil market, they will find it difficult to finance their ambitions.

Daily oil production in the United States has risen sharply in the past 5 years. In 2010 the country still imported half of the crude it consumed, but the US Energy Information Administration forecasts that will fall to little more than 20% next year. Increased production of oil in the US combined with weakening demand, has pushed prices closer to $90 a barrel than $100, and prices could drop a bit more.

While US oil output has been rising fast, part of the big jump in supplies has come from countries that remain at risk of supply disruptions, including Libya and Nigeria; and don’t forget Iraq and Iran. Meanwhile, Saudi Arabia and the rest of OPEC is expected to continue to supply oil as needed, at least as long as the price stays above $85 a barrel. The Saudis have long said that they like the price around $100. Meanwhile, US oil companies working the shale fields claim they need $100 a barrel oil to make it worth their while, but a friend in the oil business tells me their real breakeven is closer to $80. For other US oil producers, like those working the established fields in Texas, the breakeven is closer to $30.

Where will prices settle? Well, they won’t. Oil prices constantly fluctuate. In early 2008, speculators jacked up the price to $147 and a year later, after the financial crisis, prices dropped under $40. Oil prices always move and always have an economic impact. If we look back to the 1980s we can see how this played out in the collapse of the Soviet Union.

From 1973 to 1980, when the West went through huge economic problems due to oil price shocks, the Soviet Union did not appear to have any concerns and their economy was fairly strong. In the mid-1980, the Saudis stopped protecting oil prices, and instead increased production fourfold, which resulted in a drop in oil prices by about the same amount in real terms. The Saudis still got the same amount of payment, they just delivered four times as much oil. The price declines hit the Soviet Union hard, resulting in loses of more than $20 billion a year, which was big money back then – not just the price of a startup tech company that makes one stupid little app.

So, the Soviets had a choice; they could cut back food imports, which would have resulted in food rationing and an angry populace; they could stop the highly subsidized oil trade among the Soviet bloc countries and risk dissolution of the Union; they could make radical cuts to the military-industrial complex; or they could go into debt, big time. Like politicians everywhere, they chose the path of least resistance, and started borrowing money from abroad, and avoided actual reforms. They managed to borrow very heavily until about 1989, when the price of oil dropped into the low teens and Soviet oil production dropped by 30%, and the Soviet economy came to a grinding halt. And the international creditors demanded payment, and cut off the credit lines.

The only way that the Soviet Union could have possibly survived such an oil production decline crisis, not to mention a complete loss of oil export revenue for hard currency, as well as cut its internal consumption, and cut off Eastern European exports, would be to shift to a market economy. The Soviet Union did exactly that. First, the Soviet’s cut off Eastern Europe from receiving cheap Soviet oil and forced them to pay in hard currency prices. Then when that was not enough the Soviets themselves had to allow internal oil prices to rise. This forced the Soviets to follow the same transition that Eastern Europe did. Indeed, Soviet and post-Soviet oil consumption declined a staggering 50% from 1985 to 1995.

In November 1989, the Berlin Wall fell. The pictures on television and in the history books imply that the breakdown of the Communist system in 1989 was a result of the peoples’ longing for freedom and democracy, and certainly that is true. The Soviet Union was both corrupt and brutal, the military defeat in Afghanistan had been costly and demoralizing, and don’t forget Chernobyl, the Communists could not compete effectively in new technology. It wasn’t just one thing; but President Reagan’s call to “tear down that wall” would not have had the impact if oil prices had not been torn down first. The transition was not by choice but by brute economic force.

We Have Met the Enemy

Financial Review with Sinclair Noe — September 11, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB) 

 

DOW – 19 = 17,049
SPX + 1 = 1997
NAS + 5 = 4591
10 YR YLD – .01 = 2.53%
OIL + 1.38 = 93.05
GOLD – 8.80 = 1241.20
SILV – .27 = 18.77

I’m fairly certain that at some point during this day you have taken at least a moment to recall where you were 13 years ago, how you heard the news, how you responded to the news. Maybe you can recollect specifics or maybe some of the memories have faded in time. What you knew exactly 13 years ago is probably quite different than what you know today.

Last night I watched the president announce another war; this one will be different than the last one; so we are told. The plan is to expand the airstrikes against ISIS and take the fight to their base in Syria. It is no longer just about protecting American embassies and limited humanitarian efforts. The new plan is open-ended, and will likely be long-term. We won’t have combat troops on the ground, but we will have troops in Iraq; about 1600 US troops; I’m fairly certain they are capable of combat if pushed. Boots on the ground combat will come from Iraqi forces and Syrian rebels, apparently.

House Speaker John Boehner says the country should unite behind the administration, even if we don’t know all the details of the plan. Some opposition has come from both the left and right wings. Congress will vote on it next week, and it will likely pass, but there are no guarantees of passage; it may be the only thing Congress can agree on.

Even if nobody actually knows what the threat is or why it’s imminent. American intelligence agencies have concluded that ISIS poses no immediate threat to the United States. Some officials and terrorism experts believe that the actual danger posed by ISIS has been distorted in hours of television punditry and alarmist statements by politicians, and that there has been little substantive public debate about the unintended consequences of expanding American military action in the Middle East. One thing that politicians are good at is spinning the public into a panic.

The big issue in Washington is how war might affect the midterm elections; which is entirely the wrong reason for doing anything. Administration officials told lawmakers in a closed briefing that the new counter-terrorism campaign is covered by the broad authority Congress granted President George W. Bush in 2001, after the 9-11 attacks, and in 2002, to enter the Iraq War.

Secretary of State John Kerry is traveling the region this week to build the international coalition Obama is seeking to take on ISIS. Today, Arab states vowed to “do their share” to destroy ISIS. A joint communiqué issued by the United States and 10 Arab states endorsed a broad strategy to stop the flow of volunteers to ISIS, curtail its financing and provide aid to communities that had been “brutalized” by the militants. It also called for a coordinated military campaign in which nations would contribute “as appropriate.” None of the Arab participants said precisely what they would do, and it remained unclear whether any would join in the actual fighting.

Kerry hopes to sign up as many as 100 countries, which would make for some strange bedfellows. Decades of entrenched autocratic mismanagement and abusive rule in the Middle East and North Africa cannot be erased overnight; I am not confident they can be reversed by foreign intervention. Populations in the region will have to chart their own course in struggles that are likely to be volatile and deadly. The US and others cannot do it for them. Maybe we can help in some way, but our help tends to have unintended consequences and high price tags.

I don’t know how this will all play out over time, but my guess is that it will be a nasty, slow-motion train wreck. And 13 years from now, we’ll look back and be amazed at where we are and how we got there. Yes, I remember where I was on 9/11. I think where we ended up is more important.

Meanwhile, America’s NATO allies face other security challenges, foremost of them Russia’s aggression against Ukraine. Despite the current ceasefire in Ukraine, the US will unveil new sanctions against Russia’s financial, energy and defense sectors. President Obama said that the US “has yet to see conclusive evidence that Russia has ceased its efforts to destabilize Ukraine.” If Russian President Vladimir Putin pulls out of Ukraine, the sanctions could be rolled back, but if “instead Russia continues its aggressive actions and violations of international law, the costs will continue to rise.”

Russia offered up some of the strongest reaction to the plan to go after ISIS. Remember, Russia is Syrian President Bashar Assad’s main international ally. A Russian Foreign Ministry statement said such military action without a UN Security Council resolution “would be an act of aggression and flagrant violation of international law.”

You might think that the geopolitical problems might give Wall Street a pause, but that doesn’t seem to be the case. The Wall Street Journal’s monthly forecasting survey polled economists on whether their outlook for the world’s largest economies had improved or deteriorated. The survey of 48 economists showed that a resounding majority believe things in the US are likely to improve over the coming year, versus the first half of 2014. But their attitudes towards the eurozone, Japan and China were mixed. One-quarter of economists said their outlook for China had improved, versus nearly 40% that said it had deteriorated. Around 40% said their outlook for Japan had improved, while around one in eight said it had deteriorated. For Europe, about one-third said their outlook had improved, roughly balanced with the share seeing a worse outlook. There was no apparent concern about geopolitical hotsppots.

If anybody is going to end the bull market party, it’s more likely that we will just make a mess of things all by ourselves.

Corporate America celebrates 9-11… no, that’s not the right word, they commemorate…., no that’s not the right word either; they stupidly think they are required to send out social media messages marking the day. That’s it, they’re marking the day: CVS Pharmacy says: We Remember. White Castle hamburger also says: We remember. The Vitamin Shoppe says: We pause and remember. Bikram Yoga says: 9 + 11 = 20% off! Patriot Day Sale. If you ever needed absolute proof that corporations are not people, just check the corporate 9-11 tweets.

And as for the idea that corporations are patriotic, well, tax inversions destroyed that myth. You might think the shame would push them to do the right thing, which is funny. But now we find out it is bad business. Standard & Poor’s Rating Services warned tax-dodging deals known as “tax inversions” could hurt the credit ratings of the companies that do them. When humans have lower credit ratings, they have a harder time borrowing money for new Camaros or iPhone 6 Pluses or whatever. When companies have lower credit ratings, they have a harder time buying computers or private jets or whatever.

But wait, you might be thinking, isn’t the whole point of dodging taxes to get more money, which usually means better credit ratings? Sure, but it doesn’t always work out that way. Here’s why S&P thinks tax inversions are bad: Companies will often borrow a bunch of money today to buy a company to get that sweet tax-free cash in the future. That’s not good for credit ratings. And sometimes they’ll buy another company just for the tax break and then realize, too late, that merging with that other company makes no actual business sense. Everybody suffers, business suffers, credit ratings suffer, and those tax breaks don’t seem so sweet any more.

Companies will also do kind-of-stupid things once they get their hands on money. Tax-inversion deals let them tap all the cash they’ve been hiding offshore from Uncle Sam. Then they give it all away to shareholders and their executives, or maybe they place a bet at the racetrack. Next thing you know, the money’s gone. That’s also bad for the credit rating.

Now you might think that the bad PR would be another reason why companies should not do tax inversion deals, but that would be wrong. There might be some fallout from a boycott of Walgreens or Burger King, but you know and I know and corporations know the consuming public is an unorganized mess. And the threat of boycott or angry speeches from politicians threatening to actually do something, which we all know is just bluster; that has just encouraged the companies to hurry up and do deals while they still can.

Ever notice how the stock market and corporate profits are at all-time highs, while our wages are flat and roughly half of us still think the economy is in recession? America’s capitalists take every chance they get to remind us that they are our “job creators,” but it turns out that their least-favorite thing on earth to do is create jobs. Most U.S. business leaders would rather build robots, outsource work or use part-time employees than hire workers full-time, according to a new Harvard Business School survey; 46 percent of our job creators would rather spend money on technology than employ humans, compared with a sad 26 percent who prefer people to robots, and another 29 percent who were confused or indifferent about the question or fell asleep while the survey taker was talking. Forty-nine percent would rather outsource than hire, compared with 30 percent who’d rather hire.

This is also bad news for the future of the economy because it means fewer workers are getting the training they need for our super-awesome, high-tech, no-job economy, Harvard pointed out: “Firms invest most deeply in full-time employees, so preferences for automation, outsourcing, and part-time hires are likely to lead to less skills development.” This will give business leaders, who already think we lack the necessary skills for their precious jobs, even less reason to hire us in the future.

Pogo said it best: We have met the enemy and he is us.

Timing is………..Everything

Financial Review with Sinclair Noe — September 10, 2014

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

 

DOW + 54 = 17, 068
SPX + 7 = 1995
NAS + 34 = 4586
10 YR YLD + .03 = 2.53%
OIL – 1.13 = 91.67
GOLD – 6.80 = 1250.00
SILV – .12 = 19.04

Later today, at 6PM local time or 9PM eastern, President Obama will address the nation and lay out his strategy to degrade and destroy the Islamic State insurgency operating in Iraq and Syria. This will likely involve significant escalation of the US military role in the area, but we aren’t sure about the intervention in Syria; probably a combination of airstrikes, and support for more moderate Syrian forces willing to carry out attacks on both ISIS and Assad; along with regional allies providing on the ground support.

The president has pledged there will not be boots on the ground. He said: “This is not the equivalent of the Iraq war. What this is similar to is the kinds of counter-terrorism campaigns that we’ve been engaging in consistently over the last five, six, seven years.” Which sounds like a distinction without a difference.

Earlier today an administration spokesman said: “The president will discuss how we are building a coalition of allies and partners in the region and in the broader international community to support our efforts, and will talk about how we work with the Congress as a partner in these efforts.”

That doesn’t mean Congress would actually vote on going to war. For weeks, the administration, and particularly the Pentagon, has urged Congress to approve $500 million in funding to train and arm Syrian rebels to fight ISIS. The legislation has been stuck on Capitol Hill since Obama first sought it in May, but it could provide both Obama and Congress with an opportunity to tacitly enlist congressional support for a war without a formal vote ahead of the November midterm elections, something many politicians this week indicated they wish to avoid.

As one geopolitical hotspot heats up, another looks to be cooling. Ukraine’s president said today Russia had removed the bulk of its forces from his country, raising hopes a ceasefire might hold. Ukraine’s military recorded at least six violations of the ceasefire overnight but said there were no casualties. And Russia conducted military tests of a nuclear capable intercontinental missile.

Ukrainian President Poroshenko said he would propose a bill next week offering “special status” to parts of the Donetsk and Luhansk regions of eastern Ukraine now controlled by rebels, but he was adamant in rejecting the separatists’ demands for full independence for their regions and the kind of “federalization” favored by Russia.

Meanwhile Russia faces the threat of further sanctions; the kind that could actually strike at the heart of the Russian economy, its oil industry. Proposed new sanctions would cut off Russia’s access to the technology to drill its richest oil fields. Bloomberg reports the sanctions would bar companies like ExxonMobil, Shell, and BP from using their resources—such as advanced drills and experts—to work in the Russian Arctic and an enormous Siberian oilfield. Neither the US nor Europe have decided whether to proceed, but a European decision could come at any time. If Europe goes ahead with the new penalties, the US would match them.

On Wall Street there seemed to be no worries about war. Apple bounced back. This remains an Apple-dominated market, especially in a week where we don’t have a lot of economic data. After a couple of down days, the S&P bounced back. The S&P 500 hasn’t posted a four-day string of losses in all of 2014. Crude oil futures fell to a 16-month low; there’s plenty of supply and demand has been constrained.

Today is Internet Slowdown Day. You may or may not have noticed certain websites with the dreaded spinning wheel of death loading symbol. Several websites have banded together to protest proposed changes to net neutrality rules, which would allow Internet service providers to charge high traffic websites more or essentially force them to create a “slow lane” for customers. The loading icons lead users to the “Battle for the Net” website where they can sign a letter to Congress, the Federal Communications Commission and the White House. The hope is that the campaign will inspire millions of people to submit comments to the FCC on net neutrality before the public comment period ends on Sept. 15.

Commerce Department reports wholesale inventories rose just 0.1% in July, and inventories excluding autos was flat. This is an interesting economic indicator because it gives us a hint at future economic activity; you have to have wholesale inventory before you make the retail sale. Inventories added 1.4 percentage points to GDP growth in the second quarter. The slow pace of inventory accumulation, however led several financial firms to lower their estimates for third quarter GDP, down to the 2.5% to 2.8% range. Of course, inventories ebb and flow; so, if inventories are light in the third quarter that might force some businesses to restock for the fourth quarter. Still, for all the stories about the economy being poised for big growth in the second half, most of the data points to a slow, steady slog.

Relapse is the rule of the recovery, and it’s a global relapse. The US, Japan, and Europe continue to see GDP growth falter. In the US we had a first quarter contraction; part of the blame was weather, but that was just part of the problem. Europe’s fragile economy has similarly failed to recover strongly enough to ward off periodic growth setbacks. As a result, annual growth in the 18-country eurozone slipped to just 0.4% in the first half of 2014. Earlier this week, Japan reported a 6.8% contraction in second quarter GDP.

The Bank of Japan has pushed a short-term interest rate below zero to try and stimulate the economy and fend off deflation. The BOJ bought three-month bills for more than their redemption value this week, essentially paying to lend money to the market. Giving away money, as the BOJ will be doing if it holds the paper to maturity, is basically subsidizing Japanese banks. Lenders that buy debt from the government stand to make an easy profit if the government pays above par for the paper.

The European Central Bank recently decided to go negative on reserve deposits held by banks, trying to push money back into circulation. Meanwhile, the Federal Reserve FOMC meets next week, and you have to wonder how they’ll respond to the negative rates from the ECB and the BOJ. It is pretty certain the Fed will continue to taper, and stop buying bonds in October; but the next question is when they will start raising targets on interest rates. For several months the Fed has been sticking with the somewhat vague guidance that it will be a “considerable time” before we see rate increases.

Next, consider the performance of the S&P 500; after the crash in 2008, the S&P bottomed in 2009, and then went on to double. For the past 34 months the S&P 500 has not seen a correction of 10%, the third longest correction free stretch in the past 25 years. A chart of the past five years is the very picture of a relentless uptrend. Some people have been lulled into believing that this is typical market behavior; it is not. If you are looking for a reason for the bull market, look no further than the Federal Reserve; they have thrown a lot of money at Wall Street. But now they are promising to stop the flow of easy money, and eventually raise rates. This is not a guarantee that the equity party is over, but just a reminder the party won’t last forever.

The stock market is near an all-time, but economic activity is not. Corporate earnings have been good but revenue has been weak; this reflects the distortions of stock buybacks, but even more, it shows a lack of demand. Weak demand does not bode well for earnings growth. Meanwhile, the global economy wobbles, with the EU and Japan propped up by negative interest rates; China seems doomed to repeat the mistakes that hobbled Japan’s economy for a decade, and emerging markets still suffer from the last beat down. The US looks good by comparison but that’s just the prettiest horse in the glue factory argument. So, you probably think the market is ready for a pullback at the very least, and maybe even a good old fashion crash. But, as always, timing is….. everything.

This is not the time to go short. Picking tops is more a matter of luck than science. There may be many indicators of a top, but it’s smart to listen to the market because you can’t dictate to the market. So, rather than going short, now seems like a good time to lock in some gains and take out some insurance, or hedge some bets.

There are several hedging techniques, including inverse ETFs and shorts. The problem is that the past five years have not been a good time to be short, and we don’t know if the bull market will end tomorrow, or next month, or next year. Shorts and inverse ETFs are great only after the uptrend ends and you see a clear indication of a reversal. Markets can sometimes defy gravity; markets can remain irrational longer than you can remain solvent.

Other popular hedges include options, which can be very effective, but you have to pay a premium for the option. Options are a form of insurance, but they are like term insurance, you pay the premium every month, and if the market doesn’t die, you have to pay again next month. If you stop paying, you lose your coverage.

Locking in gains just makes common sense. You are not in the market for the long haul, you are in the market to make money. The way you make money in the market is to buy low and sell high, and not lose money. It’s really not complicated. One of the easiest things you can do is use stops. If the price falls, you get stopped out, and you collect your profits. Another way is to harvest gains; the idea is that if you have doubled your original investment, sell part of it. Now you’re playing with the house’s money.

Friday, July 25, 2014 - Hot and Dry

Financial Review with Sinclair Noe

DOW – 123 = 16,960
SPX – 9 = 1978
NAS – 22 = 4449
10 YR YLD - .04 = 2.47
OIL - .13 = 101.94
GOLD + 13.30 = 1308.20
SILV + .35 = 20.82

For the week, the Dow is down 0.8%, the S&P is flat and the Nasdaq is up 0.4% in its second straight weekly rise.

In economic news, durable goods orders were up 1.4% in June, but May’s numbers were revised lower to show a 1.2% decline. Shipments of core capital goods fell 1%. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement. The government will release its first snapshot of second-quarter GDP next Wednesday. The economy contracted at a 2.9% rate in the first three months of the year, with business spending on equipment falling at a 2.8% rate.

Investors have been selling junk bonds. In the past week, investors pulled $2.3 billion from junk bond funds. That marked the biggest outflow since June 2013, when the Fed was hinting about tapering. The high-yield market has pulled back in recent weeks, sending prices lower and yields higher. The bond market is not as liquid as it once was; trading volume is down across the board, and trading desks have been cut back, meaning a big sell-off could look more like a run on bonds.

Yesterday we told you about Amazon.com’s earnings report, or more specifically, a lack of earnings. Amazon has a unique business model where they manage to consistently increase sales without actually turning a profit. If it seems like this kind of model has limitations, you are correct, and today Amazon hit the wall. Yesterday’s non-earnings report went from bad to worse as Amazon announced the current quarter will result in bigger losses than the last quarter. The $126 million dollar loss will swell to a $400 million dollar loss, maybe as much as $800 million.

Breaking down the forward guidance, about $410 million of the current quarter loss will be in the form of stock compensation. What makes this even more interesting is that the company lost about $14 billion in market cap today. Jeff Bezos lost $3.5 billion from his personal fortune; Bezos may be an internet visionary, but lacks some basic math skills.

Also yesterday, Visa reported net income for the quarter ended June 30 rose 11 percent to $1.36 billion, or $2.17 a share, from $1.23 billion, or $1.88, a year earlier. Analysts had expected $2.10 a share. Visa’s losses accounted for about one-third of the decline in the Dow today. So, the earnings side was good but the company reduced its revenue forecast for the rest of the fiscal year. One reason for the reduction – Russia. After the US imposed sanctions on Russia, Putin recommended Russia create its own payment system. Visa said that tensions with Russia may affect earnings by “several pennies,” and those headwinds, in the form of lower cross-border volumes, are likely to continue in the short term in international corridors such as Ukraine, Venezuela and Argentina.

The European Union has been holding meetings in Brussels to find agreement over imposing sanctions on Russia over its behavior in Ukraine. They have decided to put together an outline on sanctions and get together again next week; the outline would exclude the crucial gas sector.

Following the downing of Malaysia Airlines Flight 17, many Europeans are eager for their governments to do something to punish Putin for fomenting instability in the Ukraine. However, the debate over economic sanctions is shining an awkward spotlight on the large and important trade relations between Russia and Europe. Russia is Europe’s gas station, and if Europe decides to stop doing business with Russia, they will have to figure out a new and likely more expensive way to put gas in the car and to heat their homes.

According to the Energy Information Administration, oil and natural gas accounted for 70% of Russia’s export revenues in 2012; and most of those exports go to Europe; and most of Europe has not figured out how to provide their own energy. Oil reserves in the North Sea are expensive to tap; fracking technology hasn’t happened for a number of reasons; and so Europe depends on Russia for about 30% of its natural gas. Many of Europe’s biggest corporations are directly involved in importing fuel from Russia, and many of Europe’s biggest industries, such as utilities, power-hungry manufacturers, car manufacturers, transportation systems, and anyone else who uses electricity – all rely on fuels imported from Russia.

If the EU were to suddenly grow a spine and just say no to Russian oil and natural gas, it would certainly inflict some short- term pain on Russia, but oil and gas are fungible and the market is global. One of Putin’s first moves was to sign a deal with China to make Russia a major supplier of natural gas. Europe does not have a quick replacement for Russia’s natural gas and winters in Europe can get very cold.

The US does not depend on Russian fuels; however, there are a couple of strange side stories coming out of the sanctions. First, is the as-yet-unaddressed need to restart NASA, so we don’t have to depend on Russia for ride sharing to the space station. The other, is that Americans don’t really care much about Russia anyway; last week the US imposed a fresh round of sanctions on Russian companies, including weapons manufacturers. How did patriotic Americans respond? Well, you can no longer buy Kalashnikov AK-47s. Technically you can, you just cannot find any. The move sent American gun buyers into frenzy, seeking to buy any AK-47s on any store shelf.

It should come as no surprise that Russia has stepped up its direct involvement in fighting between the Ukrainian military and separatist insurgents, unleashing artillery attacks from Russian territory and massing heavy weapons along the border. So, while the EU considers drafting a new outline of possible sanctions for further possible consideration; Russia may send in the troops.

About 34% of the contiguous United States was in at least a moderate drought as of this week.

Things have been particularly bad in California, where more than 80% of the state is in “extreme” drought, state officials have approved drastic measures to reduce water consumption. California farmers, without water from reservoirs in the Central Valley, are left to choose which of their crops to water. Parts of Texas, Oklahoma and surrounding states are also suffering from drought conditions. East of the Mississippi, rainfall has been rising. But global warming also appears to be causing moisture to evaporate faster in places that were already dry. Researchers believe drought conditions in these places are likely to intensify in coming years.

A new study released yesterday by NASA and the University of California Irvine shows we are losing water at a shocking rate in the West. Using a satellite designed to track changes in groundwater, the research team found that the Colorado River basin—, which supplies water to 40 million people in, seven states—lost 15.6 cubic miles of freshwater in the last 10 years. From December 2004 to November 2013, the Colorado basin lost nearly 53 million acre feet, or almost double the volume of the nation’s largest manmade reservoir, Lake Mead. (Actually, Lake Mead is no longer the biggest reservoir in the country; a lake in North Dakota takes that honor, as Lake Mead has shrunk.) More than 75% of that loss was due to excessive groundwater pumping. It is the first study to quantify just how big a role the overuse of groundwater plays in dwindling water resources out West.

How did this happen without anyone noticing it? The answer, basically, is that up until this study, nobody had a good way of measuring how much water is stored underground. And the researchers aren’t certain how much groundwater is left. The U.S. Bureau of Reclamation manages water above ground in the basin’s rivers and lakes, and its losses are documented. Pumping from underground aquifers is regulated by individual states and is often not well documented.

In the last seven years, Lake Mead’s dwindling has accelerated. The lake is now just barely more than 1,080 feet above sea level, slightly below its previous record low set in November 2010. Lake Mead is expected to drop another 20 feet into record territory by summer 2016. The low water level is already affecting hydroelectric power production. If the water level drops below 1050, the Hoover Dam might not be able to produce electricity.

Well before then, perhaps as soon as next April, downstream water rationing will kick in—this has never happened before. A 2007 shortage-sharing agreement sets three elevations for which water restrictions will be imposed on the Lower Basin states of Arizona, California, Nevada, and New Mexico. The first shortage level, 1,075 feet, will likely come into effect in the next several months. It would require a total water use cut of 4.4%, with Arizona taking an 11% cut, Nevada a 4% cut, New Mexico 3.3% and California remaining the same.

Right now, Phoenix has officially recorded just over one inch of precipitation since the start of the year; the normal amount is just less than 4 inches. The problem is that when above-ground water supplies run low - which is happening now, and it is common in California, even when there isn’t a drought - water managers use groundwater to meet public and farming needs. The study finds that so much groundwater has been used that it will be impossible to recover it naturally; overall supply of available freshwater will continue to decrease as a result.