Barbarians at the Gate with Toothpaste

Sinclair Noe — October 10, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 69 = 22,830 (Record)
SPX + 5 = 2550
NAS + 7 = 6587
RUT + 4 = 1508
10 Y – .02 = 2.35%
OIL + 1.34 = 50.92
GOLD + 3.90 = 1288.50

Cryptocurrency

• Number of Currencies: 874
• Total Market Cap: $153,183,891,232
• 24H Volume: $3,150,277,911

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	4,745.0	$79.08B	$1.51B	47.97%	1	-0.62%	+10.31%
	Ethereum	ETH	301.25	$28.69B	$332.08M	10.54%	0.0637418	+0.63%	+2.43%
	Ripple	XRP	0.25804	$10.12B	$329.41M	10.46%	0.00005539	-0.10%	+28.57%
	Bitcoin Cash	BCH	315.99	$5.28B	$261.54M	8.30%	0.0668111	-0.32%	-21.06%
	Litecoin	LTC	50.400	$2.69B	$81.09M	2.57%	0.0106525	-0.02%	-3.77%
	Dash	DASH	287.90	$2.20B	$28.65M	0.91%	0.0609756	-0.73%	-4.26%
	NEM	XEM	0.21437	$1.91B	$4.76M	0.15%	0.00004475	+2.96%	-4.85%
	NEO	NEO	30.150	$1.50B	$47.56M	1.51%	0.00634651	+2.97%	-10.79%
	IOTA	MIOTA	0.47300	$1.32B	$7.64M	0.24%	0.00009993	-0.63%	-14.76%
	Monero	XMR	86.08	$1.31B	$24.55M	0.78%	0.0181888	-0.49%	-6.51%

The Dow and the Nasdaq opened at record high. The Dow Industrials managed to hang on for a record high close. Only two of the 11 primary S&P 500 sectors are in negative territory for the year, and for broader indexes, even mild pullbacks of 3% have basically been nonexistent for months.

Volatility is near record lows. Other regions have also reported strong gains: European equities are up more than 20% this year, as are emerging markets. Basically, every country—as gauged by the most popular single-country exchange-traded funds—is positive on the year.

The International Monetary Fund is holding a meeting in Washington. Today a reporter asked Maurice Obstfeld, the chief economist at the International Monetary Fund: “Are financial markets being irrationally exuberant?” Obstfeld’s response? “Maybe.”

And he went on to add: “To some degree, asset prices are being supported by very, very low interest rates. They are supported by growth expectations that could be disappointed. Our assessment that longer-term growth rates, particularly in advanced economies, are subdued, feeds into that. So, our concern is simply that, if interest rates were to rise faster than expected or growth outcomes not validate these high asset prices, there could be abrupt repricing that could be disruptive.”

The IMF seems to be taking a more cautious stance – still calling for global economic growth, but issuing a warning against complacency. The IMF fears that financial markets are ignoring the risks, just as they did in the buildup to the crisis in 2007.

What’s more, central banks and finance ministries have used up much of their ammunition in the past decade. There is little or no scope to cut interest rates, QE has long since been subject to the law of diminishing returns, and governments are running much bigger budget deficits.

Remember that tax reform plan that was released just a couple of weeks ago. We were told it was the greatest thing since Ronald Reagan invented sliced bread. Today, Trump said he plans to make changes to his tax plan within the next few weeks, while dismissing concerns that his public spat with Senator Bob Corker would scuttle an overhaul. Trump didn’t specify what kind of changes, and it’s unclear whether he now intends to release another version.

Environmental Protection Agency Administrator Scott Pruitt is trying to repeal the Clean Power Plan, declaring “The war on coal is over.” What Pruitt forgot to say is that coal lost. Nobody in their right mind wants to go back to coal – it is dirty, expensive and an environmental nightmare. The Clean Power Plan hasn’t gone into effect yet, so there is no data to show if it had an impact on emissions. The repeal effort will end up in court. Next on the EPA’s agenda – bringing back whale oil.

The barbarians were at the gate, demanding more profit from the sale of toothpaste and detergent. But Procter & Gamble declared victory over activist investor Nelson Peltz, saying initial figures show it won the biggest proxy battle in history. But the narrow win puts pressure on the owner of Bounty and Tide to move faster in its turnaround and regain the support of investors. P&G will file results with the Securities and Exchange Commission when the vote is finalized.

Peltz’s fund Trian Partners said it plans to challenge the proxy results. With a market capitalization of $230 billion, P&G is the largest company to have fought a proxy fight and one of a few companies larger than $50 billion. In 2015, David Taylor took over as CEO and since then the company simplified its corporate structure, streamlined its portfolio, poured more money into research and development and worked to improve operations.

But the proxy fight wasn’t about how the company is run, rather it is how the shares have performed. Since Taylor took the reins, P&G’s stock has outpaced most U.S. consumer products companies, including Clorox and Colgate-Palmolive, though it under-performed against the S&P 500.

Walmart said it expects US online sales to jump about 40% in the next fiscal year. Walmart plans to invest heavily in e-commerce and online grocery in the coming months, with plans to double its online grocery pickup locations by the end of next year.

They will redesign their website by the first quarter and it will feature Jet.com’s “smart-cart” system – which basically gives automatic discounts the more stuff you throw in the cart. Now this is where it gets interesting. Walmart is ubiquitous for its brick and mortar stores but they haven’t shown great leadership online – that’s where Amazon shines.

Amazon’s is on a parallel track where they’re trying to build up the logistical capability and the brick-and-mortar capability, frankly, that Walmart already possesses. Walmart has been automating its supply chain and moving into online sales. Armed with open-source software such as the OpenStack cloud, Walmart is fighting Amazon on its high-tech turf.

Amazon responds AWS, Amazon Web Services, their own cloud which controls everything. In other words, this is a battle of the retail giants. Each brings its own set of skills to the fight. So, where does one have an advantage?

Unless you follow the retail business like a hawk, you might not know that Amazon was beating Walmart every day on its “Everyday Low Price” guarantee. Walmart responded by calling in the major consumer suppliers — from diapers to clothes to TVs — with an offer they couldn’t refuse: Either cut their wholesale prices by at least 15 percent off, or Walmart would limit their presence in stores and create its own branded products to compete with them.

Amazon, never afraid to cut sales margins by increasing volume, has responded by selling even more CRaP, an inside Amazon acronym for “Can’t Realize a Profit” products. Amazon will cut its own profit to get a new customer. Amazon will reinvest its last dollar in new technology – they’ll even invest money they don’t have.

Also, today Walmart announced $20 billion in share buybacks. This is something I would never expect from Amazon. Share buybacks are the fallback position for management that can’t figure out the next big innovation. Either way, Walmart and Amazon are the 800-pound gorillas of retail, and this will be an ongoing battle.

Last year, the South Korean military’s computer network was breached by North Korean hackers. The hack was discovered in September last year. Now South Korea is reporting it was worse than previously estimated. The North Koreans stole classified wartime contingency plans jointly drawn by the United States and South Korea.

It remained unclear how much the hacking has undermined the joint preparedness of the South Korean and United States militaries, with South Korean officials simply saying that they have been redressing whatever damage was caused by the cyberattack.

A security breach at Deloitte, a major accounting and consulting firm, may be much more serious than the company admits. Deloitte previously said on Sep. 25 that “very few clients” had been affected by a hack into its email platform, which began in fall 2016 and was uncovered in March 2017.

Yet the Guardian reported today that the affected server housed emails exchanged with about 350 clients, many of them high profile. That group includes the U.S. departments of defense, state, energy, and homeland security, along with the National Institutes of Health, the U.S. Postal Service, and major companies like Fannie Mae and Freddie Mac. The server also contained emails to or from unnamed global banks, airlines, car manufacturers, energy companies, and pharmaceutical manufacturers.

More than a dozen wildfires burned across Northern California for the third straight day. Here’s what we know: At least 15 people have died since Sunday night, when most of the fires began. Nine deaths were in Sonoma County. More than 100 people were being treated at Napa- and Sonoma-area hospitals for fire-related injuries or health issues.

About 2,000 homes and businesses have been destroyed by the fires. Wildfires were burning more than 115,000 acres in California as of Tuesday morning; firefighters are still in rescue mode, not containment mode. Fires have left more than 91,000 customers without power in the state. Some of the largest of the 14 blazes burning over a 200-mile region were in Napa and Sonoma counties, home to dozens of wineries that attract tourists from around the world.

They sent smoke as far south as San Francisco, about 60 miles (96 kilometers) away. The causes of the fires were unknown. A large part of Santa Rosa was evacuated. Authorities imposed a sundown-to-sunrise curfew for parts of the city. Taken as a group, the fires are already among the 10 deadliest in California history, and the death toll is expected to grow.

Alongside the new Pixel 2 smartphones Google unveiled last week, the company also launched a set of Bluetooth earbuds called the Pixel Buds with one standout feature: instant translation between 40 different languages using a Pixel smartphone.

In a live demo on stage, the Pixel Buds were shown translating short phrases back and forth between English and Swedish using Google Translate running on a Pixel 2 smartphone. This isn’t the first time Google has tried to break the language barrier.

The Google Translate app on Android and Apple’s iPhone can already perform the same trick. For non-Android’s, the Bragi Dash Pro does the same thing, using the iTranslate app on an iPhone.

Face the Facts

Financial Review with Sinclair Noe — September 8, 2014

 

Podcast: Play in new window | Download (Duration: 13:14 — 6.1MB

DOW – 25 = 17,111
SPX – 6 = 2001
NAS + 9 = 4592
10 YR YLD + .01 = 2.47%
OIL – .63 = 92.66
GOLD – 12.90 = 1256.50
SILV – .17 = 19.12

The Federal Reserve reports consumers increased their debt by a seasonally adjusted $26.0 billion in July, up from an $18.8 billion gain in the prior month. Monthly debt rose at a 9.7% annual rate in July, compared with a 7.1% rate in the prior month. On a dollar amount, that’s a record gain, and on a percentage basis, it’s the highest since July 2011.

Crude oil for October delivery fell 63 cents, or 0.7 percent, to settle at $92.66 a barrel in New York, its lowest level since January. Oil prices have fallen for three days straight as geopolitical worries in Ukraine and Iraq have eased.

The ceasefire between Russia and the Ukraine is holding by a thread. The EU has approved a second round of sanctions against Russia, but today, they put the sanctions on hold, hoping for a favorable outcome. In an initial set of economic sanctions imposed in late July, the EU barred five state-owned Russian banks from selling shares or bonds in Europe; restricted the export of equipment to modernize the oil industry; prohibited new contracts to sell arms to Russia; and banned the export of machinery, electronics and other civilian products with military uses to military users, so-called dual-use goods. Those measures prompted Russia to ban imports of some EU farm goods, a step that has cut off about $6.5 billion of annual trade and left the bloc scrambling to aid its producers. In a statement on Sept. 6, the day after EU member-state diplomats drew up the latest sanctions plan, the Russian government signaled it would take further retaliatory action should the extra penalties be enacted.

Also weighing on crude oil prices was a report out of China that showed manufacturing in the world’s second-largest economy was slowing down.

Also, a report today showed Japan’s economy contracting 7.1% in the second quarter. The problem in Japan is that the government is trying to raise the sales tax. The economic weakness followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose to 8 percent from 5 percent. The current contraction likely means more stimulus before the government can try to raise taxes to the target of 10%.

The Federal Reserve Survey of Consumer Finance found that only 48.8 percent of Americans held stock either directly or indirectly in 2012, the latest period measured. That’s the lowest level since 1995, when 40.5 percent of Americans held some form of stock. Only 14 percent of Americans own stocks directly; down from 21 percent in 2001. The stock ownership rate for Americans peaked in 2001. Stock ownership in America is heavily skewed toward the wealthy; 93 percent of the wealthiest 10 percent of Americans own stocks. That’s nearly twice the level for the middle 50 percent and far more than the 26 percent stock-ownership rate for the bottom 40 percent. Stock ownership is even more concentrated when it comes to share of total stock holdings. In 2010, the latest period available, the top 10 percent of Americans by net worth held 81 percent of all directly held or indirectly held stocks.

Now, this raises some interesting points. First, you know that the Federal Reserve has been propping up the stock markets for the past 5 years. The tools the Fed uses are known as ZIRP and QE, or Zero Interest Rate Policy and Quantitative Easing; also, on an as needed basis, the Fed will step in to stabilize equity markets directly or indirectly. ZIRP and QE are not direct investment in stocks; rather stocks benefit from short-term interest rates hovering around zero and from the Fed pumping up the monetary base from around $800 billion back then to more than $4 trillion now.

By lowering the cost of credit for corporations, the Fed has helped dump trillions into stocks as CEOs have leveraged up their balance sheet by issuing debt cheaply and using that money to repurchase their own shares. The practice of using debt to repurchase shares has become so widespread and aggressive that it is limiting actual physical investment in plants and equipment. Share price goes up quicker when a CEO buys back shares, rather than making investments in cap-ex and working hard and growing the business organically. Higher share price equals bigger bonus, equals early retirement. This is why both labor productivity and the capital expenditures component of GDP growth have been weak; private nonresidential fixed investment is growing at around a 7 percent to 8 percent rate compared to peaks of near 12 percent hit during the last two economic expansions.

The reason this works is because of ZIRP and QE, but the Fed has almost finished its exit from QE and promises it will raise rates, probably next year, depending on the economic data. And so the bond market is starting to respond. Junk bonds are showing signs of fatigue. If the weakness were to continue, it would limit the ability of companies to issue debt at low cost. Right now, there is a stampede to float debt after a summertime lull. Nearly $40 billion of high-grade debt was sold this past week, the third-highest weekly total so far this year. Overall, high-grade and junk-rated bond sales have already reached the $1 trillion issuance level for the year to date, the fastest pace on record going back to the mid-1990s. This follows a strong performance last year.

We know that Mom and Pop investors are not buying stocks like they used to; so, for the past couple of years, the major buyer of stocks has been corporations. Last year corporations made purchases totaling $500 billion. But as QE and ZIRP ends and rates start moving higher, with the first cracks now appearing in the high yield or junk bonds, we are also starting to see a little less in the way of stock buybacks; now on pace to levels last seen in 2012. QE and ZIRP aren’t the only reasons for fewer buybacks; part of it is that corporate balance sheets may be stretched, part of it might be because there are limits to buybacks. But there is a big question of whether corporations can now shift gears, increase capital expenditures and re-grow business after living off their own fat; or whether all that debt they’ve taken on will come back to bite them because of the steady drag of fixed interest expenses.

This does not mean the stock market will necessarily crater; just that it could. Vincent Reinhart, a former monetary policy expert with the Fed and current chief economist for Morgan Stanley thinks the Wall Street traders will have a market tantrum. The thinking is that the markets have not yet priced in a rise in rates, and when the inevitability hits, it will hit like a sack of bricks; the markets will sell-off and the investment banks will cry like little babies, and the Fed will then have to choose whether to press ahead with the rate hike or appease the bank babies and delay rate hikes.
So, the Fed is trying to offer guidance, but Wall Street types aren’t buying it; they’re too comfortable with the prospect that the Fed will leave rates near rock bottom lows for the foreseeable future. According to a research report from the San Francisco Fed, even if the Fed raise rates, the primary dealers and brokers don’t think they will really raise rates by much. It’s almost understandable, rates have been so low for so long, we can’t imagine they will ever go back to normal levels.

And even if the Fed raises rates, we live in a global economy, and last week the European Central Banks announced a new round of monetary easing; what is now being called Draghi-nomics; that prompted several investment banks to raise their outlook for equity markets. Goldman Sachs shifted from neutral to overweight; Morgan Stanley’s chief equity strategist raise the firm’s 12 month S&P 500 forecast; Deutsche Bank increased their forecast for the S&P. Goldman Sachs sees “lower risk” from bonds following the ECB decision and the net effect of the policy action from here will be positive for equity markets.

We could still see the economy pick up and businesses could grow their way out of the mess. Workers could get jobs and start spending again. And everything would be so economically strong that even whiny Wall Street traders would be laughed at.

The United States moved up two places for the second year in a row in the World Economic Forum’s competitiveness rankings, from fifth last year to third in 2014. The WEF’s Global Competitiveness Report defines competitiveness as the “set of institutions, policies, and factors that determine the level of productivity of a country.”

According to the WEF’s report, “Factor-driven” economies are the least developed, typically relying on low-skilled labor and natural resources. More developed countries are considered “efficiency-driven” economies because they focus on improving economic output by increasing production efficiency. The most developed economies, which rely on innovation and technological changes to drive growth, are considered “innovation-driven” economies. Nations may also fall between these classifications. By the way, the two countries that ranked higher than the US are Singapore and Switzerland.

The WEF measured the drivers that actually lead to economic strength or weakness. Key drivers of economic success include institutions, infrastructure, and education; the most competitive countries maintain a high level of quality for road networks and transportation infrastructure and primary education. Maintaining strong nationwide institutions and infrastructure takes money. With only a few exceptions, the world’s least competitive countries have relatively low debt levels. The most competitive countries typically had high debt, with 6 of the most competitive countries creating debt equivalent to 75% or more of GDP.