Work Never Ends
Retail sales inch up, PPI flat, equity outflows, earnings ugly, crowdfunding next week, and why Americans might never retire.
Financial Review by Sinclair Noe for 05-13-2016
DOW – 185 = 17,535
SPX – 17 = 2046
NAS – 19 = 4717
10 Y – .05 = 1.70%
OIL – .37 = 46.33
GOLD + 9.90 = 1274.10
Well, if you are triskaidekaphobic you might have expected a day like this. For the week, the Dow fell 1.2 percent, the S&P dipped 0.5 percent and the Nasdaq lost 0.4 percent. It was the third week in a row of losses for the Dow and S&P 500.
US businesses in March posted the biggest increases in inventories and sales since June, good news for economic growth. The Commerce Department says business inventories rose 0.4 percent from February. Sales rose 0.3 percent. Falling inventories have been a big drag on the U.S. economy. They trimmed economic growth by 0.3 percentage point in the first quarter.
Retail sales increased 1.3% last month, spearheaded by big gains among auto dealers, gas stations and Internet retailers. The Commerce Department reports that every segment of the retail industry saw improved results except for home centers whose sales were hurt by bad weather. Americans have increased their savings and they are still finicky shoppers. Retail sales have risen a modest 3% clip in the past 12 months.
Producer prices rose 0.2% in April after two straight declines, but inflation at the wholesale level remained largely absent in the broader economy. The cost of services edged up 0.1% in April. Goods rose 0.2%, led by surge in scrap metal prices and higher energy costs. Food prices fell 0.3%. Wholesale prices are unchanged in the past 12 months.
Consumer sentiment surged in early May. The University of Michigan’s index rose 7.6% to 95.8. Most of the gain was due to the expectations index, which soared 12.8% to 87.5, its highest in nearly a year. The current conditions component also rose, by 1.8%, to 108.6. The largest gains were centered in lower-income and younger households, who may be more sensitive to income gains and the jobs outlook.
Eurozone GDP missed estimates. The Eurozone’s economy grew 0.5% in the first quarter, missing the 0.6% that economists had forecast. Spain’s economy was the standout, growing at a 0.8% clip. The German economy grew at a 0.7% pace.
International Monetary Fund Chief Christine Lagarde said there were no economic positives to Britain leaving the European Union and that the impact would range from “pretty bad to very, very bad”. Her blunt warning came as the IMF said the country risks falling into a spiral of weaker economic growth, lower house prices and diminished foreign investment if voters opt to leave the European Union after the referendum next month.
OPEC said the global oil market is oversupplied and signaled the glut may increase this year, as surging output from its members makes up for losses from other countries whose production has been hit by a price fall. Supply from the Organization of the Petroleum Exporting Countries is climbing after sanctions on Iran were lifted and an initiative with Russia and other non-members to tackle a supply glut by freezing output failed last month.
Global investors are fleeing stock market funds. In a note to clients, analysts at Jeffries said global equity funds “recorded their fifth consecutive weekly outflow, at a net $7.3 billion.” The biggest outflow came from Japanese stock market funds where investors pulled $4.9 billion. $3.1 billion left European funds, leading to an 11th straight week of outflows. US funds fared slightly better as only $1.8 billion was pulled out of the market. Meanwhile, Bank of America Merrill Lynch reports investors pulled $44 billion out of US equity funds in the past 5 weeks; with the lion’s share being parked in money market accounts. It’s probably an understatement to say organic growth has been weak and unbalanced.
Much of the earnings growth we have seen has come through financial engineering, or smoke and mirrors if you prefer, in the form of stock buybacks, job cuts and consolidation and sales purchased through mergers and acquisitions, and also margin expansion fueled by interest expense reduction from the prolonged zero interest rate policy. According to research from JPMorgan, revenue, or top-line sales growth contracted during each of the past 4 quarters, and the first quarter numbers are expected to show a further decline of 1.8% year-over-year; while second quarter sales are estimated to drop 1.1%.
For corporate America’s bottom line, there hasn’t been a worse quarter since the financial crisis. For the more than 90 percent of companies that have reported, earnings haven fallen 6.3 percent from the year before, spreading particular pain to the energy, financial services and technology sectors. At least that’s the best estimate; you can’t really tell much from earnings reports anymore. FactSet reports 90% of S&P 500 companies make up their own metrics in an attempt to make their numbers look better. For example, can you explain the difference between “EPS diluted and adjusted” and “adjusted diluted earnings per share from continuing operations” and “”adjusted earnings” and “adjusted free cash flow”. Don’t feel bad, even Warrant Buffett thinks many of the earnings reports are confusing. Heading into the second quarter for every company that has given an upbeat preannouncement, 2.3 others have sounded warnings. That has left the S&P 500 trading at about 16.5 times expected earnings.
Apple has decided to jump into the ride-sharing wars. Apple is investing $1 billion in Didi Chuxing, the largest taxi hailing app in China, joining other investors including Alibaba and Tencent, and dealing a blow to Uber Technologies. Didi handles more than 11 million rides a day and serves about 300 million users in China. Hooking up with Didi could help Apple secure a firmer foothold in the world’s largest mobile arena at a time when the company is looking to combat a slump in its smartphone business. The tieup also represents the company’s first public investment in the auto market and could provide valuable insights should Apple proceed with its own car. Apple shares dropped below $90 per share yesterday and for a few minutes Alphabet was the world’s largest company based on market capitalization. Today, Alphabet was down slightly and Apple about .18 cents, to retake the crown by about $6 billion dollars.
Charter Communications’ proposals to buy Time Warner Cable and Bright House Networks has been approved by the California Public Utilities Commission, overcoming the last hurdle to complete the deals. The FCC valued the transaction for Time Warner Cable at $78 billion and the purchase of Bright House at $10.4 billion. A deal makes Charter the second-biggest cable company in the U.S. (and third-largest pay-TV operation) with about 18.4 million subscribers.
Hackers have again gained access to the world’s largest system for transferring funds among banks, a breach the network’s operator said indicates a wide-ranging effort to penetrate the financial system. According to SWIFT, the malware attack targeted a commercial lender and managed to send messages using the bank’s valid codes, following February’s $81 million cyber heist at the Bangladesh central bank.
Three oil and gas bankruptcies this week – Chaparral Energy, Penn Virginia and Linn Energy. According to law firm Haynes & Boone, 130 North American oil and gas producers and service companies have filed for bankruptcy since the start of 2015, owing almost $44 billion. More energy firms are also nearing default, including Breitburn Energy Partners and SandRidge Energy.
New crowdfunding rules taking effect Monday will let anyone, not just the wealthy, invest in startups. The change overrides a longstanding Securities and Exchange Commission requirement that investors backing private companies be “accredited,” meaning they make at least $200,000 a year and have a net worth of $1 million or more (excluding their home). Now startups raising money through online crowdfunding portals will be able to sell shares to people regardless of their wealth or income so long as the founders have submitted annual financial reports to the SEC. In exchange, companies can raise up to $1 million. The rules, implemented as part of Title III of the JOBS Act, were four years in the making. The big question is how much the change will transform crowdfunding, which has typically rewarded backers with T-shirts, events tickets and early iterations of gadgets.
Some startups may find the rules a bit too strict; there are costs associated with filing and submitting annual reports; and they can only raise one million. Still, for many startups that don’t happen to be a tech company in Silicon Valley, it can be a viable option. As of Thursday, five crowdfunding portals had been approved, including: WeFunder, Seedinvest.com, CrowdfundingSTAR.com, NextSeed, and StartEngine. One of the bigger portals, Indiegogo expects to get involved soon.
According to the Bureau of Labor Statistics, almost 20 percent of Americans 65 and older are now working. That’s the highest percentage of older people with a job since the early 1960s, before the US enacted Medicare. Part of the reason is demographics; the baby boomers are hitting retirement age, and they are healthier and living longer. Education comes into play. People with college and graduate degrees tend to work later than those with less schooling. And since 1985, the share of older Americans with college degrees has tripled, to about a third of 60- to 74-year-olds. With the U.S. unemployment rate at 5 percent, the lowest since 2008, employers have a greater incentive to keep older workers happy. They might not be able to replace them. And 27 percent of Americans said they will “keep working as long as possible.” Another 12 percent said they don’t plan to retire at all. Three in five retirees surveyed said making money or earning benefits was at least one reason they put off retirement. Almost half said financial problems were their main reason for working past 65. Thirty-six percent of respondents said they had worked past 65 mainly because they enjoy their jobs or “want to stay involved.”
Susannah Mushatt Jones, the world’s oldest person, has died in New York at age 116. Jones was born in a small farm town near Montgomery, Alabama, in 1899. Ms. Jones was the very last American from the 1800s. Family members said last year that they credited her long life to love of family and generosity to others.