Financial Review

A High Point

Nasdaq record close. Oil down. Productivity down but we don’t know why, or maybe we do. Honeywell in talks for JDA Software. AI unicorns. Earnings roundup. Shooting stars.

Financial Review by Sinclair Noe for 08-09-2016

DOW + 3 = 18,533
SPX + 0.85% = 2181
NAS + 12 = 5225
10 Y – .04 = 1.55%
OIL – .38 = 42.64
GOLD + 5.60 = 1341.60

 

The Nasdaq hit a record high close today; the other major indices are close to record highs. Stocks have traded within a 2% range for the past 3 weeks. Bullish side of the equation: earnings aren’t declining as bad as feared, and central banks around the world are pumping cash into the markets. Bearish sentiment: earnings are still declining, slower global growth and election uncertainty. Whether you are in the bullish or bearish camp, one thing is certain, the market is tight, and at some point it will breakout or breakdown.

 

Oil prices were down again today. If you’re wondering when you’ll see low oil prices reflected in the price at the pump – the answer is soon. The Energy Information Administration cut its price forecast for national average retail gasoline prices to $1.95 a gallon in the fourth quarter, down from last month’s forecast of $2.07 a gallon. The EIA expects gasoline prices to hold below $2 a gallon on average from October through February.

 

The Labor Department said that productivity dropped at a 0.5 percent annual rate in the second quarter. It was the third consecutive quarterly decline. Unit labor costs, the price of labor per single unit of output, increased at a 2.0 percent pace in the second quarter. Productivity measures how much an employee produces in an hour of work. Higher productivity is regarded as the key to a rising standard of living over time because it tends to lead to higher pay for workers and larger profits for companies. When the economy consistently produces more with less, workers get raises, companies create good-paying jobs and people feel like they’re getting ahead. Productivity reflects innovation, the magic formula for lifting all boats. When it stalls, living standards stop moving forward and some people inevitably go backwards. The average annual rate of productivity growth from 2007 to 2015 has sunk to 1.3%, well below the long-term rate of 2.3% per year from 1947 to 2005. Productivity has declined for nine months straight, and has fallen 0.4% during the last year.

 

There are several theories for why productivity is declining. One idea is that older, more productive workers are retiring; I think a grey haired boomer dreamed up this excuse. If this is true, we just need to wait for the younger workers to get up to speed. Another idea is that we need a fresh round of new technology to boost productivity (another dot.com era).

 

It’s also possible that falling labor costs—due to both cheap offshore labor and moderating wage costs at home—have led employers to spend more on workers and less on new equipment than they otherwise might. That would depress productivity even as hiring picked up. Here’s the bottom line: Labor compensation growth that outpaces productivity growth must either be passed through into faster price increases or squeeze profit margins. And for now, it just isn’t happening. We are not seeing wage push inflation.

 

And yet another idea is that we aren’t using the right tools to measure productivity – as the economy has shifted from manufacturing to services, it is tougher to measure output. For example, someone creates an app that makes it easier to avoid traffic delays – that’s a huge increase in productivity; now compare that to how many hours it takes to build a car. The measurements and comparisons are tricky. And how do we even measure output from jobs that have been automated? Around the end of the year, Walmart will start using drones to check warehouse inventories. Drones can reduce the labor intensive process of checking stocks around the warehouse to one day. It currently takes a month to finish manually. That sounds like a 30-fold increase in productivity but I strongly doubt that is how it is being measured.

 

Then again, Gallup just released a new poll showing that the percentage of American adults who say they currently smoke marijuana has nearly doubled over the past three years. In 2013, only 7 percent of adults said they were marijuana smokers. When Gallup asked again in July of this year, 13 percent admitted to current marijuana use. That works out to more than 33 million adult marijuana users in the US. So maybe that’s the explanation for the low productivity numbers.

 

Delta Air Lines CEO Ed Bastian apologized for a power failure that halted flights for over six hours on Monday. The airline canceled around 1,000 flights on Monday, stranding passengers at airports around the globe.  About 500 flights were cancelled today, as the carrier works to reset its operation and get crews, aircraft and other elements in place. Delta said it would offer compensation to customers affected by significant delays or cancellations. The company said it would provide $200 in travel vouchers to all customers who experienced a delay of greater than three hours or a canceled flight.

 

Brazil’s Senate is voting to start the impeachment trial against President Dilma Rousseff, which could begin as soon as August 25. The session, which will help determine whether Acting President Michel Temer will hold onto the country’s reins, will take place just days after local media linked him and two of his cabinet members to illicit campaign contributions. All three deny wrongdoing and say financing was legal.


British 10-year government yields
 have slid below 0.6% for the first time on record, while the pound dropped against the dollar, despite signs of post-referendum resilience in U.K. retail sales. The Bank of England might cut rates further and boost bond purchases if the economic downturn in the U.K. deepens. The pound sterling dropped under $1.30 today.

 

Honeywell is in talks to acquire Scottsdale-based JDA Software Group, in a deal that could value the software company at around $3 billion, including debt, sources told Reuters. The acquisition would illustrate how Honeywell is keen to boost its automation portfolio after it agreed last month to buy Intelligrated, a U.S. distribution systems and logistics company, for $1.5 billion. JDA Software provides retail and supply chain planning and execution solutions for more than 4,000 corporate customers worldwide. The company has been struggling under the burden of more than $2 billion in debt. Earlier this year, credit ratings agency Moody’s Investors Service warned that JDA Software’s debt levels might be unsustainable and that the risk of impairment in its capital structure would be high without a sizable equity infusion or reduction in debt.

 

Press Ganey, which offers performance analytics to health care companies, said it has entered an agreement to be acquired by private-equity firm EQT in a deal with an enterprise value of about $2.35 billion.

 

Marking its first major deal since Energy Transfer walked away from its $20B takeover in June, Williams Cos. and its master limited partnership have agreed to sell their Canadian businesses to Inter Pipeline for approximately $1 billion.

 

Some of the big tech companies are buying up artificial intelligence startups. Intel announced plans to pay an undisclosed amount for Nervana Systems, a 48-employee company working on semiconductors, software and services to exploit a popular AI technique called deep learning. Last Friday, Apple said it would purchase Turi Inc., a Seattle-based specialist in the field. The two acquisitions add to a string of 31 purchases since 2011 of AI startups by large companies tallied by venture-capital research firm CB Insights. Dollar figures for the AI acquisition binge are hard to come by—as are figures for individual AI transactions—because the big tech companies are swooping in on startups before they have built market valuations of a size that buyers would be compelled to disclose.

 

Shares of Resolute Energy rallied after the oil and gas company late Monday said its loss narrowed in the second quarter.

 

Valeant Pharmaceuticals confirmed its full-year guidance and said it would reorganize following another weak quarter.

 

Luxury retailer Coach posted fiscal fourth-quarter earnings that beat expectations, but shares slumped 2.2%.

 

Gap investors may need to wait a bit longer for the company’s turnaround. After reporting its first comparable-sales increase in more than a year in June, that key metric once again turned negative in July, falling 4%, and 2% during the second quarter. Revenue was down14% for the Banana Republic brand, a 4% decline at Gap and flat sales at Old Navy.

 

The U.S. Postal Service reported a fiscal third-quarter loss that widened to $1.57 billion from $586 million a year ago. The widening was due primarily to a $1.6 billion unfavorable change in workers’ compensation expense as a result of interest rate changes. Revenue rose 7.1% to $17.7 billion.

 

After the closing bell, Disney reported adjusted fiscal third-quarter earnings of $1.62 on revenue of $14.28 billion. That beat top and bottom line estimates. In after-hours trading Disney dropped about 1.5%, so we’ll just file that under – Go Figure. In a separate statement, Disney said it will acquire a 33% stake in video streaming company BAMTech for $1 billion for use in ABC and ESPN programs. BAMtech will work with ESPN to create a standalone, cable-free digital streaming service. Live sports remains one of the main things people tune into on TV.

 

If you’re looking for some great entertainment, look to the skies starting Thursday night. The Perseid Meteor shower usually brings a fantastic show each August. In any given year, when the dark heavens cooperate, the Perseids could peak at 50 to 100 shooting stars an hour. This year, the International Meteor Organization thinks that number may increase to about 150 meteors an hour. Other astronomers are calling for up to 200 meteors an hour. So here’s hoping for clear skies.

 

 

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