Financial Review

Consuming Oxygen

…..Comey firing offers minor distraction on Wall Street. IMF concerned about growing corporate debt, warns of swift repricing. Senate sticks with limits on methane emissions. Oil prices pop on lower inventories. Aetna exits ACA exchanges. Tesla launches Solar Roofs. Sears’ Lampert confirms he is clueless. Snap snapped. Whole Foods reshuffled.

Financial Review by Sinclair Noe for 05-10-2017

DOW – 32 = 20,943
SPX + 2 = 2399
NAS + 8 = 6129
RUT + 7 = 1399
10 Y + .01 = 2.41%
OIL + 1.45 = 47.33
GOLD – 2.30 = 1219.80
President Trump’s stunning firing of the FBI director, James Comey, injected another volatile ingredient into the partisanship already engulfing the capital and threatened to overwhelm Republican efforts to turn their government control into legislative success. The abrupt decision has investors raising questions about whether the president’s pro-growth, tax-cutting reforms will stall as the focus shifts to why Comey was dismissed while the FBI was investigating possible Russian ties to Trump’s campaign. Every piece of Trump’s agenda just became harder to get through Congress. Wall Street is shallow that way. Whoever Trump nominates as Comey’s replacement will face a brutal confirmation hearing before the Senate Judiciary Committee. It will get saturation-level media coverage. There are legal implications that will take time to fully unravel. The Comey dismissal is going to consume most of the oxygen in Washington for the foreseeable future.

 

As US equity markets continue to price to perfection a grab bag of promised corporate giveaways, a group of researchers at the International Monetary Fund (IMF) had the temerity to ask last month – what could possibly go wrong. In their April 2017 “Global Financial Stability Report,” IMF researchers methodically pare back the rosy lenses of the stock market and focus on the warning signs in the U.S. corporate debt market. Two particular findings have the power to potentially jolt the equity markets out of their euphoric stupor. The researchers note:

 

“The [U.S.] corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010…”

 

“The number of [U.S.] firms with very low interest coverage ratios—a common signal of distress—is already high: currently, firms accounting for 10 percent of corporate assets appear unable to meet interest expenses out of current earnings. This figure doubles to 20 percent of corporate assets when considering firms that have slightly higher earnings cover for interest payments, and rises to 22 percent under the assumed interest rate rise. The stark rise in the number of challenged firms has been mostly concentrated in the energy sector, partly as a result of oil price volatility over the past few years. But the proportion of challenged firms has broadened across such other industries as real estate and utilities.

 

The report acknowledges that equity markets “have taken a relatively benign view” of the downside risks and warns that there could be a “swift repricing of risks in the event of policy disappointment.”

 

The Senate rejected efforts to roll back an Obama-era rule limiting methane emissions from energy production sites on federal land. The vote over the greenhouse gas was close — 49-51 — with Republican Sens. John McCain, Lindsey Graham and Susan Collins coming down against the resolution. In a statement, McCain said he voted against the repeal because the effort made use of a legislative tool called the Congressional Review Act, which would have blocked similar regulations in the future. The greenhouse gas rule is intended to curb a practice called flaring, during which energy producers burn off natural gas that they can’t process or sell. That process releases methane into the atmosphere.

 

Oil prices rose more than 3 percent, as inventories suffered the biggest one-week drop this year. The US Energy Information Administration said crude inventories fell 5.2 million barrels last week. Gasoline and distillate stocks also fell. Production rose, however, and gasoline demand over the last four weeks was 2.5 percent lower than at the same time period a year ago. Prices  also found support in comments by Algeria’s energy minister that Algeria and Iraq favor extending global supply cuts when OPEC meets this month. Saudi Arabia’s energy minister went public with his support not only for an extension of the OPEC cuts for another six months, but he also dangled the possibility of an extension into next year.

 

According to the just released Monthly Treasury Statement, in April the US Treasury collected $456 billion and spent $273 billion, resulting in a budget surplus of $182 billion, higher than the $179 billion expected, and well above last year’s $106.5 billion surplus. In a surprising jump in government revenues, receipts rose 3.9% y/y in April while outlays plunged a whopping 17.7% y/y. The increase in the surplus is due entirely to calendar quirks and a shift in the timing of some corporate income tax payments.

 

On Friday, Treasury Secretary, Steven Mnuchin, will be on the world stage for the start of two days of meetings in Italy, with finance ministers from the G7: The United States and six other major economies — Canada, Germany, Japan, Britain, France and Italy. The talks come amid a number of geopolitical uncertainties. The issue of trade was at the forefront in March, when Mnuchin and leaders of the world’s 20 largest economies met in Germany. The tough talks ended in the group deciding to drop longstanding pro-trade language from a joint agreement. Hoping to bypass another row this week, Italian officials said they would keep trade off the official agenda. Italy is the current president of the G7 and has the power to set the agenda of the finance ministers’ meetings.

 

Aetna, one of the major five public health insurers in the US, announced it will remove its products from the Obamacare exchanges in Nebraska and Delaware. The move comes after Aetna announced it was pulling out of Iowa and Virginia over the past few weeks, citing losses sustained in the Affordable Care Act’s individual insurance exchanges. The moves mean Aetna has completely removed itself from every Obamacare exchange for now.

 

Tesla opened up orders and announced pricing information for its Solar Roof product. The company also launched a calculator to show people how much it would cost to replace their roof with a Tesla Solar Roof. It uses information like the size of the roof, the average local price of electricity, and how much sunlight a neighborhood receives during a year to calculate the price. Tesla’s Solar Roof uses both solar and nonsolar tiles, which allows consumers to choose how many solar tiles they need based on their home’s electricity consumption. Tesla’s estimate of $21.85 per square foot is based on a roof that’s 35% solar tiles. To help put the cost into perspective, a Tesla Solar Roof for a home needing 3,000 square feet of roofing would cost more than $65,000 if 35% of the tiles were solar. According to Consumer Reports, a slate-tile roof for a home the same size would cost about $45,000, and an asphalt roof would be about $20,000. Tesla said the cost would be offset by the value of energy the tiles produce.

 

 

Sears Holdings Chief Executive Officer Edward Lampert blasted the media for “unfairly singling out” the company over the past decade and blamed “irresponsible” coverage for the retailer’s woes. Sears, once the largest US retailer, warned investors in March there was a chance it may not be able to continue as a going concern after years of losses and declining sales. But sure, let’s say the reason is the media and not pathetic management that has not been able to capitalize on an iconic brand name, and failed to modernize. Lampert, a hedge fund investor who is rarely seen in public, kicked off his appearance at an annual shareholders’ meeting at Sears’ headquarters in Hoffman Estates with a slideshow of headlines about the company’s financial distress, dating back to 2008. Sears has not reported a profit for six years, which Lampert compared to Amazon.com’s early unprofitable growth. There is a pretty big difference between Sears and Amazon. Sears has not reported a profit for six years. Sears has been closing stores, selling off assets like its Craftsman brand and borrowing money from Lampert to survive. Amazon plowed profits back into the company as it created and dominated in e-book readers and voice assisted speakers, and state of the art distribution centers and logistics. Amazon also built a new division that handles cloud computing, one of its fastest growing divisions. Sears never figured out how to turn its print catalogue into an online catalogue. Sears has almost no online presence. Earlier this year, because of new rules from the Securities and Exchange Commission, Sears was required to disclose that there is “substantial doubt” about the retailer’s “ability to continue as a going concern.”  So today Lampert ranted that the media is to blame for the problems with Sears and he predicted people will look back and wonder how they missed the Sears’ turnaround, which he said would be driven by the Shop Your Way loyalty program. Sure, that’s the ticket Eddie.

 

Snapchat’s user growth slowed to its lowest pace in years, as parent company Snap Inc. missed Wall Street expectations for its first quarterly earnings as a public company on Wednesday, sending its shares plunging more than 20% in after-hours trading. Snap added 8 million new daily users in the first three months of the year, representing year-on-year growth of 36%. At this time last year, Snapchat was growing its DAUs by 52%.

 

Shares of Whole Foods Market rose by as much as 3.5 percent Wednesday after the company named five new board members and a CFO, and released fiscal second-quarter earnings that met expectations. The grocery store chain posted adjusted earnings of 37 cents per share on $3.74 billion in revenue. Whole Foods had been expected to report earnings of 37 cents per share on $3.73 billion in revenue. Same-store sales were down 2.8 percent for the quarter — a shallower drop than Wall Street had expected. It was the seventh consecutive quarter of negative comparable store sales.

 

 

 

 

 

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