Financial Review

Dead Cats and Shade Balls

Financial Review by Sinclair Noe for 08-11-2015

DOW – 212 = 17,402
SPX – 20 = 2084
NAS – 65 = 5036
10 YR YLD – .10 = 2.14%
OIL – 1.71 = 43.25
GOLD + 4.60 = 1109.70
SILV + .13 = 15.46

 

Since mid-July the Dow Industrial Average has dropped from a high of 18,137, including a 5 session losing streak; in late July the Dow dropped below its 200 day moving average, indicating a downtrend; it bounced up to touch the 200-day moving average but could not break through; after that we started August with a 6 session losing streak. Yesterday, the Dow bounced 241 points; and that is looking like a dead cat bounce today.

 

China’s central bank devalued the yuan in an effort to help jump-start its stalling economy. The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China ended a dual-currency system. For background, the yuan’s peg to the dollar had been in place since 2006. The People’s Bank of China, their central bank, would buy or sell yuan to keep the currency near a certain value against the dollar. The dollar’s been strong since 2011. And so, the peg made the yuan strong too.

 

The People’s Bank of China called the change a one-time adjustment and said its fixing will become more aligned with supply and demand. Outside China it smells of a currency war.  The PBOC said a strong yuan puts pressure on exports and cited a high effective exchange rate as a factor behind the devaluation. July’s export slump was deeper than economists predicted. This devaluation is a form of economic stimulus that promotes Chinese exports and makes imports from abroad more expensive. However, the risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system.

 

In trade-weighted terms, the yuan has been strengthening lately. The rising dollar has pulled it higher against the yen, euro and other currencies. Tempting as it may be for politicians to deplore the opening of fresh economic hostilities, this is a long way short of currency war. The decision is expected to add further momentum to the strong dollar, which has already been boosted this year on prospects for higher US interest rates. This could have a deflationary effect in the US. The dollar’s strength against major global currencies has taken a toll on US exports in recent quarters, and the Fed is closely watching the effects on the economy as it debates whether to raise interest rates, a move that could make the dollar even stronger.

 

Any macro benefits must be weighed against costs. These mainly fall on China’s domestic companies; the devaluation hits Chinese airlines, which carry a large debt load, which will now be harder to service; this will also likely hit European luxury goods. China is the EU’s largest trading partner. and banks in China and the rest of Asia, that have dollar-denominated debt and face the prospect of paying them back with a weakening yuan or rand, kiwi, Aussie dollar or won.

 

And don’t forget the $9 trillion in emerging-market dollar-denominated debt. It’s a ticking time bomb. Today the selloff took the MSCI Emerging Markets Index’s decline from a peak last September to 20 percent, the threshold for a bear market. And Moody’s Investors Service lowered Brazil’s rating to the cusp of junk in the second downgrade since President Dilma Rousseff came to office. Brazil’s grade was cut by one notch to Baa3, with a stable outlook. Brazil is rated BBB- by S&P. And as this strong dollar dynamic continues, you can expect more debt defaults from foreign corporations. Dollar denominated commodities are down amid speculation the weaker currency will make imports to China more expensive and slow demand.

 

OPEC pumped the most crude last month in more than three years as Iran returned output to the highest level since international sanctions were strengthened in 2012. The 12-member group, responsible for 40% of world oil supplies, raised output in July by 100,700 barrels a day to 31.5M. The increase came even as Saudi Arabia, which often curbs output toward the end of the summer, told OPEC it cut production by the most in almost a year.

 

Google has announced a major corporate restructuring. Google will become a subsidiary of a new holding company called Alphabet. Google co-founder Larry Page will serve as Alphabet’s CEO, with fellow Google co-founder Sergey Brin as president; Google’s current vice president of products Sundar Pichai is taking over as CEO of Google. Google said it would split into two reporting companies under the new holding company. Page said he’s restructuring Google so that all units outside its main Web businesses like search, advertising, YouTube and mobile software will be broken off and run independently. All those ventures will now come under the new Alphabet.

 

The restructuring should allow for greater transparency, but beyond that – why change? And the reason might be that Google wants to be like Warren, or at least like Warren Buffett’s holding company, Berkshire Hathaway. Page and Brin are big Buffett fans. A hallmark of Buffett’s approach has been to let management teams run their units independently. Under Page’s structure for the newly created Alphabet, Pichai takes over as CEO of Google; former Apple executive Tony Fadell leads Nest; and former Genentech CEO Art Levinson is leading Calico. The new structure allows Page to offload some of the day-to-day operational responsibilities of running the company, while remaining in charge of overseeing the allocation of resources to the different businesses; just like Buffett runs Berkshire.

 

Under the new structure, Alphabet will still get almost all its revenue and profit from Google. The company has been using the cash from the business to fund its other investments. Unlike Berkshire, which typically buys well-established companies with steady cash flow, Page must manage a conglomerate tasked with creating new technology products.

 

Greece and its international lenders have clinched a bailout agreement after night-long talks in Athens, although a couple of minor issues still have to be resolved. The pact is expected to be worth up to €86 billion-euro. Greek officials anticipate the accord to be ratified by parliament on Wednesday or Thursday and vetted by Eurozone finance ministers on Friday, clearing the way to aid disbursements by Aug. 20 – the day a €3.2 billion-euro debt payment falls due to the ECB.

 

Productivity in the second quarter of 2015 rose 1.3% after two straight negative quarters. But it is only up an anemic 0.3% from a year earlier. The Labor Department also said the average annual rate of productivity growth from 2007 to 2014 was revised down to 1.3% per year from the prior estimate of 1.4%. This is well below the long-term rate of 2.2% per year from 1947 to 2014. 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.

 

The National Association of Realtors reports the median existing single-family home price rose 8.2% in the second quarter, compared to the second-quarter of 2014 to $229,400.

 

Wholesale inventories jumped a seasonally adjusted 0.9% in June, though May levels were revised lower by 0.2% to show a 0.6% gain. The gain in inventories during June was led by motor vehicle and motor vehicle parts and supplies, and offset by a fall in computer and computer peripheral equipment and software.

 

Small business sentiment rose in July after two months of declines. The National Federation of Independent Business said its small-business optimism index rose 1.3 points to 95.4. Expectations for business conditions and real sales gains accounted for half the net gain in the components.

 

Investors reacted in an unusual way to Freeport McMoRan’s plan to potentially sell $1 billion worth of stock, just weeks after declaring their preference to not issue new shares: They pushed the stock 10.8% higher yesterday in the best performance in more than six years. While new shares will dilute value for existing holders, investors seem to see it as a better option than selling more assets or taking its oil business public.

 

Global mergers and acquisitions are on pace this year to hit the highest level on record, thanks to record buying sprees from companies on the hunt for growth. According to data provider Dealogic, takeover-deals would reach $4.58 trillion this year if the current pace of activity continues, comfortably above the $4.29 trillion notched in 2007.

 

You’ve heard the phrase: “Necessity is the mother of invention.” We know that California and the Southwest is suffering through a drought. We know that much of the water in the Southwest is stored in reservoirs and we lose an enormous amount of water to evaporation. Enter Sydney Chase, president of a startup company called XavierC. The company thinks they have a solution and it is called a shade ball. A shade ball is a 4-inch hollow orb made of polyethylene; it has just a little water inside to serve as ballast, so it won’t blow away in a strong wind, but it is sealed airtight and it is designed to float on the surface of a reservoir. Los Angeles has just released 96 million shade balls into local reservoirs, where they will effectively serve as a cover to reduce evaporation, also blocking sunlight to reduce algae growth and hazardous reactions with the chlorine and bromide in the water. The shade balls can also be used on tailing ponds where miners store contaminated water, to keep birds away from toxic agents, and in wastewater treatment facilities, to keep odors at bay.

 

Do shade balls work? It’s probably too soon to say for sure, but there are now 96 million of them floating in LA reservoirs; and if they do work, there might be shade balls coming to a waterway near you.

 

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