Financial Review

Flying Burritos in the Matrix

ECB stands pat. Phoenix real estate: inventories up. Oil prices: inventories down. Mario goes mobile. PlayStation Slim. More M&A. Flying burritos. BAML thinks we’re in the matrix.

Financial Review by Sinclair Noe for 09-08-2016

DOW – 46 = 18,479
SPX – 4 = 2181
NAS – 24 = 5259
10 Y + .08 = 1.62%
OIL + 1.83 = 47.98
GOLD – 6.80 = 1339.20


European Central Bank policymakers had expressed concerns following the Brexit vote; they said they were ready to unleash fresh stimulus to support the Eurozone if needed, but economic data since has been mixed and ECB President Mario Draghi hasn’t spoken publicly for seven weeks. Today, Draghi announced no change. The ECB left the main refinancing rate at zero, the deposit rate at minus 0.4 percent and asset purchases at €80-billion-euro a month. The ECB’s position is that the QE program has the flexibility to be adjusted. The limits on individual bond purchases could be raised again, or the central bank could drop its self-imposed rule that debt is only eligible if it has a yield higher than the deposit rate. The ECB cut the 2017 and 2018 GDP forecasts for the Eurozone and said he sees inflation picking up later in 2016. If you are thinking that doesn’t make much sense, you are correct. The markets didn’t buy it either.


The 30-year fixed-rate mortgage averaged 3.44% in the September 8 week, down from 3.46% in the prior week. The 15-year fixed-rate mortgage averaged 2.76%, down one basis point during the week. If you refinanced at a lower rate, thank Brexit. All those mortgage products are lower than their year-ago levels, and it was the eleventh-straight week in which the benchmark 30-year fixed held below 3.50%. The refinance share of mortgage activity has been above 60% since the United Kingdom voted to exit the European Union.


The Arizona Regional Multiple Listing Service reports overall home sales in Phoenix were up 13.6% year-over-year in August.  Inventory was up 3.4% year-over-year in August. Inventory has increased year-over-year for the past 6 consecutive months; this follows 15 consecutive months of declining inventories in Phoenix. Cash sales were down to 20.3% of total sales; cash sales usually represents investor buying. More inventory and fewer investors sounds like a recipe for softer price increases.
Filings for US unemployment benefits dropped to the lowest level in seven weeks, showing employers have little appetite to fire workers. Jobless claims fell by 4,000 to 259,000 in the week ended Sept. 3. With the unemployment rate holding at 4.9% and job openings reaching a record high in July, managers are focused on retaining and attracting employees. The four-week average of claims, a less-volatile measure than the weekly figure, declined to 261,250 from 263,000 in the prior week. Filings have been below 300,000 for 79 straight weeks — the longest stretch since 1970 and a level which indicates a healthy labor market.


The Federal Reserve reports consumer credit rose at a 5.8% seasonally adjusted annual growth rate in July, a pickup from June’s upwardly revised 4.8% pace. In keeping with recent trends, nonrevolving credit outstanding, including student and auto loans, drove borrowing in July. This category of debt rose at a 6.7% annual pace in July compared with June’s 2.4% growth rate. Revolving credit outstanding, mostly credit cards, rose at a 3.5% annual pace in July, down from June’s sharp 11.5% gain.

Oil prices are marching higher
 after U.S. industry data showed a large drawdown in crude stocks, reflecting the temporary impact of an Atlantic storm. Inventories plunged by more than 12 million barrels last week, according to the American Petroleum Institute. A similar report from the Energy Information Administration today showed crude stocks down more than 14 million barrels last week in the biggest weekly drawdown since 1999. It is possible that Hurricane Hermine disrupted shipping routes and production. In a separate report from the EIA they forecast gasoline prices nationwide will drop from $2.18 a gallon in August to $1.92 a gallon by December, even though demand is expected to remain near record highs. That tells you something about the ongoing glut.


More important than weekly inventory is how Saudi Arabia, and to a lesser extent Russia, have been gaming the oil market. When oil prices are slipping, supportive chatter from Russia and OPEC tends to increase. Many oil producers, including Russia and the Saudis, are suffering economic hardship currently, partly due to the lower price of oil. However, Saudi Arabia is prioritizing long-term market share, and is reaping benefits currently from its endurance of low oil prices. Two weeks ago, a comment out of Iran created a quick surge in oil prices. Last week, a comment from Vladimir Putin led the foolish to believe oil prices could move upward. On Monday, an actual announcement from Russia and Saudi Arabia sent oil higher before calmer heads prevailed and hemmed the gains. And the oil markets keep falling for the same old jawboning about a possible cut in oil production. It’s like Lucy urging Charlie Brown to kick that football, only to pull it away at the last moment. A production freeze is highly unlikely unless, or until  oil price drop substantially from current levels; exactly how low is open to debate, but think  about recent lows under $30 a barrel. There it immediately threatens more than just US producers, but the survival of the puppet masters as well. And even if a real “coordination” of production is announced, you should be very suspicious of the details and of its implementation. Saudi Arabia learned a tough lesson from past production cuts, as its peers cheated and it lost market share that it took years to recover. With Iran ramping production, any cuts Saudi Arabia makes now would likely mean market share loss to its least favorite rival Iran and to the desperate others.


Ireland’s government won strong backing from parliament for its appeal against a €13-billion-euro back tax bill the European Commission ordered it to collect from Apple, following 12 hours of debate on Wednesday. Lawmakers said a failure to challenge the judgment would threaten future investment in Ireland by US companies looking to sell in Europe, a central pillar of the country’s decades-old growth strategy. Ireland offers up a strange twist on the theory of competitive advantage.


Yesterday was all about Apple; they introduced a new phone, a new big phone and a new watch. Apple CEO Tim Cook declared, “It’s the best iPhone that we have ever created.” They expect to sell out quick but they won’t release first weekend number this time around. Pre-orders start tomorrow.


Meanwhile, Nintendo and Sony decided they needed a few headlines as well. Nintendo sent Mario to the Apple event, in a way. Nintendo will now offer its classic Super Mario games on the Apple mobile iOS system. Pokemon Go has been a big hit for Nintendo. The problem is that Nintendo has just a 32% stake in the Pokémon Company, which developed the game alongside Niantic. Nintendo owns Mario outright.


Sony announced a new PlayStation. The current PlayStation 4 model received a facelift; it is slimmer and will cost less. They also announced the new PlayStation 4 Pro, which is a souped-up version for really serious gamers. Both consoles are compatible with the company’s virtual reality headset, which costs $399 and launches in mid-October.


It has been a busy week for mergers and acquisitions and the deals keep rolling in. Hewlett-Packard Enterprise sold its software business in an $8.8 billion deal, and Liberty Global bought motorsport racing company Formula One for $4.4 billion. Sandwich chain Jimmy John’s Sandwiches says it sold a majority stake in the company to private equity firm Roark Capital Group. Financial terms of the deal were not disclosed.  Michael Dell once again defied the naysayers, and closed the largest technology acquisition in history, the $65 billion purchase of EMC and then quickly announced it will fire 2,000 to 3,000 employees, mainly in the US.


Google said it’s buying the software maker Apigee for $625 million. It’s hardly a blockbuster purchase, but it’s large enough to stand out for Google, which doesn’t often make acquisitions of much size. Google has announced only 23 takeovers with publicly disclosed price tags of more than $100 million. The Apigee deal is the largest since Google acquired Nest Labs in 2014 for $3.2 billion. Why Apigee? The company’s focus is APIs, or Application Interface Programs, essentially a set of routines, protocols and tools for building software applications.


But wait, there’s more. Google, or Alphabet, or whatever is teaming up with Chipotle Mexican Grill to test drone delivery for Virginia Tech students. The FAA has given the greenlight to Alphabet’s Project Wing Division to experiment with airborne burrito deliveries. This is the first commercial drone program of its kind in the US and a dream come true for college students – flying burritos delivered straight to dorm rooms.


In a note to clients out Tuesday, Bank of America Merrill Lynch wrote: “Many scientists, philosophers, and business leaders believe that there is a 20-50% probability that humans are already living in a computer-simulated virtual world. In April 2016, researchers gathered at the American Museum of Natural History to debate this notion. The argument is that we are already approaching photorealistic 3D simulations that millions of people can simultaneously participate in. It is conceivable that with advancements in artificial intelligence, virtual reality, and computing power, members of future civilizations could have decided to run a simulation of their ancestors.”


So Bank of America Merrill Lynch thinks we’re living in the matrix — meaning that the world we experience as “real” is actually just a simulation. I was all prepared to say something snarky about the people at Bank of America Merrill Lynch – how they are wasting our time, how they’ve been watching too many science fiction movies, how would we know; but then I watched the Commander in Chief Presidential Candidate Forum last night.



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