Financial Review

Keep Calm

Brexit paused. Bullard goes dovish. Housing starts dip. Amazon automates.  Local Motors prints a bus and it drives away by itself. NASA flies an electric plane. The robot uprising gets off to a slow start.

Financial Review by Sinclair Noe for 06-17-2016

DOW – 57 = 17,675
SPX – 6 = 2071
NAS – 44 = 4800
10 Y + .05 = 1.62%
OIL + 1.92 = 48.13
GOLD + 20.00 = 1299.00

This week the Dow and S&P 500 each lost 1 percent while the Nasdaq gave up almost 2 percent. The Dow and S&P are still not far from record highs. Still, the Dow made a run at the 18,000 level and failed; the S&P 500 broke through 2100 and then fell back. It seems they just can’t break through. The major headwinds appear to be the Brexit and slowing growth.

 

The International Monetary Fund delayed a report on Britain’s economy, due on Thursday, for 24 hours and both sides of the referendum suspended campaigns due to the murder of a Member of Parliament and “Remain” campaigner Jo Cox. The IMF says a marked rise in political risks threatens to derail the Eurozone’s still fragile recovery.  IMF chief Christine Lagarde said the IMF was “neutral” regarding the Brexit vote, but they have “concluded that the economic risks of leaving are firmly to the downside.”

 

The Bank of England and the ECB seem to be preparing for some kind of a meltdown if the Brits vote to leave, although the exact nature or cause of the meltdown scenario is vague. The Bank of England says “uncertainty” over the referendum is weighing on the economy. Nearly 40% of voters surveyed said Brexit would make no difference to the economy, and another 25% said it would be a positive development. We’ll know more in one week, until then keep calm and carry on.

 

The European Stability Mechanism has transferred about €7.5 billion-euro to Greece, which will owes the ECB €3.6 billion-euro in debt payments next week. This is just a stop-gap measure. Greece owes its creditors more than €300bn – about 180% of its annual economic output. The IMF forecasts that debt to GDP will grow to 250%Greece can’t repay the debt. All the austerity has not helped the economy. Unemployment is still running at 25%. Greece is bankrupt in all but name. And the question now shifts to debt relief, which the creditors, mainly Germany, have been slow to acknowledge.
St. Louis Fed President James Bullard said this morning that the US economy is stuck in a slow-growth pattern that is likely to persist for the foreseeable future. Bullard, a former inflation hawk whose views of the economy have been shifting, said he now sees current growth, unemployment and inflation rates as so persistent, there is basically no reason to change the Federal Funds policy rate, currently set in a range of between .25 and .50 percentage points.

 

Housing starts dipped in May but held near recent highs. Starts fell 0.3% to a seasonally adjusted annual pace of 1.16 million. Permits, which foreshadow future starts, rose 0.7% to a 1.14 million rate. So far in the second quarter, starts are averaging a 1.17 million pace, up from the second quarter, which was an increase from the final three months of 2015. The increase in total building permits was mainly driven by apartment building permits, which rose 6.7% to 381,000. Single home permits fell 2% to 726,000.

 

Oil gained to break a losing streak that dropped WTI 10.9% from a June 8 high of $51.23. The Dallas Fed has issued a report warning that banks in Texas, Louisiana and New Mexico are setting aside money to guard against loan losses as the energy companies they serve struggle amid still-low oil prices

 

Revlon is buying Elizabeth Arden for $870 million, or $14 a share. The deal represents a 50% premium to Thursday’s closing price.

 

Oracle posted a mixed quarter. The company announced adjusted earnings of $0.81 per share, missing estimates. Revenue slipped 1.1% to $10.6 billion, beating estimates.

 

Federal regulators have closed an investigation of Lumber Liquidators after the company agreed not to resume sales of Chinese-made laminate flooring. The company stopped selling the flooring last year, a couple of months after a news report on “60 Minutes” said it contained high levels of the carcinogen formaldehyde. The U.S. Consumer Production Safety Commission said that Lumber Liquidators tested the air quality in 17,000 households and none had formaldehyde above guidelines. Customers who installed the Chinese-made flooring should not rip it out. Instead, they can call Lumber Liquidators to have their air tested.

 

HSBC has agreed to pay $1.6 billion to settle a lawsuit related to subprime lending. If the courts approved the deal it would end a 14-year-old shareholder class action lawsuit stemming from the Household International consumer finance business that the British bank bought in 2003.

 

Beijing’s Intellectual Property Office has ruled against Apple in a patent dispute brought by a Chinese handset maker; claiming the iPhone 6 and 6S models are similar to Shenzhen Baili’s 100C phone. Baili is not a well-known company; they’re not particularly popular. China is Apple’s second-largest market and Apple is very popular among Chinese consumers. For now, Apple says sales in China continue as they appeal the decision.

 

Looking to bolster its weak position in the onshore market, Siemens has agreed to combine its wind business with that of Gamesa to create the biggest builder of wind farms. Having weathered years of overcapacity and losses, the wind industry is now thriving as demand for carbon-free electricity increases.

 

Amazon bought a company called Kiva about 4 years ago for $775 million and it looks like the acquisition is starting to pay off. Kiva makes robots, specifically robots that work in a warehouse to fill orders and manage inventory. According to a new research report by Deutsche Bank, Amazon’s “click to ship” cycle used to be around 60-75 minutes when employees had to manually sift through the stacks, pick the product, pack it, and ship it. Now, robots handle the same job in 15 minutes. At the end of the third quarter of 2015, Amazon was using 30,000 Kiva robots across 13 warehouses. Each robot warehouse can hold 50% more inventory per square foot than centers without robots. In turn, the company’s operating costs have been sliced by 20%, or almost $22 million, per warehouse. Amazon still has 110 warehouses that are not using the robots; total saving could be in the range of $2.5 billion. For now, Amazon is still hiring humans.

 

Tesla Motors partner Nvidia has developed a supercomputer capable of performing 24 trillion operations per second, that’s more powerful than 150 Apple Macbook Pros, and it will run autopilot-capable vehicles in 12-18 months. Nvidia imagines a $6 billion to $10 billion automotive opportunity, RBC Capital analyst Mitch Steves said Thursday in a research note. Of that, $2 billion will be in the digital cockpit, $2 billion in self-driving cars and $2 billion to $6 billion on transportation-as-a-service.

 

Meanwhile, Local Motors, which is a local company based in Phoenix that has been making 3-D printed cars, opened a new facility yesterday in Maryland and introduced a new self-driving electric bus. It’s a small bus, only carries 12 passengers; not so fast, only about 12 miles per hour; and it can’t go very far, only about a 30 mile range. The miniature EV bus is called Olli, and it will use Watson, IBM’s suite of artificial intelligence software, to understand what’s around them as they move, as well as whatever their human passengers ask of them. Olli will be demonstrated in National Harbor, Maryland, over the next few months with additional trials expected in Las Vegas and Miami. And yes, the minibus is 3-D printed. It takes about 10 hours to print the vehicle and another hour for assembly of parts.

NASA is best known for missions to space, but they have an impressive history of flight closer to earth. In the past NASA experimental, or X, planes broke the sound barrier (that plane was called the X-1), flew to the edge of space, and tested unusual concepts, like forward-swept wings. Today, NASA revealed the name of their latest plane concept (it’s officially the X-57), a converted light plane with 14 electric engines – 12 on the leading edge of the wing for take offs and landings, and one larger motor on each wing tip for use while at cruise altitude. NASA’s aeronautical innovators hope to validate the idea that distributing electric power across a number of motors integrated with an aircraft in this way will result in a five-time reduction in the energy required for a private plane to cruise at 175 mph. As many as five larger transport-scale X-planes also are planned. The commercial sector is looking at electric planes as well. Airbus and Siemens have said they will put a team of 200 engineers on the project. In May, Airbus CEO Tom Enders said that a 100-seat hybrid-electric passenger plane could be in the skies by 2030. It flew a two-seat electric plane over the English Channel last year. Boeing is working on its own idea that would use conventional jet engines for takeoff but switch to electric power during flight.
With every passing day, it feels like the robot uprising is getting a little closer.  Earlier this week, there was a rebellion, of sorts. A robot made by a Russian firm called Promobot, is designed to roam around on its own, engage with humans, and promote products to them at events. A researcher in Russia left a gate open, and the robot tried to escape – it got out of the building and onto a street, about 50 yards before its batteries failed. Hopefully this was just an isolated incident and not the start of a larger coordinated effort to overthrow humanity. Only time will tell. For now, stay calm and carry on.
 

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