Financial Review

The Other Shoe

Stocks climb, discounting weak earnings. Still waiting on the Fed, and more Panama Papers names. The heat builds. You deserve a break.

Financial Review by Sinclair Noe for 04-19-2016

DOW + 49 = 18,053
SPX + 6 = 2100
NAS – 19 = 4940
10 Y + .01 = 1.78%
OIL + 1.30 = 41.08
GOLD + 17.80 = 1251.30

 

The Dow Industrial Average closed above 18,000 yesterday for the first time since last July and the rally continued today, although the Dow lost about half its early gains. The S&P 500 topped the psychologically key 2,100 level this morning. We’re not far from the record highs of last May; a couple of strong days and we’re there. China looks stable, at least today. The Eurozone is preparing for more stimulus from the ECB in its battle against deflation. Oil prices are rising. Analysts are predicting earnings for the first quarter will decline anywhere from 8% to 10% and it appears that weak first quarter corporate earnings are almost fully discounted. Share prices are going up. This is when you should get nervous.

 

After the close Monday, IBM posted results that beat on both the top and bottom line. However, they did not raise full-year guidance. Netflix also disappointed with lower-than-expected subscriber growth for the second quarter. IBM was down 5% today, and Netflix lost almost 13%, which was a major drag on the Nasdaq.

 

Early morning reports include Goldman Sachs posting first-quarter earnings dropped 60 percent from a year ago, the fourth-straight quarter of profit declines. Still, earnings beat lowered expectations. Revenue dropped about 40 percent from the year ago period, missing estimates. Johnson & Johnson, which posted quarterly earnings that beat, while revenue matched forecasts. The firm raised its full-year forecast. UnitedHealth reported earnings that beat on both the top and bottom line, and raised its full-year forecast.

 

After the closing bell, Intel said it would cut 12,000 jobs globally, or 11 percent of its workforce.  The cuts will include “voluntary and involuntary departures” from its operations around the world. Most of the affected workers will be notified in the next 60 days. Intel said it had net income of $2 billion, or 42 cents a share, and revenue of $13.7 billion; a miss on both the top and bottom lines. PC sales are down; you knew that. Intel is trying to get into chips for smartphones, sensors, and cloud computing but they aren’t quite there yet.

 

 A strike by oil workers in Kuwait has reduced output to 1.1 million barrels per day from 2.8 million. However, the gains may be short-lived. Russia’s Deputy Energy Minister said the country is considering raising its production this year. A deal to freeze oil output by OPEC and non-OPEC producers fell apart after Saudi Arabia demanded that Iran join in production cuts. Iran has repeatedly said it would prioritize regaining pre-sanctions crude output levels over discussing an output freeze.

 

New-home construction in the U.S. slumped more than projected in March. Residential starts decreased 8.8 percent to a 1.09 million annualized rate. Permits decreased 7.7 percent to a 1.09 million annualized rate, the fewest in a year. Construction of single-family houses dropped 9.2 percent to a 764,000 rate from 841,000 the previous month that was the strongest since October 2007. Work on multifamily homes, such as townhouses and apartment buildings, declined 7.9 percent to an annual rate of 325,000, the fewest since February 2015. First-quarter gross domestic product growth estimates are currently as low as a 0.2 percent annualized rate. The economy grew at a 1.4 percent rate in the fourth quarter.

 

The Federal Reserve is set to hike interest rates more rapidly than investors currently expect, so says Boston Fed President Eric Rosengren, again pushing back on what he said was investors’ too pessimistic view of the U.S. economy and monetary policy. It was the second time in as many weeks that Rosengren warned that futures markets, which see only one modest rate hike in each of the next few years, are off the mark. He said U.S. inflation was now “much closer” to the Fed’s goal, downplayed weak growth in the first quarter, and said the economy is “fundamentally sound.” The Fed’s policy-setting committee meets on April 26-27. The probability that the FOMC will increase the fed funds rate by 25 basis points at the June 14-15 policy meeting is 18%, which compares to 11% yesterday.

 

Argentina has officially returned to the global bond markets following a 15-year hiatus, unveiling the biggest sovereign issuance by an emerging-market nation in two decades. The country is raising up to $15 billion, but demand for the bond issue (which will pay an interest rate of between 6.4% and 8%) was strong and attracted orders worth $65 billion. Most of the cash raised will go toward paying off a small number of holdout creditors, led by US hedge funds Elliott Management and Aurelius Capital.

 

The International Monetary Fund and the World Bank are joining forces with other international organizations to cooperate on tax issues and develop new tools and standards for taxing multinational enterprises. The decision by the organizations to formally cooperate predates the release of the Panama Papers, but an IMF official said the groups welcomed the heightened attention on tax issues that the controversy has stoked.

 

I know the news cycle moves fast, and since there were almost no Americans named in the massive document dump, coverage of the Panama Papers has faded quickly. But wait, there’s more. US officials have taken part in two global meetings about the Panama Papers. The IRS acknowledged participating in a “special project meeting” of the Joint International Tax Shelter Information and Collaboration network, about the papers in Paris last week. The IRS also encouraged any U.S. citizens and companies that may have money in offshore accounts to contact the agency now before any possible illegal activity on their part is identified. It is now believed the documents contain information on potentially thousands of US citizens and firms that have at least an indirect connection to offshore accounts affiliated with Mossack Fonseca. Waiting for the other shoe… to drop.

 

Anheuser-Busch InBev has accepted Asahi Group Holdings’ offer to buy the Peroni, Grolsch and Meantime beer brands for $2.9 billion, clearing another hurdle in its efforts to win regulatory approval for its $100 billion-plus takeover of SABMiller. The purchase is conditional on the SABMiller deal going through.

 

A consortium backed by sovereign fund China Investment Corp. has expressed interest in buying a majority stake in Yum! Brands’ China business, which runs more than 7,100 KFC and Pizza Hut eateries across the nation. The investor group includes KKR and Baring Private Equity Asia. A deal could value Yum! China at $7 billion to $8 billion.

 

Privately held outdoors retailer Bass Pro Shops has partnered with Goldman Sachs Group’s private equity arm to make an offer for hunting and fishing store chain Cabela’s. The move gives Bass Pro the equity financing necessary to pursue Cabela’s. In December, Cabela’s said it was working with investment bank Guggenheim Securities to explore strategic alternatives including a sale, following pressure from activist hedge fund Elliott Management.

 

Who wants Yahoo? The deadline to bid for Yahoo has passed with YP Holdings (formerly Yellowpages.com) the latest name in the fray, although Verizon is still considered the front-runner. Yahoo posted earnings today; adjusted earnings came in at $0.08 per share on $1.09 billion in revenue, both down significantly from the same quarter a year ago, but both the top and bottom line were slightly better than estimates.

 

UBS is going to trial over $2.1 billion in losses that investors incurred on mortgage-backed securities, the latest in a series of lawsuits over the shoddy financial products at the heart of the financial crisis. The non-jury trial in Manhattan stems from a lawsuit being pursued by U.S. Bancorp on behalf of three trusts, who claim UBS refused to buy back the MBSs when pervasive defects emerged.

 

Federal prosecutors from the U.S. Attorney’s office and the SEC are investigating Theranos over whether it misled investors. Walgreens Boots Alliance and the NY State Department of Health have received subpoenas in recent weeks seeking documents and testimony about representations made to them by the blood-testing startup.

 

The National Oceanic and Atmospheric Administration has released data showing the first three months of this year, so far, the hottest year ever. March was also the 11th consecutive month to see a new record for temperatures since agencies started tracking them in the 1800s. The new data confirms similar but separate reports from NASA and the Japan Meteorological Association. Both 2014 and 2015 were record setting years as well.  The Arctic is seeing some of the most abnormal weather on earth, with temperatures about 6 degrees warmer than average overall. These highs could lead to record melting of Arctic sea ice this summer, where the ice cover is already at its lowest since measurements began in the late 1970s.

 

After a relaxing four-day weekend, you might find that you’re more productive at work than usual. And now there is research to prove it. According to a new study by researchers at the University of Melbourne, for employees over the age of 40, the sweet spot for the best productivity is around three days of work per week. That’s when workers showed the highest level of brain functioning. Their brain functions were scored based on the results of three tests: a memory test; a reading test; and an attention, visual comprehension, and motor skills test. In all three tests, participants who worked part-time, around 25 to 30 hours a week, showed the sharpest cognitive skills. Cognitive abilities were lowest among those who worked 50 to 60 hours per work and in those didn’t work at all. The findings suggest that some work is good for your brain, but too much can be damaging, at least for older and middle-aged workers.

 

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