…..Dow, S&P 500 and Nasdaq all hit all-time highs. Dollar slips. OPEC wants higher prices. Fischer ready for fiscal stimulus and a rate hike. Dividends drop. Anthem-Cigna deal goes to DOJ. Symantec buys LifeLock. Nokia in a drone world. Alibaba attacks the Cloud. Microsoft builds a quantum supercomputer.
Financial Review by Sinclair Noe for 11-21-2016.
DOW + 88 = 18,956
SPX + 16 = 2198
NAS + 47 = 5368
10 Y + .01 = 2.34%
OIL + 1.87 = 48.23
GOLD + 6.20 = 1214.60
The Dow Industrial, the S&P 500 and the Nasdaq Composite all hit record high closes; their third simultaneous all-time closing highs this year. The Russell 2000 index finished at a record of 1,322.20, a gain of 6.56 points, or 0.5%. The index of small stocks outperformed its large-cap counterpart year to date, rising more than 16% since January, compared with 7.6% for the S&P 500.
Last week, blue chips managed to eke out some minimal gains, while the Nasdaq knocked out a solid 1.6% rally. Techs still have a ways to go considering the stock market’s post-Election Day advance has pulled the Dow up 2.9% in total, compared with a 2.5% rise for the Nasdaq.
The U.S. dollar is trading slightly lower this morning following 10 straight days of gains for the currency, the longest winning streak for the greenback in over three years. The dollar has been supported by continued expectations for higher interest rates by the Federal Reserve, as well as by the prospect of fiscal stimulus. The U.S. dollar index hit its highest level since April 2003 last week, and the dollar briefly hit a fresh multi-month high against the yen during Asian trading hours. You should always be a bit circumspect when you see big dollar moves. Remember when investors get nervous they move to cash and when foreign investors get nervous they move to the safe haven of the dollar. This doesn’t mean a sell-off is imminent but I think it does show investors have a finger on the trigger.
OPEC’s technical committee met in Vienna today to discuss the implementation of the Algiers oil-supply pact, finalized on Sept. 28, which would end a two-year policy of pumping without limits. The gathering comes as Iran and Iraq signal optimism for a deal and Russia sees few hurdles to oil producers reaching an agreement on supply levels. A formal OPEC meeting will take place on Nov. 30. Oil rallied 4% today, adding to last week’s 5.3% gain. They are trying to push oil back to the mid $50s.
Federal Reserve Vice Chairman Stanley Fischer said fiscal policy can do more to help the economy. In a speech this morning, Fischer said: “While there is disagreement about what the most effective policies would be, some combination of improved public infrastructure, better education, more encouragement for private investment, and more effective regulation all likely have a role to play in promoting faster growth of productivity and living standards.” For several years, the Fed has been providing monetary stimulus, while fiscal policy has been been a check on growth. In some ways, the Fed was the only game in town. Fischer didn’t discuss the short-term outlook but futures contracts indicate the Fed will raise interest rates for the first time in a year when it meets next month.
Two-year yields, among the most sensitive to what the Fed does with its benchmark, climbed earlier to 1.08 percent, approaching the highest level since 2010. Bonds have slumped and yields surged this month on expectations President-elect Donald Trump’s spending plans will lead to faster inflation.
Global dividends fell during the third quarter at the fastest pace since mid-2015, as American dividend growth slowed to a post-crisis low. According to the Henderson global dividend index, U.S. payouts fell to $100 billion, down 7% on a headline basis. Payments were constrained by subdued profit growth, which can partly be explained by a strong dollar, alongside higher levels of debt, causing management to take a cautious approach when deploying cash.
The Chicago Fed national activity index rose to negative 0.08 in October from negative 0.23 in September as factory production, housing and consumer spending, as well as the business orders that make up the index mostly improved; employment had a neutral effect. The October reading still shows U.S. economic growth running below its potential.
The stakes are high as the DOJ’s antitrust case against Anthem and Cigna’s merger gets underway in Washington, D.C. Expect more of the usual drama: The proposed $54 billion deal tie-up is being billed as bad for consumers and both companies have accused each other of breaching their merger agreement. The case will be followed by a second trial involving the proposed combination of Aetna and Humana on Dec. 5.
Symantec is acquiring identity theft protection company LifeLock for $24 per share, or $2.3 billion including debt, in a deal that it hopes will prop up sales at its Norton antivirus unit. Earlier this year, Symantec bought Blue Coat Systems for $4.6 billion and sold its data storage firm Veritas for $7.4 billion, as it emphasizes cybersecurity.
Nokia is collaborating with the United Arab Emirates General Civil Aviation Authority for developing an end-to-end ecosystem to support an unmanned aerial network. At the heart of the new system is Nokia’s UAV Traffic Management concept, which will make the UAE the first country in the world to allow the operation of drones by both businesses and government agencies.
Alibaba plans to launch four new global data centers, as it steps up its competition against Amazon and Microsoft in the rapidly-growing cloud computing market. The centers will be located in Dubai, Japan, Germany and Australia, taking the number of Alibaba Cloud facilities outside of China to eight, with the tech giant now present on nearly every major continent.
What’s beyond the Cloud? It might be quantum computing; and Microsoft is jumping in, moving from research to an expensive effort to build a working prototype supercomputer that would exploit the unusual physical properties of subatomic particles. There is already competition, including Google and IBM, which are also making significant investments in search of breakthroughs. Researchers are building quantum machines and developing new kinds of software to exploit certain qualities of devices known as qubits that hold out the possibility of computing in ways not possible for today’s digital systems. Unlike conventional transistors, which can be only on or off at any one time, representing a digital 1 or 0, qubits can exist in superposition, or simultaneously in both states. If qubits are placed in an “entangled” state — physically separated but acting as though they are deeply intertwined — with many other qubits, they can represent a vast number of values simultaneously. A quantum computer would most likely consist of hundreds or thousands of qubits. Microsoft has been researching this field since 2005 and now they believe they are ready to build a machine.
There is still a debate among physicists and computer scientists over whether quantum computers that perform useful calculations will ever be created. And they have yet to figure out the first qubit. The potential uses include encryption technology, which could make for safer technology, or might make it easier to break existing codes. Other proposed approaches might allow faster searching of databases or perform machine learning algorithms, which are being used to make advances in computer vision and speech recognition. Or maybe even a machine that could solve problems in quantum physics. It’s hard to imagine what such machines might be capable of – but I’m sure the computers will tell us when they are ready.
The G-20, the group of 20 economies agreed after the 2007-09 financial crisis that top banks, whose size and complexity mean a collapse could wreak havoc in markets, should hold extra capital, according to the level of risk they present. The bigger the bank, the bigger the risk, the greater the need for a cushion. In the annual update of rankings published by the G20’s Financial Stability Board, Citi has replaced HSBC in the top “bucket” facing a 2.5 percent capital surcharge on top of global minimum requirements. HSBC joins BNP Paribas and Deutsche Bank in the next category down, with a surcharge of 2 percent. Bank of America rose a category to join them. Barclays dropped a category to the 1.5 percent surcharge group. Industrial and Commercial Bank of China and Wells Fargo rose a category to join the UK bank. Morgan Stanley fell a category to the 1 percent surcharge group. The FSB also updated its list of nine globally systemically important insurers, which was unchanged from last year. Insurers still on the list in 2017 will be required to comply with tougher “loss absorbency” requirements from January 2019. The list comprises Aegon, Allianz, AIG, Aviva, Axa, MetLife, Ping An, Prudential Financial, and Prudential.
The big US banks present a bigger risk to the financial system than last year. Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo all face higher capital surcharges after they rose in the Financial Stability Board’s latest ranking of the most systemically important banks in the world, while HSBC, Barclays and Morgan Stanley saw their buffer levels fall.
In a surprise announcement, the OCC has unilaterally changed the terms of its September agreement with Wells Fargo in regards to its account opening scandal. The bank is now prohibited from offering “golden parachute” payments to exiting executives, and must now get a green light from D.C. before altering business plans, firing senior execs, or changing the makeup of its board.