JOLTS shows strong labor market. Deficit grows as corporate receipts shrink. Oil drops; Saudis pump American shale producers out of business. BOE can’t buy me bonds. The politics of burgers; Wendy’s un-zapped. Solar doesn’t shine. Happy birthday Google, or Alphabet, or whatever.
Financial Review by Sinclair Noe for 08-10-2016
DOW – 37 = 18,495
SPX – 6 = 2175
NAS – 20 = 5204
10 Y – .04 = 1.51%
OIL – 1.28 = 41.49
GOLD + 5.20 = 1346.80
Job openings increased in June, and more people were hired. The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed there were 5.62 million openings, up from 5.51 million in May, but still a bit below the all-time high of 5.84 notched in April. There were 5.13 million people hired during the month, also an increase from the 5.05 million in May. Slightly fewer people quit voluntarily, but the 2.91 million quits in June is nearly double the levels of the worst of the recession. Quits are tracked as a measure of worker confidence in job prospects.
The federal government’s budget deficit is up 10% so far this fiscal year. The government’s shortfall for the first 10 months of the year was $514 billion, up from $466 billion in the same period a year ago. Lower-than-expected revenues recently led the Congressional Budget Office to increase its estimate of the 2016 deficit to $590 billion, up from $534 billion. That would be about $150 billion more than last year’s deficit. Spending is up only about 2%. The problem is gross corporate receipts have dropped 12% so far this budget year.
The Bank of England revived its crisis-era bond-buying program last week as part of a package of measures to support the economy in the wake of voters’ decision to exit the European Union. It said it would buy $78 billion of British government bonds, or gilts, over the next six months, a policy known as quantitative easing. The aim is to drive down long-term interest rates and prod investors into riskier assets, making borrowing cheaper and easier for businesses and households. Just one problem – they can’t find enough bonds to buy, as yield-hungry pension funds and insurers refused offers to sell gilts to the central bank. The 10- year gilt dropped to a record low yield of 0.54%.
The UK economy is slowing down after the Brexit vote. That’s according to the latest numbers from the National Institute of Economic and Social Research, which shows growth in the UK was 0.3% in the three months up to the end of July, compared with 0.6% growth in the three months to the end of June.
Oil prices started the session moving higher but it didn’t last. The American Petroleum Institute issued a report showing a build of 2.1 million barrels of crude but it also reported a drop of 3.9 million barrels in gasoline, much larger than analysts had forecast. Saudi production has reached 10.67 million barrels per day, up 120,000 bpd on the prior month. While it is not unusual to see Saudi production ramping up in the summer given higher demand for crude to be used for power generation, what is unusual is that production is now at a record high, above the peak seen last summer. Also comes word that next month’s scheduled OPEC meeting in Algeria to discuss a freeze on production may be dead in the water. Oman announced it would not participate in a meeting. Finally, despite draws to both gasoline and distillates from today’s weekly EIA inventory report, builds elsewhere have lifted total U.S. crude and product inventories to a new record at over 1.39 billion barrels. This number has risen by 200 million barrels in the last 17 months. Storage tanks are filled to the brim and summer driving season is coming to a close.
One reason why the Saudis have been pumping so much oil is to try to drive US drillers in the shale fields out of business. It’s working. Chesapeake Energy agreed to give away its Barnett Shale holdings to a private-equity backed operator, exiting the birthplace of the shale revolution to escape almost $2 billion in onerous pipeline contracts. Chesapeake will convey all interests in the Barnett region in North Texas. Quitting the gas fields will slash Chesapeake’s shipping and processing costs by $715 million between now and the end of 2017 and eliminate a total of $1.9 billion in long-term pipeline agreements. Shares jumped more than 6 percent.
Brazil’s Senate voted to move the impeachment trial against suspended President Dilma Rousseff to its final phase, as expected, setting the stage for a final vote that could oust her later in August, after the end of the Olympic Games in Rio de Janeiro. Rousseff is accused of violating budget laws by delaying payments from the government to state-controlled banks, in effect forcing the lenders to provide short-term loans to her administration. She has denied any wrongdoing. Acting President Michel Temer, who was elected as Rousseff’s vice president, would complete the more than two years remaining in her term if she is convicted.
Shake Shack shares fell more than 8% in after-hours trading as the company reported slower same-restaurant sales growth as compared with a year ago.
Hamburger chain Wendy’s reported profit and revenue figures that beat analyst expectations, but those results were offset by 0.4% same-restaurant-sales growth, which fell below the consensus. Wendy’s management blamed a focus on health and wellness is keeping some would-be customers away from fast-food restaurants. Others might be staying away because of … the presidential election. uncertainty surrounding the election was one reason business stumbled during the second quarter, adding to the list of areas that claim the Clinton-Trump face-off has gotten people too nervous to spend their money. Todd Penegor, chief executive officer at Wendy’s said, “[W]hen a consumer is a little uncertain around their future and really trying to figure out what this election cycle really means to them, they’re not as zapped to spend as freely as they might have been a couple of quarters ago.”
Sure that sounds like a lame excuse, but really, be honest, haven’t you felt a little “un-zapped” lately?
SolarCity’s loss widened. The company lost $0.56 a share, more than double the $0.23 loss from a year ago. Taking into account onetime adjustments, non-GAAP, SolarCity’s loss grew to $2.32, but that was ahead of the $2.44 loss that analysts were expecting. Revenue surged 81% to $185 million, easily beating the Wall Street consensus of $146 million.
SunPower, the second-largest US solar panel producer told analysts it expects to lose as much as $175 million this year, a shift from May when it expected to earn as much as $50 million. The shares plunged the most in more than seven years. SunPower said demand for utility-scale solar projects is slowing, while competition in the panel market is dragging down prices. The guidance bombshell is leaving a crater in solar shares in today’s trading.
You remember the scandal involving VW? As part of its penalties for equipping hundreds of thousands of its diesel vehicles sold in the United States with software designed to cheat tailpipe emissions tests, VW is required to invest $2 billion in clean car infrastructure, such as a network of electric car charging stations. Now, 28 Electric vehicle charging companies are calling for independent oversight; they want to make sure VW does not gain an edge in the car charging space. While the companies called the money a potential “game changer,” they worry that if it is misspent, it could hurt competition.
What’s the fastest growing devices when it comes to wireless connectivity? Is it tablets, smartphones, or computers? Wrong. It’s cars and other stuff. Internet-connected cars and other everyday products have become the fastest-growing part of the US wireless industry. AT&T dominated revenue in connected devices, with the company connecting cars to its network at twice the pace of tablets. AT&T should reach 10 million connected car subscriptions soon. For carriers, the Internet of Things – a world in which everything from garage doors to cars to light bulbs connect to the web – has become a major source of revenue growth at a time when phone-related business has slackened. Verizon has been a distant second to AT&T in connected cars, but is mounting a big entry in a related area – connected trucks. Last week, the company agreed to buy Fleetmatics for $2.2 billion.
You know the company Alphabet? You certainly know its subsidiary, Google? Alphabet has a market cap of $539 billion; it is one of the biggest companies in the world, bigger than some nations. It is one year old today. The restructuring was supposed to allow Google to focus on the things it knows how to do well and make money on—search, advertising, Chrome, YouTube, the Android operating system—and shifted more pie-in-the-sky projects, like trying to cure death, build robots, and beam the internet from weather balloons, into a new division called “Other Bets.” One year later, Google is still growing—its revenue last quarter was $21.3 billion, up 21% from a year earlier—but similar signs of life have not been seen in Other Bets. In the last four quarters, it’s lost over $3.7 billion, and only generated roughly $500 million in revenue, which works out to less than 1% of Alphabet’s quarterly sales. Oh well, it’s still young.
Delta Air Lines tried to return to normal operations after a power outage hit its computer systems, causing the cancellation of more than 1,600 flights over two days. But they still had about 300 cancellations today. Most of Wednesday’s delays and cancellations are the result of flight crews being displaced or running up against maximum allowed work hours. According to Georgia Power, Delta’s problems arose after a switchgear, which helps control and switch power flows like a circuit breaker in a home, malfunctioned for reasons that were not immediately clear. In other words, the backup plan failed, and they still don’t know why.