The Trend Continues

Another week of interest rates moving sideways and stocks inching higher. We are starting to get technical readings that show some weakness in the uptrend but nothing to cause a fire drill. Still not much word on language to policy changes for taxes or healthcare – maybe next month.

Economic & Central Banking Snippets

  • Federal Reserve governor Daniel Tarullo, who played a key role in the overhaul of bank regulation, said he will step down in early April. That will leave a third seat open on the seven-member Federal Reserve board of governors. By the way, Chair Janet Yellen’s term ends next year.
  • US industrial production (a measure of everything made by factories) unexpectedly shrank in January as it declined by 0.3% in January. The decline was led by a 5.7% drop in output by utilities, while manufacturing remained unchanged.
  • The Philadelphia Federal Reserve’s manufacturing index soared to 43.3 from 23.6 in in January. This is the highest reading since 1984 (see chart below). New orders and shipments both increased markedly. However, inventories slipped into contraction territory.
  • New housing starts moved lower by 2.6% in January from December to an annualized rate of 1.25mm units as reported by the Commerce Department. Meanwhile, permits to build new homes advanced by 4.6% to a rate of 1.29mm units.
  • Japan’s economy grew at an annualized pace of 1% in the final quarter of 2016, roughly in line with analysts’ expectations, as yen weakness spurred a pick-up in exports and business investment. For calendar 2016, the economy grew by 1%, following an expansion of 1.2% in 2015.
  • Next week’s reports will be highlighted by the FOMC minutes, consumer sentiment and more housing reports.

The Trump T(i)rade

  • President Trump’s proposed border wall along the Mexican border would be a series of fences and walls that would cost as much as $21.6B, and take more than three years to construct, based on a U.S. Department of Homeland Security internal report. (STRATFOR)
  • In the daily briefing, White House Press Secretary Sean Spicer said that U.S. President Donald Trump expects Russia to return the Crimean Peninsula to the control of Kiev and de-escalate violence in eastern Ukraine.
  • Staff at the U.S. Environmental Protection Agency have been told that President Donald Trump is preparing a handful of executive orders to reshape the agency, to be signed once a new administrator is confirmed, two sources who attended the meeting told Reuters.
  • What does Donald Trump’s “big border tax” threat actually mean? Lawyers for the EU and other US trading partners are not waiting to find out. They have begun laying the groundwork for a legal challenge to a US border tax proposal in a move that could trigger the biggest case in World Trade Organization history. The Trump administration’s promised tax revolution has also triggered a corporate civil war between importers (such as Walmart) and exporters (such as GE) in the US. (FT)
  • The EU and other US trading partners started the groundwork for a legal challenge to a proposed US border tax. The preliminary moves come as Republicans in Congress are working to convince President Donald Trump to back a major shake-up of the US corporate tax system that would include a new “border adjustable” system. It would see US imports subject to tax and export revenues exempted.
  • U.S. President Donald Trump recently described the European Union as “a vehicle for Germany.” He and members of his administration argue that German industry has benefited significantly since the introduction of the Euro currency. Germany has benefitted as the European currency is weaker than the Deutsche Mark would have been given the strength of their exports. Trump was not the first U.S. president to criticize Germany’s trade surplus, the biggest in the world. But he was the first to suggest the United States could take countermeasures against German exports. Some of Germany’s own eurozone partners have also accused the country of exporting too much and importing too little, a situation that leads to low unemployment in Germany and to high unemployment elsewhere in the Euro zone. The European Commission and the International Monetary Fund have asked Germany to increase investment in public infrastructure and raise the wages of German workers. (STRATFOR)

Chart Time!

S&P 500 (SPY)
S&P 500 (SPY)
Dow Jones (DIA)
Dow Jones (DIA)
Russell 2000 - Small Caps (IWM ETF)
Russell 2000 – Small Caps (IWM ETF)
10 Year Treasury Yields - TNX
10 Year Treasury Yields – TNX

Market Snippets

  • “The Happiest Place on Earth” is getting a bit more expensive. One-day prices at Disney’s U.S. theme parks have increased by up to 4.9%. Theme parks are Disney’s second-largest division ($17B in revenue).
  • Apple would return more capital to shareholders if the tax rate on repatriating overseas cash was lowered, the iPhone maker’s finance chief said on Tuesday. Asked at a Goldman Sachs investor conference in San Francisco what Apple’s top priority would be if the tax rate was lowered, Luca Maestri said it would give “additional flexibility around our capital return activities” by allowing it to repatriate some of its $230B in overseas funds.
  • SoftBank’s Masayoshi Son, who has boasted of creating the “Berkshire Hathaway of tech,” has thrown himself into the world of private equity and hedge funds with a $3.3B acquisition of Fortress Investment Group. The deal comes as SoftBank emerges as one of the world’s largest investors with the imminent launch of its record-setting $100B technology fund.
  • The Obamacare exodus continues as insurer Humana said it will pull out of the Affordable Care Act marketplace in 2018.
  • The U.S. solar market nearly doubled its annual record by installing 14,625 megawatts of solar PV installed in 2016. For the first time ever, U.S. solar ranked as the number one source of new electric generating capacity.
  • Facebook announced an upcoming app that will allow users to stream videos in their news feed through set-top boxes such as Apple TV, Samsung Smart TV and Amazon Fire TV. The move extends Facebook’s effort to transform Facebook to compete for TV ad dollars.
  • Just days after Verizon began offering unlimited plans for the first time since 2011, AT&T is opening up its unlimited wireless data plans to all potential customers, not just those who buy its television service. The move leaves all four national wireless carriers offering the same plan and leaving price and network claims as the major differences.

International Snippets

  • “The eurozone must remain together. And what we agreed on should be delivered together by all the euro member states,” German Chancellor Angela Merkel declared, after Finance Minister Wolfgang Schaeuble said Greece would have to leave the bloc if it failed to meet its bailout commitments. Meanwhile, Moody’s is warning the impasse between the IMF and eurozone member states is “credit negative” for Athens.
  • Trading volumes at China’s three largest bitcoin exchanges have plummeted after the PBOC put the virtual currency market under sharper scrutiny in a move that coincided with efforts to stem capital outflows. China has been the world’s leading venue for bitcoin trading.
  • Toshiba shares plunged this week as the company failed to release its earnings where details of a multi-billion dollar write-down were expected. The company declined to provide a new time for the announcement. There were also reports that it will issue a warning that it may not be able to continue as a going concern (bankruptcy). (Reuters, NAR)
  • Japan had a surge in claims for refugee status last year, however, the country accepted just 28 refugees out of 10,901 claims for entry. “They really prioritize immigration control rather than refugee protection,” said one expert. (FT)
  • French bonds are being traded at volumes not seen since the eurozone crisis as the tumultuous presidential election race has divided investors over whether France will deliver the world’s next populist upset. Investors are becoming increasingly concerned at the possibility that far-right candidate Marine Le Pen, whose National Front party has pledged to pull France out of the euro, will win when voters go to the polls in late April. The volumes are similar to levels seen during the 2010-12 eurozone sovereign debt crisis, when fears that insolvent member states would trigger the collapse of the currency union dominated markets.
  • Economic risks continue to swirl, particularly around Italy. The eurozone’s third-largest economy has its second-largest ratio of debt to gross domestic product at 132%. Meanwhile, Italy’s banking sector is saddled with 276B Euros in bad loans and is teetering on the edge of crisis. Adding to its troubles, Italy is the eurozone member most vulnerable to a doom loop: Italian institutions are the bloc’s biggest holders of their own government’s debt, which accounts for just under 12% of its banking sector’s total assets.
  • Complications in restructuring Saudi Arabia’s state-owned oil company and disentangling its finances from those of the government are slowing the march toward what is expected to be the biggest IPO in history. The hotly anticipated listing of a minority stake in Saudi Aramco is now unlikely to happen until late 2018 at the earliest. (WSJ)
  • Israel has global ambitions to become a medical marijuana supplier and has taken the first steps to amend laws that will allow the export of medical marijuana products. (FT)
  • South Korean giant Hanjin Shipping Co., the world’s seventh-largest shipping firm, was officially declared bankrupt by a court in Seoul on February 17th. The South Korean shipping sector, one of the country’s staple industries, has been suffocating under the pressure of both global economic factors and competition from China, whose shippers enjoy government support and have undergone rounds of consolidation.

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.