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Wednesday 05.03.2017

Apple posts surprise fall in iPhone sales

Apple Inc (AAPL.O) reported a surprise fall in iPhone sales for the second quarter on Tuesday, indicating that customers had held back purchases in anticipation of the 10th-anniversary edition launch of the company's most important product.

Shares of the world's most valuable listed company were down 1.2 percent at $145.78 in after-hours trading. The company boosted its capital return program by $50 billion, increasing its share repurchase authorization by $35 billion and raising its quarterly dividend by 10.5 percent.

Apple sold 50.76 million iPhones in its fiscal second quarter ended April 1, down from 51.19 million a year earlier. Analysts on average had estimated iPhone sales of 52.27 million, according to financial data and analytics firm FactSet.

However, revenue from the smartphones rose 1.2 percent in the quarter. Expectations are building ahead of Apple's 10th-anniversary iPhone range this fall, with investors hoping that the launch would help bolster sales.

Michael Lewitt: Crushing Debt Will Stifle Growth Despite Tax Cuts

Michael Lewitt, the manager of the Third Friday Total Return Fund who has warned that stocks are in a bubble, said the global economy is groaning under massive debts that have built up since the 2008 financial crisis, and tax cuts proposed by President Donald Trump won’t necessarily boost growth.

“A heavy debt load suppresses growth and … much of the meager growth experienced since the financial crisis was fueled by an epic accumulation of public and private sector debt,” Lewitt said in the May issue of his Credit Strategist newsletter. “Divorcing economic growth from debt growth paints a false picture of what occurred in the American economy since the financial crisis and offers false hope for the type of growth that can be achieved unless there is a radical reordering of budget and tax priorities in the future.”

U.S. Treasury Secretary Steven Mnuchin this week said economic growth of 3 percent is achievable in the next two years as the Trump administration seeks tax cuts to create more incentives to work and invest. The U.S. economy has grown by 3.2 percent a year on average since 1947, but never exceeded 3 percent during the Obama administration, the first time in history.

Lewitt cites data that show total U.S. debt, including nonfinancial, foreign and bank debt, reached 372.5 percent of gross domestic product last year, compared with 251.9 percent in 2006, the last time the Federal Reserve started a rate-hiking cycle.

India's Infosys will hire 10,000 American tech workers

India's Infosys (INFY) said Tuesday the jobs will go to "experienced technology professionals and recent graduates from major universities, and local and community colleges." The Bangalore-based company, whose U.S. clients include IBM (IBM, Tech30) and Lockheed Martin (LMT), said the move reflected a continuation of three decades of investment in the U.S.

Infosys is hiring for four technology and innovation hubs across the country, the first of which will open in Indiana in August. The new jobs represent a big commitment that will significantly increase Infosys' workforce in the Americas. The company has around 24,000 workers across the region, of which nearly 15,000 are in the U.S. on H-1B work visas.

The investment is likely to be seen as a victory for President Trump's "Buy American, Hire American" agenda. Trump has accused outsourcing firms of undercutting American workers and depriving them of jobs by using H-1B visa to bring in thousands of Indian tech workers. Trump has ordered a comprehensive review of the visa program.

Infosys, which is believed to be the biggest single recipient of H-1B visas, declined to comment on whether it had decided to hire more Americans because of pressure from Trump. "Our announcement is a natural evolution of how we work in the United States, allowing Infosys to remain close to our clients, while also enhancing our ability to attract and recruit local, top talent throughout the country," a spokesperson said.

US men are making less and less money

As the gender wage gap is closing, men and women’s lifetime earnings distribution seem to be offsetting one another.

New research shows men’s median lifetime income has declined by 10 percent to 19 percent (adjusted for inflation) when you compare men who entered the workforce in 1967 with men who entered it in 1983; meanwhile, women’s median lifetime income increased by 22 percent to 33 percent between the cohorts who entered the workforce in 1967 and those in 1983, according to a report published in the National Bureau of Economic Research that used data from the Social Security Administration.

Men in the lower three-quarters of income distribution faced the most struggle, seeing little to no rise in their earnings. New workers are not catching up, said Greg Kaplan, an economics professor at the University of Chicago and a co-author of the report. “Rather they’re starting lower and staying lower.”

Because the report was based on lifetime income, there was not much data on younger cohorts, such as those beginning their careers in the late 2000s. However, data did show stagnation continued for younger cohorts and median incomes have been declining from 1998 onward). So why were lower-income men not seeing a rise in lifetime earnings? Gray Kimbrough, a micro-economist in the D.C. area, said they have fallen victim to a double-edged sword of lack of education and job availability. Jobs for the less educated have been on the decline, and more women are also taking over less-skilled service jobs than they were six decades ago. More highly educated people also tend to be more attached to their jobs, Kimbrough said. (They also are more likely to juggle multiple jobs, one study showed.) This could be troublesome for men hoping to increase their income, especially since their peak earning years tend to come in their early 50s, research shows.

Greece agrees to new bailout terms -- and more austerity

Greece and its creditors have reached a deal that will restart bailout loan payments and keep the country from facing default and reigniting a eurozone crisis this summer, officials said Tuesday.

Following months of tough negotiations, the sides agreed that Greece should make another round of pension cuts in 2019 and commit to maintain a high budget target once the current bailout program ends next year.

Prime Minister Alexis Tsipras' left-wing government is set to approve the new cuts in parliament by mid-May, so that finance ministers from the nations using the euro can unfreeze more bailout funds at a scheduled meeting on May 22. Tsipras' governing coalition has a majority in parliament of just three seats.

Greece has been surviving on bailout loans since 2010 in return for harsh spending cuts and tax increases that have put nearly a quarter of the workforce out of work and seen more than a third of the population living in poverty or at risk of poverty. "We have said many times ... that this is a painful compromise," Interior Minister Panos Skourletis told state-run ERT television.

The Fed/Central Banks’ $13 Trillion Gorilla in the Room

The US Federal Reserve, the European Central Bank and the Bank of Japan alone have over $13 trillion in quantitative easing assets on their balance sheets. The Fed recently hinted that it would like to start reducing its QE assets this year if possible. That has sparked an entirely new discussion on how the central banks could go about reducing their unprecedented QE asset holdings without sparking a new financial crisis.

This is a complicated issue and one that, if not handled properly, could be a disaster for the stock and bond markets in the years ahead. We’ll start today with a basic look at the problem, how it developed and some of the possible solutions. Before we get into that, let’s take a look at last Friday’s very disappointing GDP report for the 1Q. In light of that weak report, some are asking if the Fed will hold off on raising interest rates again this year. I’ll give you my thoughts as we go along.

Americans say they feel more optimistic about the economy since President Trump was elected. But they certainly are not acting that way in terms of consumer spending, and that is shaping up to be a challenge for the Trump administration. The caution among consumers was particularly notable on big purchases like automobiles and durable goods.

Economic growth slowed in the first quarter to its slowest pace in three years as sluggish consumer spending offset impressive business investment. The Commerce Department reported on Friday that 1Q Gross Domestic rose only 0.7% (annual rate) in the first three months of this year. That was only one-third of the 2.1% pace in the 4Q of last year, and was well below the pre-report consensus of a 1.1% gain.

Can Trump’s tax cuts lead to 3% GDP growth?

GM to take $100 million charge on Venezuela operations

General Motors Co. will take a $100 million charge as it writes off its operations in troubled Venezuela, where authorities last month unexpectedly seized its production plant on a court order, the company said Tuesday.

GM GM, -2.87% has ceased all operations since the April 18 takeover of its facilities but said in a statement that it is open to discussing with Venezuela’s government the possibility of restarting production “with a new, viable business model.”

Car output, along with most industrial activity, has plummeted in the South American country amid a punishing economic crisis where companies and individuals lack access to hard currency because of the leftist government’s rigid controls.

Unable to pay for imports, GM’s Venezuela unit hasn’t assembled a vehicle since December 2015, data from the Venezuelan car makers’ association shows. While the government has nationalized scores of companies over 18 years of socialist rule, authorities say the GM plant seizure wasn’t an expropriation. Instead it is linked to a nearly two-decade-old lawsuit filed against the company by a local dealership, who sued GM for $370 million alleging wrongful termination of its concessionaire contract.

Puerto Rico teeters on brink of historic bankruptcy as lawsuits mount

The cash-strapped island of Puerto Rico was hit with several lawsuits on Tuesday just hours after a stay on litigation expired as the commonwealth failed to reach a restructuring agreement with its bondholders on its massive debt load.

In a suit filed by Ambac, one of the largest insurers of debt issued by Puerto Rico, the company argued that "the Commonwealth, egged on by the Oversight Board, continues to flagrantly disregard the rule of law" and is seeking a declaratory judgment that the commonwealth's fiscal plan is unconstitutional and illegal.

Ambac is also seeking to block Puerto Rico from officially launching Title III, a court-supervised bankruptcy-like restructuring process. The restructuring of Puerto Rico's roughly $70 billion in outstanding debt would be the largest in the history of the U.S. municipal bond market.

In a note issued Tuesday, BTIG analysts Mark Palmer and Giuliano Bologna said they believe Ambac's "lawsuits represent the beginning of the municipal bond insurers' pushback against Puerto Rico's efforts to force its creditors to accept severe haircuts, and we would not be surprised to see similar litigation filed by Assured Guaranty and MBIA in the coming days."

Is The U.S. Stock Market Headed Higher – Or For A Crash?

A groundswell of concern is building on Wall Street that the U.S. stock market is in dangerously high territory. This week, the Nasdaq Composite hit a new high as the Dow Jones Industrial Average and S&P 500 remained in record territory — and they are up 28%, 18% and 16% respectively from a year ago. Meanwhile, the S&P 500 is trading at 25 times trailing 12-month earnings compared with a historical average of 16. The value of the stock market is nearly 150% higher than the nation’s GDP, a level last seen around the dot-com bust in 2000, according to the World Bank. And a BofA Merrill Lynch survey showed that 81% of fund managers think U.S. stocks are overvalued.

The Fed has weighed in as well. In the minutes of its March meeting released earlier this month, it observed that equity prices are “quite high relative to standard valuation measures.” The widely followed Cyclically Adjusted Price-to-earnings Ratio (CAPE) stands at a historically high 29, according to creator Nobel laureate Robert Shiller. Last week, he told CNBC that the U.S. stock market “hasn’t been this overvalued except a couple of times around 1929 (the Great Depression) and around 2000. We’re above the 2007 valuation” right before the financial crisis, although he also said the market could still have room to run.

The euphoria flies in the face of several lackluster economic reports. In the first quarter, the U.S. economy grew the slowest in three years, with U.S. GDP up 0.7% after inflation, according to the initial estimate by the Department of Commerce. Manufacturing fell to a four-month low in April while consumer spending — which drives two-thirds of the economy — remained flat in March. On the positive side, S&P 500 companies are reporting double-digit earnings growth for the first time in six years, according to FactSet. What also seems to be driving the market are hopes that the Trump administration will be able to cut federal corporate income tax rates to 15% from 35% and reduce the number of regulations restricting businesses.

“The most important thing that I think is spurring the markets is the forward guidance [in corporate earnings.] For the first time in years, the forward guidance is even maintained or being raised,” Wharton finance professor Jeremy Siegel said on the Wharton Business Radio’s Behind the Markets show on April 28, which airs on SiriusXM channel 111. In past years, he said, companies typically project overly rosy earnings at the beginning of the year that often see big corrections later.

Why There Will Never Be A Political Solution To America’s Problems

Why do things never seem to change no matter who we send to Washington? It seems like for decades many of us have been trying to change the direction of this country by engaging in the political process. But no matter how hard we try, the downward spiral of our nation just continues to accelerate. Just look at this latest spending deal. Even though the American people gave the Republicans control of the White House, the Senate and the House of Representatives, this deal very closely resembles “an Obama administration-era budget”. It increases spending even though we have already been adding more than a trillion dollars a year to the national debt, it specifically forbids the building of a border wall, it fully funds Planned Parenthood, and there are dozens of other concessions to the Democrats in it. As I previously warned, these “negotiations” were a political rout of epic proportions.

Perhaps many of us were being highly unrealistic when we expected that Donald Trump could change things. Because fixing America is going to take a lot more than getting the right number of “red” or “blue” politicians to Washington. Rather, the truth is that the real problem lies in our hearts, and the corrupt politicians that currently represent us are simply a reflection of who we have become as a nation.

The generations of people that founded this nation and established it as the greatest republic that the world had ever seen had far different values than most Americans do today.

So until there is a dramatic shift in how most of us see the world, it is quite likely that not much in Washington will change. Throughout the campaign, Donald Trump spoke boldly about “draining the swamp”, but this spending deal very much reflects the swamp’s priorities.

The fuel of the US economy is drying up, but it's not as bad as it seems

Upon first glance, a slowdown in business lending would suggest troubled times ahead for banks. Think again, says Credit Suisse.

They see growth in commercial and industrial (C&I) loans normalizing with gross domestic product, which it's outperformed for the past several years. The two measures have historically been highly correlated, and C&I is simply allowing GDP to play catch-up, according to Credit Suisse.

The Federal Reserve's most recent H.8 report showed that C&I loans grew 5% year-over-year in the first quarter, a slowdown from last year's 9% compound average annual growth rate. While lower, the expansion more closely mirrored GDP than it has in previous periods, indicating a return to normalcy.

Conventional wisdom goes that fewer loans would likely mean lower investment, which could negatively affect everything from the labor market to the stock market. But the slowdown in C&I loans, which are used by businesses to fund activities from buying equipment to building factories, won't materially hurt profit growth, the firm says. That's a good sign since earnings expansion has historically been the biggest driver of share price appreciation.

One of America’s Biggest Mall Developers Might Sell Itself

The CEO of the No. 2 U.S. mall developer General Growth Properties has had it with the narrative that shopping centers are dying. Sandeep Mathrani, CEO of the owner of such malls as Fashion Show in Las Vegas, and Ala Moana in Honolulu, surprised investors on Monday when he said he was looking at "strategic alternatives" for company, frustrated that the stock market wasn't giving his company more credit for the quality of the malls in GGP's portfolio.

The company had just reported its quarterly financial results, which included occupancy of 95.9% of space at its established malls. Still, the idea among many investors that malls are in trouble, bolstered by a surge of headline-grabbing retail bankruptcies and mass store closings by top retailers, has taken hold, hurting the stocks of mall owners like GGP and its larger rival Simon Property Group, which last week reported a similar occupancy.

All the agita around retail has been a drag on mall stocks, even those of GGP and Simon, both of which operate primarily high quality, productive malls: GGP shares are down about 28% off a multi-year high hit last June. Simon has taken a similar beating.

"There is a wide discount between public and private markets," Mathrani said on the conference call. "The sum of the parts is far greater than GGP's current stock price. We are reviewing all strategic alternatives to bridge the gap." When pushed on whether "strategic alternatives" could mean a sale of the company, as the term usually implies in corporate jargon, Mathrani would only say "There is no sacred cow." He also suggested the company could sell off some assets and offer a special dividend, among other options.

Trump’s budget director unveils photos of what the border wall may look like

New Car Sales Are In The Longest Losing Streak Since 2009

For a couple years, the Morning Shift story at the beginning of every month was “Another month of record sales!” As the country recovered from the recession—or seemed to, anyway—all that pent-up demand resulted in booming new car sales for months on end. That’s not the story anymore. More and more we’re seeing that the party’s over. Even as automakers like General Motors post big profits, sales are starting to slide pretty hard, reports Automotive News:

General Motors and Ford Motor Co., behind another weak month for cars, posted declines in U.S. sales for April in what is projected to be the fourth consecutive monthly decline for the industry and the longest losing streak since the market bottomed out in 2009.

GM said volume slipped 5.8 percent behind a 10 percent decline at Chevrolet and 0.3 percent dip at GMC. Volume rose 17 percent at Buick and 9.5 percent at Cadillac. Overall, GM said it cars sales declined 13 percent in April.

Ford’s sales dropped 7.2 percent, with demand falling 7.5 percent at the Ford brand and 0.9 percent at Lincoln. It was the fourth straight decline for Ford. The company said car deliveries slumped 21 percent last month, while SUV deliveries edged up 1.2 percent and truck demand slid 4.2 percent. Overall, analysts expect U.S. light-vehicle deliveries to drop as much as 4 percent when other automakers report April results later today, even as companies and dealers attempt to lure consumers with bigger deals.

Pipeline Companies Push Back Against Trump's 'Buy American' Rule

A directive requiring U.S. pipeline companies to use American steel and iron in their projects is testing President Donald Trump’s ability to keep his promises to two industries on opposing sides of the issue.

In comments to the U.S. Department of Commerce, which is crafting the so-called "Buy American" plan, pipeline companies and their trade groups argued the change would increase costs and disrupt operations. Steel companies, meanwhile, embraced the policy as an opportunity to take advantage of the country’s surging oil and gas production. And Trump has vowed to support both.

The debate goes to how the president will be able to reconcile the conflicting edges of his America-first platform. During his campaign, Trump promised to break energy loose from the leash of regulation and protect steel from the bite of unfair competition. Market forces, though, may force him to make a choice, according to Stefanie Miller, a senior analyst at Height LLC.

"I don’t think those conflicts are insignificant," Miller said in a telephone interview. "You cannot have ‘Buy American’ and the most cost-effective pipeline, in the current scenario." In a Jan. 24 memorandum, the president gave the Commerce Department 180 days to develop a plan for requiring retrofitted, repaired or expanded pipelines to use U.S.-produced materials "to the maximum extent possible." The decision has prompted almost 100 letters to the Commerce Department during a comment period that ended April 7, split about evenly between endorsement and opposition.

Minimum wage hike would cost youth jobs

Last week, Bernie Sanders reintroduced $15 federal minimum wage legislation. Five in six U.S.-based labor economists agree that such a policy would cost jobs for youth. Even left-wing economists from the Barack Obama and Bill Clinton administrations have advised against it. And a recent review of minimum wage literature from the San Francisco Federal Reserve suggests minimum wage hikes may cost more jobs than expected.

But when have facts and logic ever stopped activists? They rely on fact-starved emotions to inform their positions on public policy. They recognize that by tapping into the public’s emotions on issues like the minimum wage, they can win public policy debates even if the evidence is lacking.

That’s not to say activists never use facts. It’s just that when they do, they skew them. Instead of facts informing public policy positions, they’re used as the handmaiden of a pre-existing agenda. Sen. Sanders justifies his federal “one size fits all” $15 minimum wage by saying, “Millions of full-time workers are in poverty.” He forgets one fact: Roughly 60 percent of working-age people in poverty don’t have a job. A wage hike is a Pyrrhic victory for those people. And increasing the wage for the least skilled will only add to that number.

A classic example of activists skewing data comes from the AFL-CIO’s annual “Executive Paywatch” report. It claims the average worker bee earned $36,875 compared to the average $12 million-plus compensation of S&P 500 CEOs. The data strikes an emotional cord, but falls apart under closer inspection.

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