Financial Review

2018 Gains Gone

…Stock crash again. Stocks suffer when faced with trade wars, rising interest rates. Beige Book points to another rate hike. New home sales plummet. Earnings news: TSLA, MSFT, V, AMD, F, T.

Financial Review by Sinclair Noe for 10-24-2018

DOW – 608 = 24,583
SPX – 84 = 2656
NAS – 329 = 7108
RUT – 57 = 1468
10 Y – .04 = 3.12%
OIL – .40 = 66.42
GOLD + 3.30 = 1234.20

Once upon a time, stocks were up in 2018. Not anymore. The Dow Jones Industrial Average dropped 606 points and erased all of its gains for 2018. The S&P 500 dropped 3.1 percent and also turned negative for the year. The Nasdaq Composite fell 4.4 percent — entering correction territory — as Facebook, Amazon, Netflix and Alphabet all traded lower. That was the biggest one-day fall for the Nasdaq Composite since August 2011. Stocks have taken a beating this month. The Dow has dropped 7.1 percent in October, while the S&P 500 has pulled back 8.9 percent. The Nasdaq, meanwhile, has tumbled 11.7 percent. And since the market has taken out the lows for the year, that means it has also taken out any near-or-intermediate levels of support. We could still find some stability here, but there is a very strong chance that the market falls harder from these levels.


It is earnings season, and let’s start by taking a look at an earnings report that came out yesterday. Caterpillar’s fundamentals are strong — it posted record third-quarter profits, rising revenue in all its major markets and brisk demand for its wares.  But investors see storm clouds gathering, not least from the Trump administration’s import duties, which the company estimates will raise its material costs by at least $100 million in the second half of this year.  It’s a story starting to play out across the economy. Companies are reckoning with trade barriers the Trump administration appears to be in no hurry to lower as it eyes a longer-term showdown with China. A number of other firms reporting their third-quarter results are citing higher costs thanks to tariffs: United Technologies said it expects tariffs to cost it $200 million next year, double its earlier estimate; 3M said “tariff head winds” would raise its costs by $100 million next year; Honeywell reported that tariffs could jack up its costs by hundreds of millions of dollars; Ford said that metals duties have cost it $1 billion in profits; Honda pointed to “hundreds of millions of dollars” in new costs.


Meanwhile, the outlook is bleak for a negotiated peace between the Trump administration and its counterparts in Beijing. White House economic adviser Larry Kudlow confirmed that Trump will meet with Chinese President Xi Jinping at the G-20 summit next month in Buenos Aires. But he immediately sought to play down hopes for a breakthrough there, saying a good outcome would constitute agreement “on some basic principles and trading rules.”


Expectations are similarly dim across the Pacific. Chinese officials who once hoped to buy their way out of a conflict via purchases of U.S. energy and agricultural exports are also now bracing for a prolonged fight and focusing on adapting to a new normal in relations. In private, Chinese officials have started to talk less about a potential peace and more about stabilizing the relationship with the U.S. to avoid escalation.


Main Street is buying the dip.  Wall Street isn’t. For the third week in a row, individual investors bought stocks while institutional and hedge funds were net sellers. Data on client flows compiled by Bank of America showed – while a reflection of only one firm’s clients – the data is the latest to show the divided sentiment that has gripped the market in recent months. To some, the latest selloff is another dip that’s worth buying with earnings growth running at 20 percent and valuations falling. The others see a congregation of forces that threatens to slow the 9 1/2-year bull market: higher bond yields, slowing profit growth, and persistent political tensions at home and abroad.


A couple of weeks before a Federal Reserve monetary policy meeting, the Fed publishes anecdotes from the 12 Fed districts around the country. Wages and prices moved higher in the Federal Reserve’s 12 districts through mid-October but not faster than a “modest to moderate” pace. Districts across the country reported tight labor markets. Firms were using “non-wage strategies,” like bonuses and lengthy vacation allowances, to recruit workers. Retailers in “some” districts were able to raise selling prices. They cited higher transportation costs and worried about impending cost increases from trade tariffs. Overall economic activity expanded at a “modest to moderate” pace. Manufacturing reported “moderate output” despite firms facing rising costs for materials and shipping, uncertainties over the trade environment, and a shortage of qualified workers.


And two weeks away from a policy meeting Trump jumped into the debate about interest rates, claiming they are too high. In response to a hot labor market and signs of inflation, the Fed has settled into a quarterly rate-hike cycle. But if the market sell-off, which included Treasuries earlier this month, carries on it could convince some Fed officials to shelve plans to keep tightening policy well into next year. Cleveland Federal Reserve President Loretta Mester isn’t worried – not yet anyway. The sharp, nearly month-long drop in major equities indexes has not on its own caused Mester to adjust her expectation to continue gradually raising interest rates, she said, adding that for now data is pointing to a “strong” U.S. economy. A “prolonged” drop in stocks could eventually begin to weigh on the U.S. economy, though there are no signs of pinched credit or a pending recession so far.


New home sales plunged in September, falling 5.5 percent to an almost two-year low. The Commerce Department reported that sales for the month came in at 553,000 on seasonally adjusted basis. That’s 5.5 percent below the downward revised August rate of 585,000 and a 13.2 percent tumble from the 637,000 reported for the same period a year ago. September represented the worst month since December 2016. June and July sales rates were also revised lower. New home sales have now declined for four straight months. The median sales price dropped from $331,500 a year ago to $320,000 now. The report comes as mortgage rates have been drifting higher, with the most recent average at 4.87 percent, according to Housing experts believe a 5 percent average rate could be an inflection point for a market under pressure all year from rising rates. While fiscal stimulus has provided a strong boost to corporate profits and business and consumer confidence is running near record highs, a slumping housing market due to rising rates represents a significant headwind going forward. One thing is for certain, the economy cannot grow at a sustainable 3% pace for long if new home sales continue to tumble.


After the closing bell, Microsoft reported profit well above what Wall Street had expected, posting a net income jump of 34% to $8.8 billion, which amounts to earnings of $1.14 a share. This might give us some hint of what to expect tomorrow morning – in after hours trade, Microsoft dropped more than 5%.


Tesla has reported a quarterly profit for just the third time in its 15-year history – $311 million in earnings for the third quarter. Shares jumped more than 12% in after-hours trading. Tesla said last month it produced more than 80,000 vehicles, of which more than 60% were Model 3s. Revenue more than doubled to $6.8bn in the quarter, mostly from car sales.


Ford Motor jumped more than 6% in the extended session after the car maker reported third-quarter earnings and sales that surpassed Wall Street expectations. Ford said it earned $991 million, or 25 cents a share, in the quarter, compared with $1.57 billion, or 39 cents a share, in the year-ago period.


Advanced Micro Devices reported third quarter earnings; profit double from a year ago; sales increased; but the company missed estimates on the top and bottom lines. AMD shares dropped 24% in after-hours trade.


AT&T’s stock dropped 8% after the company reported mixed results for its first full quarter since completing its merger with WarnerMedia. The massive purchase gave AT&T an array of media assets anchored by HBO, Warner Bros. and Turner, but it also saddled the company with a ton of debt. AT&T added nearly 70,000 subscribers in its US postpaid phone business, which measures the number of people who pay a monthly bill — but other areas were soft. The company lost 359,000 satellite subscribers.


Visa’s net income rose to $2.85 billion in the fourth quarter ended Sept. 30, from $2.14 billion a year earlier. Rising wages, job growth and lower taxes have spurred U.S. consumer confidence to its highest in nearly two decades, driving spending on everything from luxury goods to day-to-day essentials.


Facebook says company moderators during the last quarter removed 8.7 million user images of child nudity with the help of previously undisclosed software that automatically flags such photos. Under pressure from regulators and lawmakers, Facebook has vowed to speed up removal of extremist and illicit material. Machine learning programs that sift through the billions of pieces of content users post each day are essential to its plan. Machine learning is imperfect, and news agencies and advertisers are among those that have complained this year about Facebook’s automated systems wrongly blocking their posts. Facebook admit the child safety systems would make mistakes, but users could appeal.


Only one ticket matched all six numbers in the Mega Millions lottery for a jackpot of $1.537 billion, just short of a world record. The ticket was sold in Simpsonville, South Carolina, at KC Mart convenience store. I have never been to the KC Mart in Simpsonville. So, we’ll meet here again tomorrow.

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