Financial Review

21st Day of September

…Another record close for the Dow. Quad witch and rebalancing. Waiting on the Fed. China trade war kicks into gear on Monday; retailers write letters. NAFTA? Bid for Sky.

Financial Review by Sinclair Noe for 09-21-2018

DOW + 86 = 26,743
SPX – 1 = 2929
NAS – 41 = 7986
RUT – 8 = 1711
10 Y – .01 = 3.07%
OIL + .51 = 70.83
GOLD  – 8.20 = 1198.70


The Dow Industrial Average hit another record high close. The Dow and S&P 500 each ended the week with their 10th weekly gain in the past 12 weeks. The Nasdaq lost ground on the week. Quadruple witching, when stock options and futures expire, and the rebalancing of the S&P 500 and the Russell 2000 indexes also contributed to heavier traffic. Volume on U.S. exchanges was 10.7 billion shares, nearly 64 percent higher than the 20 day average.


Tech has grown to be roughly 26 percent of the S&P 500. Facebook, Amazon, Apple, Microsoft and Alphabet represent an S&P 500 market weighting (15.6 percent) that is greater than either the health-care or financials sector. Monday, the S&P 500 will shake things up and rebalance its index. This mainly involves shuffling existing cards in the deck, or rearranging which companies are included in which sectors. Some of the market’s leading tech stocks — Alphabet, Facebook and Netflix — are moving to a new communications sector that replaces telecom in a reshuffling of market capitalization near-$3 trillion. Many investors and market strategists say the reshuffling of major tech stocks between the technology, consumer discretionary and communications sectors won’t solve the problem of big tech’s influence in the market, but it will have major implications for investors.


It is important for investors to understand how the reclassification will affect their portfolios, since the ETFs that they currently hold may no longer suit their investment objectives. The $23 billion Technology Select SPDR Fund (XLK) will change. Specifically, Alphabet, with over a 10 percent weighting in XLK, will move to the new communications services sector, where it will be triple that weight. Facebook, a 5.6 percent weighting in XLK, also will close to triple its weight in Communication Services. Those moves will lead to a major decline in the dividend yield of the former telecom sector. In creating the communications services sector — which now has its own ETF, the Communication Services Select Sector SPDR (XLC) — the S&P has eliminated one the market’s most popular defensive equity plays. The revamped communications services sector will be seen as a cyclical sector with much stronger growth prospects. Big dividend stocks AT&T and Verizon are coming out of XLK, but they were small weights. The removal of non-dividend payers like Facebook and Google is being offset by increased weightings in the tech sector’s more value-oriented stock set, and big dividend payers, such as Apple, Microsoft, Cisco Systems and Texas Instruments. While telecom currently boasts a dividend yield of 5.4 percent, the highest in the S&P 500 index, the dividend yield for the new communication services sector will shrink to 1.7 percent. That is below the 1.9 percent offered by the broad S&P 500 index. If you own any of these ETFs, it is probably a good idea to review your holdings.


U.S. Treasuries — and maybe financial markets across the world — are at a critical juncture. The bond selloff is gathering pace, pushing 10-year yields above 3 percent to the highest since May and within sight of levels last seen in 2011. A rate hike at the U.S. Federal Reserve’s Sept. 25-26 policy meeting is all but certain – taking the rate to 2.00 percent-2.25 percent. And the odds have also increased for a December rise and more bumps up into 2019. But market watchers have already turned their attention to the question of when to call the next economic downturn. The traditional indicator is the yield curve inverting — in the United States this has been a pretty accurate predictor of recessions. However, another interesting sign could be read from the relationship between the fed funds rate and employment. The fed funds rate has risen above the employment rate ahead of prior recessions – and the unemployment rate, currently 3.9 percent, is now near the lowest in 18 years. So the fed funds rate and the employment rate are still a far bit apart. But they are inching closer and another hike will trim the gap a little bit more.


New U.S. tariffs of 10 percent on about $200 billion of Chinese products will kick in on Sept. 24, rising to 25 percent by year-end. China’s retaliatory tariffs on 5,207 U.S. products also enter into force in the coming week. There is a good chance China will consider some accommodation, perhaps raising reserve ratios, a move that would pressure the yuan. The problem is if the yuan sinks too low, China could face capital outflows. For now, China says it will not devalue the yuan. At the same time the dollar has lost some power.


So far, the American consumer has not felt the impact of tariffs – not much, anyway. That might change.  The longer the trade war lingers, the more pain it will inflict, and there is no sign of resolution. Hundreds of retailers and other companies are pushing back against President Donald Trump’s new 10 percent tariffs on $200 billion in Chinese goods. Walmart, Sears, Petland, Dollar General and a coalition of roughly 300 retailers — including IKEA North American Services, Kohl’s, L.L. Bean, the Gap, Macy’s and Under Armour — sent letters strongly opposing the tariffs. Target stores says the trade war threatens to undermine the U.S. economy, penalizes American families and raises prices on everything from backpacks to playpens.  Walmart, the largest retailer in the United States, also opposed the tariffs, saying it is “very concerned about the impacts these tariffs would have on our business, our customers, our suppliers and the U.S. economy as a whole.” And Jack Ma, the founder of Alibaba, last year pledged to help Trump create a million American jobs.  But now Ma has scrapped the pledge, saying that an escalating trade war has wrecked it. Ma said, “The promise was made on the premise of friendly U.S.-China partnership and rational trade relations. That premise no longer exists today, so our promise cannot be fulfilled.”


Meanwhile, Canada has yet to sign on to a revised NAFTA deal. White House economic aide Kevin Hassett says the U.S. and Mexico are prepared to move ahead alone on a new trade agreement, and Canada may get left behind. While multiple deadlines have passed during the more than year-long negotiations to renew NAFTA, pressure on Canada to agree to a deal is growing, partly to push it through the U.S. Congress before Mexico’s new government takes office on Dec. 1. Canada says it does not feel bound by the latest deadline.


Japanese Prime Minister Shinzo Abe and Trump will hold a summit meeting on Sept. 26 on the sidelines of a United Nations General Assembly meeting in New York. Fears grow in Tokyo that Washington could demand that Japan curb its car exports to the United States. Japan is hoping to avert any import curbs and potentially steeper U.S. import tariffs on its cars, and fend off U.S. demands for a bilateral free trade agreement.


Comcast and Twenty-First Century Fox may have to go to the auction block for British broadcaster Sky on Saturday after neither side backed down in a drawn-out $34 billion battle. A deadline for Comcast and Fox to declare that their all-cash offers for Sky would not be increased passed on Friday without a move by either side, triggering a rare auction run by Britain’s Takeover Panel. Saturday’s auction of pay-TV group Sky will last a maximum of three rounds and any bids will be made in private by either telephone or email. The Takeover Panel then expects to announce the offer prices that the bidders have submitted on Saturday evening. Sky’s independent directors are expected to meet immediately to decide which offer to back. Fox already holds 39% of Sky, but the Sky directors have been favoring a Comcast acquisition.  The deal has had a number of complications of over the past 2 years, including a separate deal that Disney struck in December 2017 to acquire a host of film and TV assets from Fox, including its Sky stake. So, a Fox victory would result in Disney then taking control of Sky, once it has completed its deal for the Fox assets.


Floodwaters breached a dam near a Duke Energy power plant Friday, the company said, and material from an adjacent toxic coal ash basin has reached the nearby Cape Fear River. The rising waters also swamped a 625-megawatt natural gas plant at the site, forcing it to shut down.


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