The Fed Said…
Fed no change but hints at hikes. Durable goods orders drop. Pending home sales up. Oil in a bear. Apple sold one billion. Facebook crushes it. Analog Devices buying Linear Tech. State Street misconduct. You can’t win if you don’t play – good luck.
Financial Review by Sinclair Noe for 07-27-2016
DOW – 1 = 18,472
SPX – 2 = 2166
NAS + 29 = 5139
10 Y – .04 = 1.52%
OIL – 1.01 – 41.91
GOLD + 20.00 = 1340.72
The Federal Reserve wrapped up its FOMC meeting today. As expected, they left interest rates unchanged. In a written statement, the Fed opened the door a bit to making an interest-rate increase at its next meeting in September. A specific change in the language of the statement said, “Near-term risks to the economic outlook have diminished.” That’s a stronger hint than most analysts had expected. In the statement, Fed officials painted a picture of an improving economy. “Information received since the Fed policy committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate,” the Fed said.
Job gains were “strong” in June, and household spending has been growing at a brisk clip, the Fed said. Yet the central bank also noted that business investment remained “soft.” At the same time, Fed officials said they would continue “to closely monitor inflation indicators and global economic and financial developments.” Prior to the announcement, Fed fund futures, used by investors to bet on the timing of Fed rate hikes, were pricing in only a 20% chance of a rate hike in September. The odds rise to 40% at the December meeting.
Investors are awaiting a major policy announcement at the Bank of Japan’s policy meeting on Friday. There has been plenty of speculation, and the rumors have pushed the yen down to 106.53. Japanese Prime Minister Shinzo Abe isn’t waiting; in fact he may be trying to prod the Japanese central bank to take a more accommodative stance. Abe announced plans for a 28 trillion yen ($265 billion) fiscal package.
Orders for durable or long-lasting goods made in the U.S. sank 4% in June, marking the biggest drop in almost two years and reflecting ongoing struggles by American manufacturers to drum up sales. The only standout performer: Auto makers. Orders for new cars and trucks rose 2.6%, reversing a similar decline in the prior month. New orders fell most sharply for commercial airplanes and expensive military hardware such as ships, tanks and fighter jets. Stripping out the volatile transportation sector, orders fell a smaller 0.5%. One small bright spot: Orders for core capital goods, viewed as a proxy for business investment, edged up 0.2% in June after falling in the prior two months. Core orders are 3.8% lower through the first half of the year compared to the same period in 2015.
The National Association of Realtors’ pending home sales index rose 0.2% to 111.0 from 110.8 in May. June’s reading was the year’s second-highest, behind only April. The index now stands 1.0% higher than its level a year ago. The index forecasts future sales by tracking real-estate transactions in which a contract has been signed but the deal has not closed. The West was the only region to register a reading lower than its year-ago level, down 1.3%. That’s likely due to extremely tight supply that’s pushing prices out of reach of many buyers: The median sale price in the West was $350,800 in June.
There has been a whole bunch of news lately and maybe you haven’t noticed but oil has been falling hard. Since early June, oil prices have dropped right at 20%, usually the level associated with a bear market. Oil dropped to a three-month low of 41.91 in New York after government data showed that U.S. crude stockpiles unexpectedly climbed last week, halting the longest streak of declines on record. Refineries reduced operating rates, which had been at the highest level of the year. U.S. refiners usually don’t begin to curb processing until August as the summer driving season nears its end. You should expect further inventory gains as refinery runs decline. Crude extended losses and the dollar briefly spiked after the Federal Reserve struck a more hawkish tone while leaving interest rates unchanged.
This is an important week for earnings. Last night Apple posted results that beat estimates, and the shares were up 6.8% in after-hours trade. The company’s total revenue dropped 14.6 percent in the third-quarter ended June 25, declining for the second quarter in a row. Apple’s quarterly net profit fell 27 percent to $7.8 billion, while revenue of $42.36 billion beat analyst’s estimates.
Over the last nine years, Apple has sold 1 billion iPhone smartphones, the company announced today, less than a day after its third-quarter earnings. That’s about one iPhone for every three people on the planet with access to the internet. In that time, Apple helped to bring about a revolution in the way we communicate and share information. Even though this was the second quarter in a row where iPhone revenue had fallen from a year earlier, the company could still boast that its line of phones had managed to sell a quantity that we tend to reserve for things like lightbulbs and McDonald’s hamburgers. And one beneficiary of all those mobile devices is Facebook.
Facebook quarterly profit and revenue blew past Wall Street estimates after the closing bell, sending its shares up 6.5 percent in after-hours trading to $131.40, their highest since the company went public in 2012. Mobile advertising revenue accounted for 84 percent of the company’s total advertising revenue, compared with 76 percent a year earlier. Facebook is one of the biggest beneficiaries as advertisers move money away from television to the internet and mobile platforms. The company is also courting advertisers to experiment with Facebook Live, its recently launched live video feature. Facebook still has several untapped areas for revenue opportunities, including its WhatsApp and Messenger apps, both of which have more than 1 billion users. Facebook also owns picture-sharing app Instagram, which recently announced it has more than 500 million users.
Facebook reported net income attributable to stockholders rose to $2.05 billion, or 71 cents per share, compared with $715 million, or 25 cents per share, a year earlier. Total revenue rose 59.2 percent to $6.44 billion, ahead of analysts’ average estimate of $6.02 billion.
This morning, Boeing reported a smaller-than-expected loss, sending its shares up 3 percent in early trading. The loss of 44 cents a share in so-called core results, which excludes some pension and other expenses, was about half the 93-cent loss that analysts expected.
Coca-Cola reported lower-than-expected quarterly revenue as higher sales in North America failed to make up for weakness in many of the company’s emerging and developing markets, including China and Argentina. Coke also cut its full-year organic revenue growth forecast. The company’s net operating revenue fell 5.1 percent to $11.54 billion, the fifth straight quarter of decline. Coke and smaller rival PepsiCo have been struggling as consumers increasingly turn health conscious and cut back on fizzy drinks and opt for teas, fruit juices and smoothies. Coke has responded by building its non-carbonated drinks portfolio, expanding beyond North America and cutting costs by refranchising its bottling operations.
Freeport-McMoRan reported weaker-than-expected revenue for the second quarter as the price of copper plunged and gold sales tumbled. Freeport-McMoRan sold 156,000 ounces of gold, less than half as much as it sold a year ago. Meanwhile its average selling price for oil fell 18 percent compared to the second quarter of 2015, and the price of copper slumped 20 percent. The Phoenix-based company disclosed a loss of $479 million, or 38 cents per share. Excluding one-time items, Freeport-McMoRan said it lost 2 cents per share. Its revenue dropped 15 percent to $3.33 billion.
Analog Devices said it would buy fellow chipmaker Linear Technology for about $14.8 billion, the latest deal in a wave of consolidation in the semiconductor industry in the past two years. By buying Linear, Analog is aiming to boost its profitability and increase its share in the fragmented market for analog chips, which process signals such as sound, light and temperature and convert them into digital signals. The chips are central to smart phones and devices connected to the internet.
Deutsche Bank, the German bank which is an important part of the global financial system, announced revenue and income fell, which could add further concerns for investors made jittery by a combination of Brexit and previous issues at the bank. Deutsche announced second-quarter net income was down 98 percent from the same period in the previous year, to 20 million euros ($22 million), as it exited parts of its business while revenues were down 20 percent to 7.4 billion euro. The bank, one of Germany’s largest lenders, has lost around 40 percent of its market value this year as concerns mount about its capital position and $14 billion in fines over past misconduct.
State Street has agreed to pay $382 million for misleading mutual funds and other custody clients by applying hidden markups to forex trades. The settlement includes $167 million in disgorgement and penalties to the SEC, a $155 million penalty to the DOJ, and at least $60 million to ERISA plan clients in an agreement with the DOL. State Street also agreed to pay $147 million to settle private class action lawsuits filed by bank customers alleging similar misconduct. Basically, it looks like the bank was misleading custody clients, telling some clients that it guaranteed the most competitive rates available on their foreign currency exchange trades, provided “best execution,” or charged “market rates” on the transactions. State Street instead set prices largely driven by predetermined, uniform markups and made no effort to obtain the best possible prices for these clients – pocketing the difference.
Time for some lottery dreaming again: The prize in Wednesday night’s Powerball drawing has climbed to $422 million, thanks to three months without a winner.