….Stock indices hit records. Dow 26k. Beige Book hints at inflation. Goldman trading slips. BofA better than expected. A mysterious “single client”. Apple brings cash home. Bitcoin breaks $10,000.
Financial Review by Sinclair Noe for 01-17-2018
DOW + 322 = 26,115
SPX + 26 = 2802
NAS + 74 = 7298
RUT + 13 = 1586
10 Y + .03 = 2.58%
OIL + .33 = 64.06
GOLD – 11.40 = 1327.60
The Dow Industrials closed above 25,000 on January 4th. It took 7 trading sessions to cross the 26,000 milestone, and 8 trading sessions to close above – the fastest-ever traverse of 1,000 points on the Dow. Boeing shares were up 3.5%, or around $12, and contributed about 80 points to that burst higher. A $1 move in any one of the price-weighted Dow’s 30 components equates to a 6.8-point swing. We still have 2 days until a possible government shutdown and Wall Street seems completely unconcerned.
The Federal Reserve published its Beige Book today; this is an observational report from the various Fed districts, published 2 weeks before a FOMC meeting. The economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher. “Most districts said that wages increased at a modest pace,” and “A few districts observed that firms were raising wages in a broader range of industries and positions since the previous report.” Several regional Fed districts noted increases in manufacturing, construction, and transportation input costs, according to the report. Some reported expectations of further wage increases in the coming months, though price pressures were still mixed. “Firms in some districts noted an ability to increase selling prices. Retailers in some districts reported modest price increases and there were reports of rising home prices across the country.”
In a separate report, the Fed said industrial production increased more than expected in December as unseasonably cold weather at the end of the month boosted demand for heating, but manufacturing output barely rose, pointing to moderate growth in the industrial sector. For all of 2017, industrial output rose 1.8 percent, the first and largest increase since 2014.
Earnings reports have been strong, Goldman Sachs notwithstanding. Goldman reported a nearly $2 billion quarterly loss — its first loss in six years — due to a short-term hit from the new tax law. The lack of market volatility also led to a steep drop in trading revenue during the last three months of 2017. Revenue from stock trading fell 14% from a year ago in the fourth quarter while revenues for bond, currency and commodity trading plunged 40% from the fourth quarter of 2016. Goldman shares dropped 3% today. CEO Lloyd Blankfein alluded to the headwinds facing the firm, saying in the company’s earnings release that last year was “a challenging environment ” for its trading business. Blankfein was more upbeat about the future though, saying that he expects a better year “with the global economy poised to accelerate” and that the new tax laws in the United States will give the company a longer-term boost too.
Goldman Sachs said that it took a $4.4 billion charge in the fourth quarter because of the tax law changes. Most ($3.3 billion) was due to the cost tied to bringing cash in foreign subsidiaries back to the United States. The remaining $1.1 billion was a result of revaluing so-called deferred tax assets — previous tax deductions that are worth less following the corporate tax cut. Other big banks have been hurt by the tax changes too. JPMorgan Chase took a $2.4 billion hit when it reported its latest results last week while Citigroup said Tuesday that it took a whopping $22 billion one-time charge. Most banks should benefit from the lower corporate tax rate going forward though — and Goldman Sachs is no exception.
Bank of America reported better-than-expected adjusted fourth quarter earnings Wednesday after a jump in loan growth offset a drop in fixed-income trading. Shares fell though as investors focused on quarterly revenue which fell slightly short of expectations. The bank also posted a charge of $2.9 billion related to the new tax law. Excluding the tax bill-related items, the bank reported: Adjusted earnings per share of 47 cents, versus expectations of 44 cents from analysts polled by Thomson Reuters. Adjusted revenue of $21.4 billion, versus expectations of $21.531 billion. Bank of America shares are up nearly 36 percent over the last 12 months. The stock declined about 2 percent today.
A single company has been blowing a hole through Wall Street bank earnings, reappearing in the fourth-quarter announcements of major banks as the culprit for hundreds of millions in unexpected, one-time losses. It started with JPMorgan last week, which reported a $273 million loss from “a single client,” followed by Citigroup on Tuesday announcing a “single client” was responsible for a $130 million hit in its equities-trading revenue and most of $267 million in credit losses in its Institutional Clients Group. Bank of America announced a $292 million charge-off from a single client, and Goldman Sachs announced a $130 million loss on a loan to one company. While Citi and Bank of America didn’t name names, JPMorgan and Goldman identified the same company as responsible for knocking off hundreds of millions from their financial results: Steinhoff International, a South Africa-based retailer whose stock has cratered following an accounting scandal. Steinhoff, which owns the US furniture chain Mattress Firm, is believed to be the “single client” responsible for the losses at Citi and Bank of America as well. Bloomberg reports lenders had $22 billion of exposure to Steinhoff loans at the end of March.
Tiffany & Co. reported an 8 percent increase in net revenue during the holiday season. Total same-store sales were up 5 percent during the November and December months. In the US alone, same-store sales rose 6 percent. Building on the holiday momentum, Tiffany raised its earnings outlook for fiscal 2017. The changes don’t yet include any effects from new tax legislation.
Apple said it would make a “direct contribution” of $350 billion into the US economy over the next five years. The company said this number does not include ongoing tax payments, or tax revenue generated by wages paid to employees or sales tax on Apple products. Apple said its capital expenditures, a tax payment due to repatriating overseas profits, and investments in manufacturing in the U.S. will account for $75 billion of its contributions. The company also said it will invest $30 billion to create 20,000 new jobs at existing campuses and will also open a new campus in the US. Apple’s announcement is the latest in a series of corporate declarations that companies would increase investment following the passage of a tax bill late last year. Apple “anticipates repatriation tax payments of approximately $38 billion as required by recent changes to the tax law. A payment of that size would likely be the largest of its kind ever made,” the company said. Using the new 15.5 percent repatriation tax rate, the $38 billion tax payment disclosed by Apple means they are planning a $245 billion repatriation, or almost all of their offshore cash holdings.
Despite a handful of high-profile announcements, the recent cuts in corporate taxes haven’t yet had a meaningful impact on American companies’ plans to boost investment or raise workers’ pay. CNBC contacted the 100 biggest US companies by market capitalization and asked if they planned to hike wages because of the tax changes. Only 9 companies in the S&P 100 said they have specific plans to use some of the money saved from the corporate tax cuts to boost worker pay or invest in facilities or charitable causes.
Bitcoin started the morning with another dive – dropping below $10,000, then bouncing back above $10K. Bitcoin has dropped nearly 30% this week and has lost almost half of its $19,343 peak value on December 16. Other popular cryptocurrencies ethereum and ripple also have posted double-digit losses. One virtual currency exchange, Bitconnect, dived 93%. Last week, South Korea banned opening anonymous virtual currency accounts and put in place new laws giving authorities power to shut down digital currency exchanges. Officials are currently weighing halting trading on exchanges. Meanwhile, Chinese officials were stepping-up measures to limit cryptocurrency trading, which is already banned on exchanges.