Financial Review


….Ten-year Treasury note tops 3%. Stocks fall. Earnings disappoint. Cat sees problems with tariffs hitting pricing.  FANGs give up market cap. Apple down on weak demand. 3M can’t stick. Home prices up faster than wages.

Financial Review by Sinclair Noe for 04-24-2018

DOW – 424 = 24,024
SPX – 35 = 2634
NAS – 121 = 7007
RUT – 8 = 1553
10 Y + .03 = 3.00%
OIL – .92 = 67.72
GOLD + 5.60 = 1330.80


The 10-year Treasury yield finally reached 3 percent, a milestone that bond traders were eyeing for months. We knew 3% was coming. The Federal Reserve has telegraphed that rates would move higher and then followed the messaging with gradual, incremental action. Rates are rising, but perhaps not in a hurry. JPMorgan Chase estimates the 10-year yield will end 2018 at 3.15 percent. Goldman Sachs, which has been one of the more aggressive in calling for Federal Reserve rate hikes, reiterated its 3.25 percent year-end call this week. Wall Street sees that rates are rising, but slowly. So, why did 3% spark a selloff? What was expected was that yields reaching 3 percent would trigger automatic trading by algorithms and high-frequency traders. Sophisticated investors probably used the algos to trade on the yields reaching 3 percent, though it’s hard to quantify how big the trading was. That was the catalyst for a sell-off in stocks, but it wasn’t the only reason for stock lemmings to run off the cliff.


We have seen signs of inflation – you can question whether the pricing pressure is from wage push or from trade policy – it doesn’t matter. We are seeing signs of inflation. And then today, yields topped 3% for the first time since 2014. Perhaps a more important level is 3.05%, which is the high set back in 2014. A break above that level would make people question if the bond bull is dead. For now, bond traders are dealing with a deluge of new debt. This week alone, the Treasury is issuing a combined $96 billion of two-, five- and seven-year notes, the largest slate of fixed-rate coupon sales since 2014. In its $32 billion two-year sale, the notes drew a yield of 2.498 percent, the highest since 2008.


Fed officials have largely been sanguine about the stock markets, looking through the pickup in volatility relative to the past couple of years. But that doesn’t mean policymakers are blind to stock market rollercoasters. There is still no certainty that yields will rip through 3%.


Alphabet, the parent for Google, dropped about 4.5% today.  Last night Alphabet reported earnings. They beat on top and bottom lines. Revenue growth was over 20%, which is remarkable for a company as big as Alphabet. But they are spending more and more to compete with their biggest rivals. Other tech giants fell in tandem, with the FANG complex that also includes Facebook, Amazon and Netflix seeing almost $85 billion in market value wiped out. So far, the latest earnings season has done little to validate bulls’ faith, with tech stocks falling an average 2.2 percent in first-day reactions. The trend bodes poorly for Facebook and Amazon when they report in the next two days. Should the pattern continue, it’ll exacerbate pain for FANG investors.


Apple dropped nearly 1.5 percent today as investors’ worries intensified about soft demand for iPhones after a warning from a company that supplies components for smartphones. South Korean chipmaker SK Hynix said following its quarterly report that it expected smartphone demand to stagnate, echoing a similar warning last week from Apple supplier Taiwan Semiconductor. Compounding stock difficulties is an antitrust probe Apple is facing in Europe. European Union regulators announced Monday plans to investigate Apple’s proposed acquisition of music recognition app Shazam. Concerns ahead of Apple’s quarterly report next Tuesday have shaved 9 percent from its stock price in the past five sessions, erasing $80 billion of its stock market value. Apple is down more than 11% since its most recent high at $183.50 on March 13. Tuesday was the first time shares of Apple fell below $163 since February.


I don’t want this to sound like the FANG stocks have been destroyed. The other way to think about this is that they are still titans of technology – and they are on sale at discount prices.


Caterpillar is the world’s biggest maker of construction and mining equipment and often viewed as a bellwether of the global economy. Caterpillar’s first-quarter earnings released early in the morning beat estimates, but company executives later said on a call with analysts and investors that those results “will be the high watermark for the year.” That’s a problem for the stock market – that may be the problem for the stock market. Everybody knew coming into earnings season that profits would be strong, but to justify the lofty price-to-earnings levels that stocks were trading at early in the year, companies would need to be equally bullish in their outlooks. But that is not happening. Based on the companies that have reported so far, earnings-per-share rose by 17.8 percent from a year earlier, above early-season targets of 16.5 percent. But estimates for the next four quarters have declined. The downward pressure on industrials came after Caterpillar’s Chief Financial Officer said on the company’s earnings conference call that it expects “steel and other commodity costs to be a headwind all year.” Trump’s crackdown on steel imports has constrained supplies in the domestic market, inflating costs of the metal. Caterpillar said steel costs for the equipment industry were up about 15 percent in the March quarter.  To compensate, the company is carrying out price increases that would come into effect in the middle of the year. CAT -6.2%. As Caterpillar sank, so too did Cummins, down 4.5%; Cree, down 2.5%; Crane, down 8%; and Freeport McMoRan, down 14.5%.


The text-book example of high-dividend stocks retreating on rising rates didn’t materialize. Telecoms moved higher after Verizon Communications’ first-quarter EPS beat the highest estimate. Revenue also beat expectations, with retail postpaid connections up by 260,000. VZ + 2%


3M shares dropped 6.8%.   The conglomerate and post-it maker’s earnings were basically in-line with estimates, but it trimmed its full-year profit forecast, citing softness in its automotive aftermarket, oral care and consumer electronics businesses.  The price decline of $14.75 subtracted about 102 points off the Dow. The selloff was the biggest one-day post-earnings percentage decline since Oct. 19, 2007. The stock has now shed 22.2% since its Jan. 26, 2018 closing record of $258.63. A decline of 20% or more indicates a stock is in bear market territory.


Shares of Texas Instruments gained more than 4 percent after hours. The semiconductor company announced earnings per share and revenues that beat Wall Street estimates. Guidance for the upcoming quarter was strong on top and bottom lines.


Wynn Resorts stock fell nearly 2 percent post-market. The hotel and casino developer announced a big beat on earnings per shares but just missed estimates on revenues. Its dividend was also increased by 50 percent.


Crude oil surged in recent weeks, and at least part of that move was a result of geopolitical tensions, including the problems in Syria, and tariffs on Russia, and also concerns that Trump will terminate the Iran nuclear deal in two and a half weeks, eliminating roughly 1 million barrels in Iranian output from the market. So, the mere suggestion that the Iranian deal could be salvaged – as virtually all of Europe has insisted and pleaded with Trump – could send oil tumbling. That’s precisely what happened today, when during his press conference with Trump, French President Emmanuel Macron proposed a new Iran deal, noting that a “new deal” would block nuclear activity to 2025.


The S&P/Case-Shiller national index rose a seasonally adjusted 0.5% and was up 6.3% compared to a year ago in February. The 20-city index rose a seasonally adjusted 0.8% and was 6.8% higher than a year ago. Home prices are accelerating. The 6.8% annual gain in the closely-watched 20-city index was the strongest since mid-2014. February’s Case-Shiller data, which actually covers the three-month period ending in that month, was also notable for another reason: the 20-city index finally broke above the peak it last touched in 2006. Very lean supply and outsize demand are keeping home prices booming — especially in the strong economies of the West and other areas scarred by the housing bust. No cities experienced monthly price declines in February. On Tuesday, the Federal Housing Finance Agency said its house price index rose 7.2% in the twelve months ending in February. The FHFA House Price Index covers only homes with mortgages backed by Fannie Mae and Freddie Mac. Phoenix saw prices jump 0.9% for the month; with prices up 6.4% over the past 12 months.


According to the latest BLS data, average hourly wages for all US workers in November rose at a relatively brisk 2.7% relative to the previous year. That is below the Federal Reserve’s projections, but it is not enough to keep pace with rising home prices. According to the latest Case Shiller data, 18 of 20 metro areas in the US saw home prices grow at a higher pace, while 16 of 20 major U.S. cities experienced home price growth of 5.4% or higher, double the average wage growth. In other words, as the disconnect between prices and wages becomes wider, homes become increasingly unaffordable for most Americans.


Commerce Department reports new-home sales ran at a 694,000 seasonally adjusted annual rate in March; that’s 4% above upwardly revised February figures, and the highest pace since November. It was 8.8% higher than a year ago. The median sales price in March was 4.8% higher compared with a year ago.


Consumers’ confidence rebounded slightly in April with a small gain that put the index back near an 18-year high. The consumer confidence index climbed to 128.7 in April from 127 in March. Two months ago, the index hit the highest level since the end of 2000. The survey showed Americans were more optimistic about their own finances and they think jobs are easy to find.

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