Financial Review

Spring Break

…..Xi in Florida. Syrian options. Senate goes nuclear for Gorsuch. Devin Nunes recused. Glass-Steagall reconsidered. Kashkari calls out Dimon. States downgraded. CMBX, a short trade crowded. Taser-AAXN

Financial Review by Sinclair Noe for 04-06-2017

 

DOW + 14 = 20,662
SPX + 4 = 2357
NAS + 14 = 5878
RUT + 12 = 1364
10 Y – .02 = 2.34%
OIL + .55 = 51.70
GOLD – 3.80 = 1252.60

Yesterday saw a big reversal – from triple digit gains on the Dow to a loss at the close. Today’s trading followed that pattern, but not the magnitude.

 

President Trump flew to Florida to hold his first meeting with Chinese President Xi Jinping, facing pressure from a crisis with North Korea, and also working to make good on promises for trade concessions. The US and China account for one-third of the global economy.  The two countries not only drive the world economy but also rely critically on one another, a fact that should moderate the decisions of these two strong-willed leaders. Overall, the U.S. rang up a $347 billion trade deficit with China last year, with California responsible for roughly a third of that amount. About 30 states imported at least $1 billion more in Chinese goods than they exported, according to data from the International Trade Administration, an arm of the U.S. Department of Commerce. Tough actions could end up harming many American consumers and businesses. Bloomberg Intelligence Chief Economist Michael McDonough writes: Shoppers at Wal-Mart and Target would see an immediate surge in imported goods costs. U.S. corporations selling into or producing in China would see lower profits. The promised benefits — a return of U.S. manufacturing jobs — appear uncertain. High labor costs, automation and sticky supply chains all make it difficult for firms to relocate back to the U.S. This suggests the Trump administration might be content with symbolic wins, rather than major sanctions.

 

The Pentagon and the White House are in detailed discussions on military options to respond to a poison gas attack in Syria that killed scores of civilians, and which Washington has blamed on the Syrian government. Trump said today that “something should happen” with Assad after the attack, but stopped short of saying he should leave office. Secretary of State Rex Tillerson said however, there was no role for Assad in Syria in the future. Any US action against Syria’s government would open a new front in Syria’s fighting, with consequences that are difficult to foresee. Entering into such a confrontation might complicate the fight against ISIS and potentially draw in Russia. Possibilities for military action reportedly include striking the Syrian air force or specific military targets.

 

Senate Republicans voted to strip Democrats of the power to filibuster President Trump’s nominee to the Supreme Court, invoking the so-called nuclear option. Senators voted 52-48 along party lines to change the Senate’s precedent, lowering the threshold for advancing Neil Gorsuch from 60 votes to a simple majority. They then immediately voted 55-45 to advance the nominee to a final confirmation vote, which is expected to happen Friday afternoon. Senators on both sides lamented the escalation of partisan tactics over Gorsuch’s nomination and warned it would erode the fabric of the institution, which has traditionally protected the rights of the minority party.

 

House Intelligence Committee Chairman Devin Nunes temporarily recused himself today from all matters related to the committee’s ongoing probe into Russia’s interference in the presidential election, as House investigators look into ethics allegations against him. Nunes said in a statement that he decided to recuse himself after complaints were filed with the Office of Congressional Ethics about his leadership. Nunes called the charges “entirely false and politically motivated,” but said his recusal would be in effect while the House Ethics Committee looks into the matter. The House Ethics Committee released a statement saying it had “determined to investigate” allegations that “Nunes may have made unauthorized disclosures of classified information, in violation of House Rules, law, regulations, or other standards of conduct.”

 

White House economic adviser Gary Cohn said he supports bringing back the Glass-Steagall Act, a Depression-era law that would revamp Wall Street banks by splitting their consumer-lending businesses from their investment arms. The National Economic Council director, also a former Goldman Sachs president, expressed support to lawmakers for a banking system where firms would focus primarily on trading and underwriting securities or issuing loans. Big banks have strongly opposed such a move that would fundamentally overhaul their business. Reinstating the law, which was repealed in 1999, has not attracted significant attention in Congress, but advocates in the White House and both parties now argue it would provide critical safeguards to prevent another financial crisis.

 

Minneapolis Federal Reserve President Neel Kashkari criticized JPMorgan Chase CEO Jamie Dimon over what he contends are unrealistic views on core U.S. banking regulations. Dimon’s assertions in a letter to shareholders this week that government-imposed capital requirement for big banks are holding back lending and that relaxing them could spur economic growth “are demonstrably false,” Kashkari said in a blog entry posted to the Minneapolis Fed’s website. In his letter, Dimon lamented that JPMorgan is constrained in lending because of capital demands. In response, Kashkari noted that the bank has bought back $26 billion of its own stock in the last five years, using money that he says could have been loaned to customers. One thing Kashkari and Dimon did agree on: “reducing regulatory complexity.” But Kashkari is continuing to argue that higher capital can replace other regulations while Dimon said that there is already “excess capital in the system.”

 

A federal judge in Detroit said he plans to name former FBI director Robert Mueller to oversee nearly $1 billion in Takata Corp restitution funds as part of a Justice Department settlement. In January, Takata agreed to plead guilty to criminal wrongdoing and to pay $1 billion to resolve a federal investigation into its air bag inflators linked to at least 16 deaths worldwide. As part of the settlement, Takata agreed to establish two independently administered restitution funds: one for $850 million to compensate automakers for recalls, and a $125 million fund for individuals physically injured by Takata’s airbags who have not already reached a settlement.

 

Even with the US economy boasting impressive job growth and domestic equity markets near record highs, a fragmented recovery has left many states struggling to close budget deficits nearly a decade after the 2008 financial crisis. The broad recovery has benefited large, economically diverse states like California and Texas, ratings agencies say, while states heavily dependent on oil revenues, like North Dakota and Alaska, and those like Illinois that are grappling with large unfunded pension obligations, have seen budget deficits bloom. That has left those struggling states with painful decisions over spending cuts and tax increases, and ill prepared to deal with another economic downturn or cuts to federal money tied to the Medicaid program.

 

S&P Global has downgraded 11 states compared to just two upgrades since January 2016. It has 11 states on negative outlook, which means the ratings agency believes more than 20 percent of states are in danger of a credit downgrade. According to a recent report by the Center on Budget and Policy Priorities, half of the states face budget shortfalls despite overall economic growth and lack the revenue needed to maintain services at existing levels in 2018. No state has defaulted on its public debt since the 1930s. Despite many near misses more recently, the possibility of any state going under financially is remote at best.

 

Wall Street’s bet against empty malls is getting too crowded, according to Citigroup analysts, who instead recommend wagering against individual retailers as the “next big short.” The strategy differs from the one pursued by a growing number of hedge funds, which have wagered against mall properties through CMBX derivatives indexes that tracks commercial mortgage-backed securities. The prevailing theory is that failing brick-and-mortar retailers will mean higher vacancies and bankruptcies for mall operators, with losses inflicted on CMBS holders. But the trade has become so crowded in recent weeks that betting the index will drop even further is a longshot. Retailers have been struggling for years as consumers defect to online merchants such as Amazon and shift spending to experiences such as dining and travel instead of merchandise. Mall operators are under pressure from anchor stores such as J.C. Penney and Macy’s, which have announced plans to shutter stores, and Sears Holdings has raised doubts about its survival.

 

Yesterday we told you Payless ShoeSource was filing for bankruptcy protection and closing nearly 400 stores. The list of store closures was released today, and 7 stores in Arizona will be shut down.

 

Taser International  will change its name and ticker – the new name is Axon. A-X-O-N and it is launching a program to equip every US police officer with a body camera, including supporting hardware, software, data storage and training, all free for one year. Axon’s aim is to provide police departments in the United States with the technology so that officers — frontline officers in particular — can effectively try it, learn how to use it and offer insight on how best to implement it. While Taser will remain one of the company’s trademark products, the company attributed its name and ticker change to changing times and a shift in the focus of their business. The new ticker symbol is AAXN

 

The number of Americans who applied for unemployment benefits near the end of February fell by 19,000 to 223,000, setting a fresh post-recession low and illustrating the strength of the labor market. We’ll find out more tomorrow with the release of the March Jobs Report. Economists’ estimates are calling for still-solid gains of 175,000 in the public and private sectors, but that would be down from an average pace of about 237,000 the first two months of the year. The recent strength in the labor market could actually make it tougher for employers to find skilled workers.

 

 

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