Financial Review

$70 Oil

— Oil tops $70; waiting on Iran decision. Merger Monday: Blackstone-Gramercy, Athena Health, Comcast-Sky, Nestle-Starbucks deal. Android Things. Apple record. Berkshire annual meeting.

Financial Review by Sinclair Noe for 05-07-2018

DOW + 94 = 24,357
SPX + 9 = 2672
NAS + 55 = 7265
RUT + 13 = 1578
10 Y + .01 = 2.95%
OIL + .28 = 70.00
GOLD – 1.40 = 1314,60


The Dow Jones industrial average gave back more than half of a 200-point intraday gain, while the S&P 500 held on for moderate gains. The major averages were first boosted by strong gains in energy stocks. The Energy Select Sector SPDR Fund (XLE) rose as much as 2.3 percent before closing 0.1 percent higher. For most of the session, crude oil was trading well above $70 a barrel, until a Trump tweet that he will announce a decision on the Iran nuclear deal tomorrow. Trump faces a May 12 deadline to either continue suspending sanctions targeting Iran’s oil exports or snap the penalties back into place. Refusing to grant the sanctions relief would imperil the nuclear agreement and potentially put the United States on a diplomatic collision course with some of its closest allies and trade partners. The decision also has implications for the oil market because Iran is OPEC’s third largest exporter.  Trump could waive sanctions as he gears up for nuclear talks with North Korea, putting the Iran decision off until the Korean crisis is resolved. Or the Trump administration could restore sanctions but offer a generous grace period for compliance. That might buy time to continue negotiating with European leaders, who want to keep the deal in place.


In recent months, oil prices have risen to levels not seen in 3 ½ years. Today, the rally was focused on the possible reinstatement of sanctions on Iran; however, OPEC’s efforts since the start of last year to curb global production has probably been the biggest influence on crude values, along with growing demand for oil and Venezuela’s output woes. The Venezuelan output cuts just helped OPEC achieve their global production cuts a little faster. Iran’s current oil production stands at 3.8 million barrels a day—up almost one million barrels since the sanctions were lifted in 2015. So if the U.S. decides to reimpose sanctions, the oil market could lose just under 1% of total global production, and we could expect to see oil prices pop by $5 to $10 per barrel. If sanctions are reinstated, other countries could make up the difference, but it would not be instantaneous. And of course, when prices jump, demand drops as people cut back on driving and try to conserve.


Nestle agreed to pay $7.15 billion to Starbucks to for the rights to sell the coffee chain’s products globally. Starbucks shares briefly rose before trading slightly lower.


Meanwhile, Blackstone reached a deal with Gramercy Property Trust to buy it for $7.6 billion in cash. Gramercy’s stock shot up more than 15 percent.


AthenaHealth shares jumped 16% in Monday after activist investor Elliott Management said it plans to acquire the company for $160 per share in cash, in a deal valued at about $7 billion. AthenaHealth shares closed at $126.08 per share on Friday. Elliott already has an about 9% stake in AthenaHealth, and previously approached the company about taking it private.


Cable operator Comcast has formally notified the European Commission of its intention to bid for Britain’s pay-TV group Sky, starting the clock on a review. Comcast is racing to get ahead of Rupert Murdoch’s Twenty-First Century Fox in the battle to buy the European company, and the notification in Brussels is a key development. Comcast, the world’s biggest entertainment company made an informal $30 billion bid for Sky in February, taking on Fox which is in the final stages of its own bid to buy the 61 percent of Sky it does not already own. Comcast made its bid formal in April and the notification in Brussels starts the clock on the regulatory review.


Walmart is likely to announce its much-anticipated deal to buy a controlling stake in Indian e-commerce player Flipkart before the end of this week. Walmart will likely acquire a stake of about 60 percent in Flipkart, while Alphabet will get a roughly 15 percent stake in the online marketplace for about $3 billion, putting total valuation of Flipkart at about $20 billion.


The Federal Reserve said consumer credit in March grew at a seasonally adjusted annual rate of 3.6%, or $11.6 billion, to mark the slowest gain since September. Nonrevolving credit such as student and auto loans grew 6%, the third straight month of growth around that level. Revolving credit, namely credit cards, fell 3%, marking the second drop in a row. It’s still narrowly holding above the $1 trillion level. Despite rising levels of debt, loan growth remains at historically low levels. Moreover, as a percent of assets, household liabilities continue to fall, suggesting households are better capitalized.


Is now a good time to buy a house? In Gallup’s most recent survey, far more Americans said yes than no, although the 65% response rate was down from 67% last year, and down even more from 74% in 2014, when the housing recovery was kicking into high gear.  Gallup first asked the question back in 1978, and the survey firm notes that the percentage of Americans saying it’s a good time to buy has never fallen below 50%. The poll also asked whether respondents thought home prices in their local area will rise, and 64% said yes — the highest since 2005. Of course, real estate prices took quite a tumble shortly after 2005.


The dollar rose to fresh 2018 highs. The euro broke below $1.19 for the first time this year. Investors increased bets that rising U.S. interest rates would continue to boost the dollar, while traders unwound their bearish positions on the greenback. Worries over inflation and interest rates, along with tariff and geopolitical tensions, have overshadowed a solid earnings season, which is on track to record its best quarter in seven years. Nearly 80 percent of the 417 S&P 500 companies that have reported so far have topped profit estimates. That is well above the long-term average of 64 percent and the average of 75 percent over the past four quarters.


Richmond Fed President Thomas Barkin, in his first public speech, said today that he wants interest rates to go higher since the economy is growing strong with low unemployment. Barkin, who joined the Richmond Fed in January, said that the level of the fed-funds rate target is still boosting the economy, or stepping on the gas. It is “hard to argue” this is the correct policy stance with strong growth, low unemployment, and stable inflation close to the Fed’s 2% target. Barkin said, “In the current robust environment, we don’t see the risk [of raising rates] of being significantly high.” The April Jobs Report, which was published by the Labor Department on Friday, showed the unemployment rate had dropped to 3.9%, the lowest level in 18 years. And while that was good news, wages remained flat. Barkin is right about one thing – we still need to be stepping on the gas.


Android Things was first shown off back at Google’s Developers’ Conference in 2016, and now, two years later, Google’s nebulous internet of things platform is finally getting an official release ahead of the 2018 edition of Google’s annual developer conference. So what is Android Things, you ask? Well simply, it’s another variant of the Android operating system like Android TV or Android Automotive, except this version has been designed specifically to perform best on IoT devices, like smart thermostats, air quality monitors, and all sorts of little gadgets that don’t really need a full-blown user interface like you’d find on a smartphone or laptop.


Share of Apple closed up $1.33, or 0.7%, to close at a record $185.16. The stock got a 4.4% lift last Wednesday, after Apple reported fiscal second-quarter profit and revenue that beat expectations, and a further 3.9% boost on Friday, after Warren Buffett said he bought 75 million more Apple shares during the first quarter. Apple is currently the most valuable U.S. company with a market capitalization of $910 billion. For Apple to reach the much-anticipated $1 trillion valuation goal at the latest share counts, the stock would have to close above $203.45, which is $18.29, or 9.9%, above current levels.


This past weekend Berkshire Hathaway hosted its annual shareholders meeting. Most shareholder meetings are rather dry, but the Berkshire meeting is more like an event. Tens of thousands of investors descended on Omaha, Nebraska, over the weekend to hear Warren Buffett and Charlie Munger speak about business and the economy and the billionaires’ version of homespun wisdom. The first question Warren Buffett was asked at Berkshire’s event on Saturday was whether he was “semi-retired,” having given four lieutenants oversight over the company’s operating businesses and some investments. Buffet gave a half joking answer, “I’ve been semi-retired for decades.”


“Warren is very good at doing nothing,” Vice Chairman Charlie Munger quipped. How long Buffett and Munger stay on is more serious. Buffett is 87. Munger is 94. And that means change is likely soon. This might be the last shareholder event with both Warren and Charlie, or it may go on a few more years, but not much longer. In January, Buffett tapped longtime executives Greg Abel and Ajit Jain to oversee Berkshire’s business units, making them front-runners to succeed him as chief executive. He has also for several years given Todd Combs and Ted Weschler some Berkshire money to invest. They could become chief investment officer. But none has Buffett’s and Munger’s public profile, magnetism, or history of investing success. Buffett’s track record is unparalleled. From 1965 to 2017, Berkshire Hathaway’s rising market value generated a 20.9 percent annual return compared to S&P 500’s 9.9 percent, resulting in a cumulative gain of 2,404,748 percent versus the market’s 15,508 percent return.


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