Financial Review

7 Straight

…Dow drops again. Nasdaq and Russell 2K hit record highs. FAANGs lead. Trade war exposure. OPEC could benefit. Family separation policy ends. Fed’s Powell concerned about trade. Existing home sales dip. Disney ups bid for 21st Century Fox.

Financial Review by Sinclair Noe for 06-20-2018

DOW – 42= 24,657
SPX + 4 = 2767
NAS + 55 = 7781
RUT + 13 = 1706
10 Y + .03 = 2.93%
OIL + .84 = 65.91
GOLD – 6.80 = 1268.60


The Dow Industrial Average opened in positive territory but then turned negative in the first half hour of trade, going on to post the 7th consecutive loss in a row.  Yesterday, the Dow moved into negative territy for the year to date. The S&P 500 edged higher along with the Nasdaq, with technology shares providing support. The Russell 2000 index of small-capitalization stocks rose to an all-time high. The Russell has outperformed other indexes of late, in part due to the higher domestic focus of its components, which insulates it from trade uncertainty. The Nasdaq closed at a record high. The Trump administration dialed up the rhetoric late Tuesday, accusing China of waging a systematic campaign of “economic aggression”, but traders were tempted to test the waters after Tuesday’s big selloff.


Four of the five so-called FAANG stocks – Facebook, Alphabet, Amazon and Netflix – surged to all-time highs today, with only Apple spoiling a perfect scorecard. Trade war worries have limited the benchmark S&P 500’s gain to about 3.5 percent this year, but the FAANG group, whose businesses are seen as largely immune to trade and tariffs, has surged 10 times in this period. Right now FAANG stocks are leading and acting very well. Even among the FAANGs, there were clear winners. Netflix has surged about 120 percent in 2018, more than double the roughly 50 percent increase in Amazon, the next best stock. A distant third is Facebook, now up about 14 percent for the year after recovering from a slide in the wake of the Cambridge Analytica scandal. Just behind it is Alphabet, with a 11.5 percent gain. Lagging the group with an increase of about 7 percent is Apple. Its stock this year has been weighed down by persistent fears over slowing demand for its new iPhones, as well as exposure to China.


Of course, there are plenty of stocks that do have exposure to a trade war with China. Here’s a quick list of US companies in the Russell 3000 that get 40% or more of their total revenue from China: Qualcomm, Micron Tech, Broadcom, Texas Instruments, Wynn Resorts, and Skyworks Solutions. And while Boeing is often cited as a proxy for trade war tensions with China, they only get about 12% of their revenue from China. If you’re looking for a winner in the US-China trade dispute, consider OPEC. With China threatening to slap a 25 percent tariff on $50 billion worth of US goods, including oil and refined products, OPEC could step in to fill the void if US shale producers get shut out. China has been the largest Asian buyer of U.S. crude with U.S. exports booming thanks to the shale revolution. Chinese buyers could increase purchases of light crude grades from other OPEC members such as Saudi Arabia, Kuwait, Iraq, the UAE and even Iran. Even though Chinese tariffs represented an opportunity for OPEC to sell more crude, the tariffs might lead to oversupply in the United States, potentially pushing oil prices down.


The European Union will begin charging import duties of 25 percent on a range of U.S. products on Friday, in response to U.S tariffs imposed on EU steel and aluminum early this month. The Commission formally adopted a law putting in place the duties on $3.2 billion worth of U.S. goods, including steel and aluminum products, farm produce such as sweetcorn and peanuts, bourbon, jeans and motor-bikes.


Trump has signed an executive order to end the separation of children from their parents when immigrant families are caught crossing the U.S.-Mexico border illegally. The catch and detain policy will continue. The order requires that immigrant families be detained together when they are caught entering the country illegally, although it was not immediately clear for how long. Still no word on specific policy for reuniting children separated from their parents.  Border-crossers aren’t the only targets. Thousands of illegal immigrants with deep roots in their adopted communities are being locked up. Authorities are transferring about 1,600 Immigration and Customs Enforcement (ICE) detainees into federal prisons. Five federal prisons will temporarily take in detainees awaiting civil immigration court hearings, including potential asylum seekers, with one prison in Victorville, California, preparing to house 1,000 people. Trump’s zero tolerance policy has been facing pressure from Democrats and Republicans as well. And today, Pope Francis criticized the administration’s policy of separating migrant families at the Mexican border, saying populism is not the answer to the world’s immigration problems. Meanwhile, three US airlines — American, United and Frontier — on Wednesday asked the federal government not to use their airlines to transport children who were separated from their families under a controversial immigration policy. The airlines responded after reports that claimed migrant children separated from their parents were transported on some flights.


In economic news: The US current-account deficit, which measures the nation’s debt to other countries, rose 6.9% in the first quarter. The US recorded a larger deficit in goods in the first three months of the year. The bigger trade gap largely reflects a stronger economy in which Americans can afford to buy more imported goods than citizens in other countries. The higher cost of imported oil also played a role.


The National Association of Realtors reports existing-home sales ran at a seasonally-adjusted annual 5.43 million rate in May, down 0.4% from April. Sales of previously-owned homes fell for the second straight month, as a supply shortage continues to bite the market. In May, sales were 3% lower than a year ago, and April’s selling pace was revised down. At the current pace of sales, it would take 4.1 months to exhaust the available inventory, well below the 6 months that’s traditionally been considered a sign of a balanced market. Total inventory in May was 2.8% higher than in April, but 6.1% lower than a year ago. Properties typically stayed on the market for 26 days in May. As supply dwindles, prices surge. In May, the median sales price for an existing home was $264,800, a 4.9% annual increase. There aren’t enough homes to buy, whether existing or new, so prices for the little inventory that is available get bid up, keeping homes out of reach, and on and on.


Fed Chairman Jerome Powell spoke at a forum in Portugal alongside ECB President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda and the heads of several other central banks. The US labor market is now as strong as it has been in almost 50 years, but Chair Powell says the economy is not on the verge of repeating the outbreak of inflation last seen in the 1970s, despite the obvious parallel of tight labor markets. Powell said there seemed to be “rising” concern from business leaders about trade friction. For the first time the central bank’s business contacts are talking about postponing hiring, investment and decisions, but this talk hasn’t yet shown up in the economic data. European Central Bank President Mario Draghi said he saw “no ground to be optimistic” about the trade tensions. Lessons from past trade disputes are all very negative, he said. Draghi said he was worried about the U.S. and other countries were beginning to take unilateral actions in what had been a multilateral world.


Walt Disney raised its bid for the bulk of Twenty-First Century Fox’s film and television assets to $71.3 billion, sweetening its deal with cash as it looks to beat Comcast Corp’s $65 billion offer. The new cash-or-stock deal may be attractive to Fox’s largest shareholder, Rupert Murdoch, who owns 17 percent voting shares along with his family. The Murdochs face a large capital gains tax bill under Comcast’s all-cash offer. Disney’s previous offer was all stock. Fox’s board of directors said Disney’s latest offer was “superior” to the proposal made by Comcast. Disney’s revised offer of $38 a share, which would be split 50-50 in cash and stock, is $10 a share higher than Disney’s first bid in December 2017. Comcast’s last bid was for $35 a share in cash. Disney will also take on about $13.8 billion of Fox’s net debt, implying a total transaction value of about $85.1 billion. Now, we’ll see if Comcast wants to up the ante again.


Oracle shares fell 7.5% after an earnings beat was followed up by weak guidance. La-Z-Boy dropped 4.5% a day after the furniture company missed revenue estimates. Synaptics gained 11.5% after the computer-component group confirmed late Tuesday that it is pursuing a merger with rival Dialog Semiconductor. AT&T fell 1.2% after a report that the telecommunications group is in talks to buy advertising technology company AppNexus. Late Tuesday, Starbucks cut its forecast for fiscal third-quarter same-store sales growth. Today, CEO Kevin Johnson admitted that the coffee chain has seen growth slow over the past two to three years and that it will take discipline to get things back on track. Starbucks shares dropped 9%.


Instagram is officially diving into long-form video. The new video hub, called IGTV, will host vertical videos as long as 60 minutes. The platform is more suited to mobile use than YouTube. The Facebook-owned photo-sharing app has previously dealt in still images and videos of up to 60 seconds. IGTV will be ad-free for now as Instagram focuses on engagement, but ads are a possibility in the future. Instagram now has 1 billion monthly active users. That’s from the 800 million reported in September.


Micron Technology continued to post huge gains in profit and revenue; profit for the quarter doubled from a year ago and revenue climbed 40%. Micron also raised its guidance for the current quarter. Micron’s stock has been juiced by higher prices for its core product, computer memory, which Micron has attributed to demand from cloud-data centers, especially in China. Micron gained 2.6% in after-hours trade.

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