Financial Review

8 Straight

…Losing streak stretches. EU launches retaliatory tariffs. SCOTUS rules on online tax. Krzanich out at Intel. OPEC meets to ponder output.

Financial Review by Sinclair Noe for 06-21-2018

DOW – 196 = 24,461
SPX – 17 = 2749
NAS – 68 = 7712
RUT – 18 = 1688
10 Y – .03 = 2.90%
OIL + .13 = 65.84
GOLD – .70 = 1267.90

 

The Dow Industrials posted its 8th straight losing session, the longest streak since March 2017. The Dow is now negative year-to-date. The S&P 500 declined 0.6 percent as energy shares fell 1.9 percent.The Nasdaq composite pulled back 0.9 percent erasing earlier gains, led by declines in Amazon and Alphabet. The Nasdaq reached record highs earlier in the week, but is down 0.4 percent week to date. Meanwhile, the Dow and S&P 500 are down 2.5 percent and 1.1 percent, respectively, for the week. Auto makers fell, with General Motors, Ford and Fiat Chrysler all sliding at least 1.5 percent. The move lower followed a profit warning from German car manufacturer Daimler, which said its bottom line could be affected by the U.S.-China trade tensions. Daimler has big factories in the US that export to China.  Mercedes-Benz had record sales in the first three months of this year, led by China, where sales increased by 17%. But Daimler, the owner of Mercedes-Benz, said this year’s earnings from car sales were expected to be “slightly below the previous year”. Daimler down 4%, and VW dropped 2.4%.

 

Tomorrow, the European Union will launch retaliatory tariffs against US exports. The move comes after Trump imposed steep duties on steel and aluminum earlier this month. American exports such as blue jeans, motorbikes and bourbon whiskey will be targeted. Brussels drew up the list of products in March when Trump initially proposed the 25% tariffs on steel imports and 10% on aluminum, which also target Canada, Mexico and other close US allies. Cranberries, orange juice, sweetcorn and peanut butter are among the other goods targeted. Many of the products the EU has in its sights are specifically chosen to have maximum political effect. Bourbon whiskey is produced in Kentucky, the state of Senate majority leader Mitch McConnell. Orange juice is a key export for Florida, a swing state in the US elections. The EU tariffs will affect just over $3 billion worth of US goods, but EU trade officials say those levies could be removed if Washington removed its metal tariffs.

 

The U.S. Supreme Court ruled internet retailers can be required to collect sales taxes in states where they have no physical presence. If you’ve enjoyed some tax-free shopping online, you will likely have to pay more for those items. Big online retailers like Wayfair and Overstock will likely be required to collect sales taxes in every state. GlobalData Retail estimates the additional costs for consumers could be up to $15.2 billion a year.

 

However, Amazon, which dominates the online shopping space, is expected to stay largely unaffected. This is because Amazon has already been collecting sales tax for its own products in most U.S. states where the e-commerce giant has warehouses and fulfillment centers.

 

This may not be the case for third-party sellers on Amazon marketplace, which account for nearly half of its total sales. With the Supreme Court decision in this case, South Dakota v. Wayfair, those third-party retailers may have to start collecting sales tax. Retailers are already operating on thin profit margins, so it’s likely consumers will absorb the costs in the form of higher prices.

 

The ruling is a win for brick-and-mortar retailers that have long asked for a level playing field. For a big retailer like Walmart, which has brick and mortar as well as a significant online presence, it might not be a big change; Walmart already charges and remits sales tax in most states since they have a physical presence across the nation. While large online retailers have the resources to cope with collecting sales tax, smaller individual sellers on Amazon marketplace and other platforms may have a hard time complying with the court decision. There are over 10,000 tax jurisdictions across the U.S. because of county and city taxes. The challenge for smaller players will be significant and the concern here is that complexity could stymie innovation and entrepreneurship. Or the small players could get a pass, maybe an exemption for small outfits that sell less than $100,000 of goods or services into a state or they could escape scrutiny because of the scale. The court’s opinion didn’t address the new burden placed on small online sellers but mentions that technology solutions could contain the costs of compliance. Amazon, for example, has already developed systems to collect and remit sales tax on behalf of third-party sellers. It has been doing so in Washington since this year, after the state passed a law mandating the collection of online sales taxes from retailers that do not have a physical presence in the state. Online retailers that host small businesses, like eBay and Etsy will probably be responsible for collecting the sales tax. Small businesses selling goods on these sites will charge their customers any additional sales tax. Sellers may also see increased administrative costs as they manage this new sales tax regime.

 

Amazon dropped just over 1%, Walmart gained 0.7%, Overstock.com down 7%, Wayfair down 1.6%. eBay down 3.2%. Etsy dropped 1.4%

Brian Krzanich is no longer the chief executive of Intel, the world’s largest chipmaker, according to a statement from the company this morning announcing his resignation. The reason: Krzanich “had a past consensual relationship with an Intel employee,” which Intel says violates the company’s non-fraternization policy. Put differently, Intel is saying that in the past Krzanich had an affair with someone else who works at Intel, probably someone under him, since he’s been an executive for decades, and that’s against the rules. Krzanich is married with two children. Now the company’s chief financial officer, Robert Swan, will serve as Intel’s interim CEO.

 

By most accounts, Krzanich had been doing a pretty good job. He has been the top exec at Intel since 2013 and had been trying to diversify the company’s output beyond the chips that are nestled inside home computers and smart phones. The stock has performed quite well over the past few years. Last summer there was a problem with a security in Intel chips and Krzanich reportedly sold about $39 million of his personal stock right before that story went public. An inappropriate stock sale didn’t sink him, but fraternization did, or at least it was the final straw. By expelling Krzanich, Intel is clearly trying to signal it holds its corporate leadership to high standards of workplace behavior. We don’t know what happened: who complained, what motivated the complaint, when it happened, and what kind of power dynamics were involved. Whatever went down, clearly internal disciplinary procedures weren’t going to cut it, perhaps because there was a possibility details of the relationship could leak. After all, Intel felt it was prudent to share that it had to do with a “consensual affair.” Still, the dismissal of a CEO is a big deal—and even if Krzanich did violate rules, his exit counts as a surprise. Intel shares dropped about 2.4% today.

 

The world’s major oil-producing countries are under pressure from the US, China and Russia to pump more crude and bring down oil prices. But OPEC’s crunch meeting in Vienna on Friday finds the oil cartel divided after nearly two years of unity over production curbs, which were due to run until the year’s end. Saudi Arabia and Russia are leading the push to boost supplies; Iran, Iraq and Venezuela are opposed to a significant increase. Since OPEC and Russia agreed in late 2016 to curb production in a bid to rebalance world supply and demand, crude prices have jumped 55%. Brent crude, the international benchmark, recently hit highs of $80 a barrel, raising inflation fears and concerns it could act as a brake on world economies. Prices have since fallen back slightly, to around $74, on market expectation that the OPEC meeting will result in an agreement to increase crude production. Higher oil prices spurred a jump in output from US shale fields, but not enough to offset the output reductions by OPEC and its allies.

 

Until recently, many observers thought this week’s meeting would likely just mark an easing of the cuts, not a reversal. The US changed that calculus in May by promising to reimpose sanctions on Iran and threatening sanctions on European companies that did business there. Iran supplies 4% of the world’s oil, so its expected drop in exports will cause a shortfall. Supply has already been dented by production freefall in crisis-hit Venezuela. Saudi Arabia and Russia have the capacity to pump more oil; Iran, Iraq, Algeria and Venezuela do not, and have nothing to gain from higher production and lower prices. While OPEC production cuts pushed prices higher, supply is not the only factor. Strong economic growth globally has driven surprisingly high demand for crude and shows no sign of stopping. The International Energy Agency is forecasting demand to hit 100m barrels per day next year. That appetite should create a floor under prices. Today, light sweet crude gained on news of inventory draws in the US.

 

The Conference Board said its leading economic index rose 0.2% in May. Although it’s a decent gain, the index had climbed twice as fast in April and March. A measure of current conditions — or how the economy is doing right now — rose 0.2%. A “lagging” index that looks back at the past several months climbed 0.5%. The leading economic index still points to solid growth but the current trend, which is moderating, indicates that economic activity is not likely to accelerate.

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