Financial Review

After the Deluge

…Spending bill passes. Wall Street looks past trade war but the devil is in the supply chain. Current account deficit drops. Housing starts rise. Global poverty drops. Tilray flies high. Visa, MC to pay $6 bill for swiping. Hurricane costs. Puerto Rico one year after Maria.
Financial Review by Sinclair Noe for 09-19-2018

DOW + 158 = 26,405
SPX + 3 = 2907
NAS – 6 = 7950
RUT – 8 = 1702
10 Y + .04 = 3.08
OIL + 1.32 = 71.17
GOLD + 5.80 = 1204.70


The Senate has approved an $854 billion spending bill, which also includes a short-term stopgap bill to fund the rest of the government through Dec. 7 and prevent a shutdown that would start Oct. 1. It’s the first time the Senate has approved funding for Labor, HHS or Education outside an omnibus bill since 2007. Despite containing only two appropriations bills, the package represents roughly two-thirds of Congress’s 2019 spending. Of the $854 billion, $785 billion fell under agreed-upon budget caps, and the rest came from off-budget funds such as Overseas Contingency Operations. It includes provisions for military pay raises, defense research, increases for Pell Grants and the National Institutes of Health, and workforce development training, among others. The House is out this week but expected to take up the funding legislation next week, ahead of the Sept. 30 deadline to keep the government funded. While Trump could still choose to veto the spending bills, congressional leaders have expressed confidence that the inclusion of the defense bill with the CR will make it difficult for him to do so.


Next Monday, the United States will begin imposing 10% tariffs on an additional $200 billion of Chinese goods.  The White House is reportedly holding out for a promise from China to unilaterally reduce the bilateral trade deficit by $200 billion over the next three years. But the U.S. simply doesn’t produce enough stuff the Chinese need for this gap to be closed purely through China growing its purchases of U.S. goods.


Markets are already pricing in the trade war with China, and the thinking is that it is a minor event. Ten percent tariffs on $250 billion will be partially offset by a devalued yuan. And in the grand scheme the duties imposed are far less than the $1 trillion in share buybacks Wall Street is looking at for 2018. For the first time, consumer goods are going to be directly hit by the new 10% duty, likely causing an immediate increase in prices for US shoppers. Still, the biggest threat is much deeper in the supply chain. The United States did not include rare earth elements, metals used in magnets, radars and consumer electronics, in its final list of tariffs on $200 billion of Chinese goods. China is the world’s largest producer of rare earths and the biggest supplier to the United States. Rare earth elements and minor metals have broad applications in U.S. industry, ranging from jet engines to mobile phones to oil and gas drilling. The United States is aware of the strategic importance of rare earth metals as illustrated by a U.S. law passed last month that bans the purchase of rare earth magnets from China for the military in the 2019 fiscal year. The law clearly highlighted how exposed the nation was to any kind of disruption to the Chinese supply chain. Whether the Chinese will retaliate and use rare earths as a bargaining chip or “strategic lever” in future talks with the United States remains to be seen.


The U.S. current-account deficit fell 17% in the second quarter and touched the lowest level in three years, though the dropoff is unlikely to last. The deficit dropped to $101.5 billion from a revised $121.7 billion in the first quarter. Exports of U.S.-produced oil, industrial supplies and agricultural goods, mainly soybeans, climbed sharply in the spring. In the case of soybeans, American sellers and foreign buyers sought to strike deals before Chinese retaliatory tariffs took effect. tax cuts, meanwhile, have spurred companies to shift billions of dollars in earnings from affiliates abroad to their parent companies in the US; that leaves at least $2.5 trillion still sitting off shore.


Housing starts ran at a 1.282 million seasonally adjusted annual rate in August. That was 9.2% higher than July’s pace, and 9.4% higher than a year ago.


The global population living in extreme poverty has fallen below 750 million for the first time since the World Bank began collecting global statistics in 1990, a decline of more than 1 billion people in the past 25 years. The World Bank defines “extreme poverty” as living on less than $1.90 a day, or about $694 a year. The sum, which is based off measures of poverty determined by many low-income countries, is the amount it takes to afford minimal basic needs.


Medical cannabis company Tilray (TLRY) reached an all-time high during intraday trading, with prices briefly touching $300 per share before trading was halted several times due to volatility. At one point, Tilray shares were up 73% in intraday trade. Tilray was up 38% at $214.06 per share at market close. The company was priced at $17 per share during its July IPO. Shares of Tilray, now the most valuable pot company, surged earlier in the week following comments of growth prospects from CEO Brendan Kennedy in an interview with CNBC’s Jim Cramer Tuesday. Tilray also gained Tuesday after the U.S. Drug Enforcement Administration approved medical cannabis imports for use in medical testing. The company leads a slew of gains from cannabis-related stocks: New Age Beverages (NBEV), which plans to debut CBD-infused drinks, closed up 55% at $4.4, while Cronos Group (CRON) was up 9.8% to $12.7 per share. If it sounds a little crazy – it isn’t. it is a whole lot crazy.


Visa and Mastercard will pay some $6 billion to put an end to one branch of a two-pronged price-fixing case. The case began over a decade ago, with merchants accusing Visa and Mastercard of conspiring to inflate the “swipe fees” that the merchants paid when they swiped a customer’s card. It is believed to be the largest class-action settlement of an antitrust case. The class in this case is 12 million merchants who accept the payment networks’ cards. Retailers are gearing up for the next round in their fight with the world’s biggest payment networks. Tuesday’s settlement addresses only monetary damages associated with the lawsuit. There’s a separate class of merchants fighting for changes to Visa and Mastercard’s business practices. Ending the practices that lead to these anti-competitive fees is the only way to give merchants and consumers full relief. Merchants have said that lowering the amount they pay in swipe fees will also benefit their customers in the form of lower prices.


Amazon is reportedly planning to roll out as many as 3,000 cashierless stores by 2021. Amazon’s first cashierless store opened near its Seattle headquarters in 2016.


United Continental and JetBlue Airways raised baggage fees in August. Today, Delta joined in charging $30 for the first checked bag on domestic routes, up from $25 previously, and $40 for the second bag, up from $35. U.S. airlines’ revenues from baggage and reservation change fees increased from $5.7 billion in 2010 to $7.5 billion in 2017.


Meanwhile, it looks like millions of homes in the Carolinas might have been flooded. Only about 335,000 homes in the two states have flood insurance. The math is simple, and the result is ugly: Many people affected by the storm are going to have to pay for repairs to their damaged homes out of their own pockets. If that sounds familiar, it’s because the same thing happened last year after Hurricane Harvey flooded Houston and after Hurricanes Irma in Florida and Maria in Puerto Rico. Standard homeowners’ insurance does not cover flooding, but coverage is available from the federal government. Anybody can buy it, but not many do. If the National Flood Insurance Program worked as intended, more people would have coverage. But it doesn’t work as intended. The result is that people who need the coverage don’t always get it, and that means they don’t pay insurance premiums, and that means the programs doesn’t have enough money to pay claims. Making it tougher still, many homes that get flooded are not in flood areas and not eligible for insurance coverage. Homeowners might still get federal loans to rebuild after the hurricanes, but the loans have to be repaid. Bottom line, the hurricanes have been very costly.


One year ago, hurricane Maria hit Puerto Rico. To say that the island of 3.3 million has not yet recovered – from the damage or the trauma – is an understatement. One year after Maria, nearly every pillar of Puerto Rican society remains devastated. Puerto Rico already faced a massive debt problem before Maria. After Maria, new austerity measures were implemented. Small businesses, the island’s main job creators, are struggling. Roughly 8,000 of Puerto Rico’s 45,000 small employers have closed up shop over the last year. Four in 10 Puerto Ricans reported losing a job in the storm’s aftermath. Maria also destroyed nearly all agricultural production in Puerto Rico. Eleven months after Hurricane Maria knocked out Puerto Rico’s power, the island’s department of energy announced last month that electricity was fully restored. Early on in the blackout, many Puerto Ricans hoped the power crisis would lead Puerto Rico to build a cleaner, more sustainable power grid. The island generates almost half of its electricity by burning oil or diesel. Instead, the island’s power authority struggled just to function.



Hurricane Maria has brought new urgency to an old debate about Puerto Rico’s status as a United States territory. The island is home to an estimated 2.5 million voting-age American citizens who cannot vote for any representatives in Congress. But the number of Puerto Ricans who can vote in federal elections is growing. An estimated 135,000 Puerto Ricans have moved to Florida, New York, Texas and Pennsylvania since Maria. And they can vote, and probably will vote.






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