Financial Review

All Talk

…Dow has best day in months. China will talk about trade. Turkey continues meltdown. EM struggles. Walmart rules. Nordstrom racks a beat. JC Penney hardly worth a penny.

Financial Review by Sinclair Noe for 08-16-2018

DOW + 396 = 25,558

SPX + 22 = 2840

NAS + 32 = 7806

RUT + 15 = 1685

10 Y + .02 = 2.87%

OIL + .01 = 65.47

GOLD – 1.00 = 1174.70

 

The best day for the Dow Industrial average since April 10. The S&P and Nasdaq had nice gains, but nothing unusual. The Nasdaq was unable to recover its losses from yesterday. The big winners in the Dow were Boeing, Caterpillar, Apple, and Walmart – in that order. So the gains were more about tariffs than Walmart’s earnings.

 

A Chinese trade delegation will visit the US this month to kick off a new round of talks, the first since negotiations broke down two months ago. Washington has imposed tariffs on $50 billion worth of Chinese goods, prompting Beijing to retaliate. Trump’s administration is threatening further tariffs on $200 billion of Chinese goods, in a bid to pressure US companies to bring production back to the US. China’s commerce ministry reiterated that Beijing opposed trade protectionism and would not accept any unilateral trade restrictions. Both sides appeared to have reached a deal in May, but Trump backed away from the agreement and the two nations have been locked in a tit-for-tat trade war ever since. The last official round of talks was in early June in China, but those talks never really got off the ground. Trump touted his trade agenda, writing in a Twitter post that his tariffs are “leading to great new trade deals.” But so far, he has yet to finalize any trade deals. And today’s announcement was that there will be talks later in the month – not that there will be a deal any time soon. Today’s rally on Wall Street was pure relief, with maybe a dash of a short squeeze.

 

Turkey’s finance minister sparked a recovery in the lira after he addressed international investors, pledging to protect local banks and cut public spending to prevent the country defaulting on its loans. The Turkish lira was up 4% against the US dollar following the conference call. A pledge by Qatar to invest $15bn in the financial sector has also helped stabilize the situation. However, attempts to shore up confidence in the lira were quickly undermined. Treasury Secretary Steven Mnuchin warned that Washington is preparing more sanctions for Turkey.

 

The dollar has risen nearly 2% since Thursday last week. Since April 17, when this move started, the dollar has surged over 8%. That recent surge in the dollar makes dollar-denominated debt across the emerging economies harder to service. After the collapse of the Turkish lira and the Argentine peso, this is particularly the case for dollar-debt and other foreign-currency debt in those countries.

 

Over $200 billion of US Dollar-denominated bonds and loans, issued by emerging market governments and companies will come due during the remainder of 2018. About $500 billion will come due in 2019. They will need to be paid off or refinanced. When financial conditions in the emerging markets get tight, some economies will find it difficult to pay off or refinance that debt because dollar investors are going to be leery and would want to be compensated for large risks – a consideration that was absent as little as a year ago, when Argentina was able to sell 100-year dollar-bonds. As far as these bondholders and creditors are concerned, it will take either an IMF-bailout to make them whole, or a default. Argentina has already made a deal with the IMF to bail out its bondholders. In terms of the USD-denominated debt as percent of GDP – not including other foreign currency debt – Turkey is on the forefront, followed by Argentina. These two countries have gotten hit not only by the USD-appreciation but more importantly by the separate collapse of their own currencies. In Turkey, USD-denominated debt by non-bank borrowers hit a record $195 billion at the end of 2017, or a stunning 23% of GDP. Turkey also has a heavy load of euro-denominated debt, and its total foreign-currency debt now amounts to over 50% of GDP.

 

As foreign currency debt becomes more difficult to service, the default risk rises, and foreign currency investors are then even more inclined to stay away, leading to more capital outflows, and making it nearly impossible to refinance and service that debt – thus speeding up the trip to a default. And it’s not just Turkey. Asia’s dollar-denominated debt, relative to its foreign exchange reserves and exports, has risen significantly since 2009. Notably, the Asian nations that have amassed record amounts of USD debt are also home to the largest technology companies, such as: Tencent (China), Alibaba (China), TSNC (Taiwan), Samsung (South Korea). The tech sector is now 28% of the MSCI EM index. And just a reminder, the largest holder of marketable Treasury securities remains China, with about $1.2 trillion on the books. Just in case you think China has been forced to the negotiating table.

 

Perhaps no single company is a better barometer of economic health than Walmart, the country’s largest retailer. In 2016, the company said more than 40 percent of the U.S. population, or 140 million people, shopped at Walmart on a weekly basis. And now Walmart’s sales growth is better than at any time in the past decade. Walmart closed up 9.3 percent after it posted its highest domestic same-store sales growth in more than 10 years for its second quarter. Walmart reported an increase of 4.5 percent versus the Thomson Reuters estimate of 2.4 percent.

 

Nordstrom reported earnings and sales for the second quarter that topped analysts’ expectations and also raised its outlook for the full year, citing momentum in its online business and robust traffic at Nordstrom Rack. Shares soared more than 13 percent in after-hours trading.

 

Earlier today, J.C. Penney reported a net loss of $0.32 per share for the quarter and missed on revenue by $30 million. Total net sales decreased 7.5% to $2.76 billion compared to the year before. Furthermore, the company is still looking for a new full-time CEO. JCP shares dropped 27% to close the session at $1.76

 

Nvidia’s second-quarter results beat Wall Street sales and earnings estimates, and beat estimates in nearly every sales category, except… Nvidia reported that sales related to mining of cryptocurrencies were much lower than expected in the second quarter, and it is not counting on any sales related to blockchain the rest of the year. Shares dropped about 5% in after hours trade.

 

Teva Pharmaceuticals received Food and Drug Administration approval for generic versions of both the EpiPen and EpiPen Jr. The products are the first competitors cleared by the FDA that are direct generic copies of the EpiPen and could be substituted for the brand-name product by a pharmacist. Other versions of epinephrine auto-injectors are on the market but aren’t considered EpiPen generics. Teva shares rose nearly 6 percent on the news.

 

Chipotle will retrain its entire staff after customers got sick at an Ohio restaurant last month. Starting next week, every Chipotle (CMG)employee will receive a new training on “food safety and wellness protocols.” As of June, the company employed about 70,000 people across roughly 2,450 locations. People reported getting sick after eating at a Chipotle in the Columbus suburb of Powell late last month; the problem appears to be food left out at an unsafe temperature. The latest incident was an unwelcome reminder of Chipotle’s previous struggles with food-borne illness. The company suffered a series of health scares in recent years. In 2016 the company shut down all of its stores for a few hours to talk to employees about food safety. This time, the stores will remain open and the training sessions will be completed next week during employees’ shifts.

 

Construction on new houses increased by less than 1% in July, reflecting a recent slowdown in building that’s likely tied to higher mortgage rates and growing shortages of skilled craftsmen. Housing starts edged up to an annual rate of 1.17 million last month from a revised 1.16 million in June. For the past few years, buyers have been clamoring for more houses and builders have suggested that they’re feeling fine. Yet none of that has translated into enough homes being built to keep prices down and satisfy the needs of most buyers.

 

According to a new report published by the Economic Policy Institute, the chief executives of America’s top 350 companies earned 312 times more than their workers on average last year. The rise came after the bosses of America’s largest companies got an average pay rise of 17.6% in 2017, taking home an average of $18.9 million in compensation while their employees’ wages stalled, rising just 0.3% over the year. The pay gap has risen dramatically, with some fluctuations, since the 1990s. In 1965 the ratio of CEO to worker pay was 20 to one; that figure had risen to 58 to one by in 1989 and peaked in 2000 when CEOs earned 344 times the wage of their average worker. CEO pay dipped in the early 2000s and during the last recession, but has been rising rapidly since 2009.

 

The astronomical gap between the remuneration of workers and bosses has been brought into sharper focus by a new financial disclosure rule that forces companies to publish the ratio of CEO to worker pay. Last year, McDonald’s boss Steve Easterbrook earned $21.7m while the McDonald’s workers earned a median wage of just $7,017 – a CEO to worker pay ratio of 3,101 to one. The average Walmart worker earned $19,177 in 2017 while CEO Doug McMillon took home $22.8m – a ratio of 1,188 to one.

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