Financial Review

An Ugly Week

…Wall Street tumbles for the week, faces key levels of support. Trade war worries. Budget bill signed. New home sales drop. Dropbox IPO jumps. Facebook Sued. Bank of America fined.

Financial Review by Sinclair Noe for 03-23-2018

DOW – 424 = 23,533
SPX – 55 = 2588
NAS – 174 = 6992
RUT – 33 = 1510
10 Y un = 2.81%
OIL + 1.44 = 65.74
GOLD + 18.20 = 1347.80

This was an ugly week on Wall Street. All the gains of 2018 have now evaporated. The Dow is now down almost 1,200 points year-to-date, or right at 4%. The S&P 500 is down 2.75% year-to-date; it is within 3 points of the 200-day moving average; and is now sitting at almost the same level as the low of Feb. 8 – we may find support at this level, but any breach could lead to a big drop – so, it will be very important to see if this level holds on Monday. The Dow was down 11.6 percent since its Jan. 26 high, and hit its lowest close since confirming a correction in February. And just to be clear, the market has been in correction territory since early February, to move out of a correction, we would have to hit a new high. Today, the Dow fell below its Feb. 8 closing low at 23,860 in intraday trade, which could be viewed as a sign of bearish momentum, but we have been in a correction for the past month and a half. The good news is that we’re not getting presidential tweets about the stock market anymore.


The Dow is down 1413 points for the week. For the week, the Dow was down 5.67 percent, the S&P 500 was down 5.95 percent and the Nasdaq was down 6.54 percent, marking their biggest weekly percentage falls since January 2016. The tech heavy Nasdaq 100 dropped 7.3 percent this week, the most since 2015. Facebook fell more than 13 percent for the week, closing Friday just below $160, and wiping out about $75 billion in market capitalization. The Dow and S&P are now on track for the worst March performance since 2001. Even established blue chip names are getting pounded; with 5 stocks in the Dow Industrials now in bear market territory. General Electric is the biggest Dow laggard, down more than 56 percent from its 52-week high, while Walmart has fallen 21 percent, Proctor & Gamble and Merck are both down 18 percent, and energy giant Exxon Mobil has dropped around 17 percent from its highs.


MSCI’s gauge of stocks across the globe shed 1.8 percent. The index lost 3.4 percent this week for its worst week since early February when a spike in volatility had sent markets into a tailspin. The equity markets are getting clobbered, which is not that surprising with fears of a trade war breaking out.  Of course, yesterday Trump announced tariffs on up to $60 billion of Chinese goods. China urged the United States to “pull back from the brink,” but investors fear Trump’s tariffs are leading the world’s two largest economies into a trade war with potentially dire consequences for the global economy. China disclosed its own plans today to impose tariffs on up to $3 billion of U.S. imports in retaliation against U.S. tariffs on Chinese steel and aluminum products. It may be too early to call this a trade war. Recently announced steel and aluminum tariffs have resulted in temporary exemptions for Mexico, Canada, the EU, Australia, Brazil, Argentina, and Korea. European Union leaders called for permanent exemptions for the EU from U.S. metal import duties, saying they reserved the right to respond “in a proportionate manner” to protect the bloc’s interests. The tariffs on Chinese goods are subject to review and public comment – meaning no action till at least May. The negotiating strategy seems to be – take hostages and make demands. We will see if that flies.


Investors moved to safe havens.  The yield on 10-year U.S. Treasury notes finished the week at 2.81%, down from 2.85% last Friday. In Europe, benchmark issuer Germany’s 10-year bond yields hovered close to 10-week lows struck a day earlier at around 0.52 percent. While German bond yields recovered in European trading, they suffered their biggest two-week drop since November. Many investors also turned to the Japanese yen, a currency likely to benefit from a full-fledged trade war.


A month of negotiations between Republicans and Democrats culminated in a deal to raise defense and domestic spending following a bruising fight that triggered a shutdown in January. The deal would keep the government going through September – no shutdown. Then this morning, Trump tweeted he might veto the spending bill. As the day wore on, he eventually signed. There will be no shutdown – at least not an imminent shutdown. The federal fiscal year began Oct. 1. In the end, Trump had to sign the bill—for the military, he said. But he didn’t have to like it. And he says he would not do it again. Over and over again, he talked about defense spending, including reading through a litany of what would be allocated for specific craft in the bill. Meanwhile, more turnover in the White House. H.R. McMaster out and John Bolton in as National Security Adviser.


The Commerce Department said new home sales dropped 0.6 percent to a seasonally adjusted annual rate of 618,000 units last month. The housing market has slowed in recent months as an acute shortage of homes, especially on the lower end of the market, squeezes sales while pushing up prices. The median new house price was $326,800, a 9.7 percent increase from a year ago. The 30-year fixed mortgage rate is hovering at a four-year high of 4.45 percent, according to mortgage finance agency Freddie Mac. In contrast, annual wage growth has been stuck below 3 percent despite the unemployment rate dropping to a 17-year low of 4.1 percent.


New orders for key U.S.-made capital goods rebounded more than expected in February after two straight monthly declines. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 1.8 percent last month. That was the biggest gain in five months.


Dropbox Inc’s shares closed at $28.42, up more than 35 percent in their first day of trading. Dropbox is the biggest tech initial public offering in more than a year. Its IPO priced at $21 per share late on Thursday, $1 above the projected range of $18 to $20, and was several times oversubscribed. And the debut was even more impressive considering the S&P tech index was down 2.73 percent. Dropbox started as a free service to share and store photos, music and other large files, competes with Google, Microsoft and Amazon, as well as Box Inc. It has yet to turn a profit. The 11-year old company reported revenue of $1.1 billion in 2017, up from $844 million a year earlier.


Investors are suing Facebook – you knew this was coming in the wake of the Cambridge Analytica scandal. Facebook shareholder Fan Yuan filed the lawsuit in federal court in San Francisco on behalf of an undisclosed number of investors who bought Facebook shares between February 3, 2017, and March 19, 2018.


The lawsuit said Facebook “made materially false and misleading statements” about the company’s policies, and claims Facebook did not disclose that it allowed third parties to access data on millions of people without their knowledge.


In today’s edition of Banks Behaving Badly – Bank of America Merrill Lynch doctored paperwork on 16 million orders to fool institutional clients into thinking stock trades were taking place in-house when they were not. The bank admitted to “systematically misleading clients” between 2008 and 2013 about how orders were handled for more than 4 billion shares of stock. New York Attorney General Eric Schneiderman said Bank of America agreed to pay a $42 million penalty for the “masking” scheme and violations of New York securities law. Schneiderman’s investigation revealed that Bank of America told clients that trades were taking place in-house when they were really going to electronic market makers such as Citadel Securities, Knight Capital and now-defunct Madoff Securities. Many of these market makers engage in high-frequency trading. Knowledge of looming trade orders can be extremely valuable to these firms, allowing them to jump in front of large trades with ones of their own. That’s why some large institutional investors, such as pension and mutual funds, prefer to conduct trades at in-house “dark pools,” alternative exchanges that offer greater discretion. The New York investigation found that Bank of America “inflated its claims” about its own dark pool.


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