Financial Review

And Bounce

…It was an ugly week but markets bounced to the close. Bank earnings: JPM, Citi, Wells Fargo. China records a record trade surplus with US. Facebook breach update. Hurricane Michael’s wake.

Financial Review by Sinclair Noe for 10-12-2018

DOW + 287 = 25,339
SPX + 38 = 2767
NAS + 167 = 7496
RUT + 1 = 1546
10 Y + .01 = 3.14%
OIL + .54 = 71.51
GOLD – 6.10 = 1218.50

Yesterday we told you we were expecting a strong open for today’s session; we got it. The Dow opened about 400 points higher. Beyond that, we had to see what the markets offered. And what happened for most of the session was that stocks drifted lower; by shortly after lunch, the Dow slipped into negative territory; and that resulted in a “buy the dip” rally. Today’s rally snapped a 6-session losing streak, but it wasn’t enough to salvage a nasty week. For the week, the S&P fell 4.1%, the Dow fell 4.2%, and the Nasdaq slipped 3.7%. Wednesday’s 800-point slam on the Dow, was the third-worst single-day point loss in market history. And it might be reasonable to expect more pain in the markets, in spite of today’s bounce; certainly, more volatility in the short term. Just 19% of S&P 500 stocks remain above their short-term 50-day moving average. Meanwhile, about 75% of the S&P 500’s constituents, or about 380 companies, are in correction. Of those, 164 stocks have fallen by 20 percent or more from their highs, establishing them in a bear market. While technology stocks have born the brunt of this week’s selling, companies across the 11 major sectors have felt the pain. The stocks that have fallen most from their 52-week highs also include consumer discretionary and staples, health care, financials and industrials. The technology sector’s biggest boosts were Apple, and Microsoft which rose more than 3.0 percent. Visa and Mastercard both climbed almost 5.0 percent, boosted by strong credit card sales included in bank earnings reports.


JPMorgan Chase third quarter profit rose to $8.38 billion, or $2.34 a share – beating estimates of $2.25 per share. JPMorgan also beat revenue estimates. Banks generally perform well in a rising interest rate environment. In a conference call with analysts, CEO Jamie Dimon said higher rates could eventually put a halt to the nearly decade-long economic growth cycle. Dimon said the benchmark 10-year note yield could reach 4 percent. He then reeled off a list of geopolitical issues that could derail economic cycle: the Trump administration’s trade war with China (although he is optimistic there will be a resolution), Brexit, the unwinding of bond-purchasing programs by central banks around the world, as well as flareups across Europe, the Middle East and Latin America including in Italy and Turkey.  Here’s the quote from Dimon: “The U.S. and the global economy continue to show strength, despite increasing economic and geopolitical uncertainties, which at some point in the future may have negative effects on the economy.” So, it’s good, could be better. Which sounds kind of political for an earnings call.


Citigroup reported better-than-expected earnings for the third quarter on Friday as the company’s bottom line received a boost from lower corporate taxes. Citigroup’s overall sales totaled $18.3 billion in the third quarter, slightly below estimates and roughly flat on a year-over-year basis. Citigroup said its effective tax rate fell to 24 percent in the third quarter from 31 percent a year earlier. This helped its third-quarter profit grow by 21.8 percent on a year-over-year basis.


Wells Fargo posted earnings per share that just missed estimates. Net income was $6 billion in the quarter, up 33 percent from last year. Revenue 0f $21.9 billion just topped estimates. Wells Fargo is working on cutting costs. In September, it announced plans to cut 5 percent to 10 percent of its workforce over the next three years as part of an ongoing turnaround plan. Wells employs 265,000 people.


All three banks were able to grow their net interest margins, a key measure of the difference between interest collected from loans and interest paid on deposits. JPMorgan Chase squeezed the largest boost in net interest margin, widening its spread by 14 basis points year-over-year and 5 basis points quarter-over-quarter. The company was able to improve its earnings in part because it expanded core loan growth by 6% year-over-year. Citigroup also grew its loan portfolio to fuel a higher net interest margin. Wells Fargo, which saw its total loan levels decrease, said it cut lower-yielding assets out of its portfolio to improve the efficiency of its interest-bearing assets. Higher interest rates have a push and pull effect on bank revenues; although higher interest rates theoretically bump the interest that banks can collect on loans, they also raise the cost of interest-bearing deposits that customers park at a bank – although there is usually a lag, meaning they very slowly raise the rates paid on deposits. Meanwhile, the Fed’s balance sheet unwind would reduce deposit growth by taking cash out of the economy and slowing the growth of credit.


JPMorgan chase closed down 1 percent. Citigroup rose 2 percent, and Wells Fargo eked out a 1.3 percent gain after upbeat results. PNC Financial led the percentage losers among bank stocks, with a 5.6 percent drop after the regional bank reported disappointing quarterly loan growth and said it expected only a small improvement in lending this quarter.


The University of Michigan’s consumer-sentiment index fell in October to a reading of 99 from September’s 100.1.


The cost of goods imported into the U.S. rose in September for the first time in four months. The import price index climbed 0.5% last month, driven up by higher cost of imported fuel. If fuel is excluded, import prices rose were flat. The costs of imports over the past 12 months slowed to 3.5% in September from 3.8% in the prior month.


China recorded a record trade surplus of $34.13 billion with the U.S. in September. That’s a 13 percent increase compared to last year and is the second-straight record month after a deficit of $31 billion in August. That takes America’s trade deficit with China for the year to $225.8 billion — about $30 billion more than at the same point in 2017. You may recall that part of the reason for a trade war with China was to reduce the trade deficit – to send more US-made products there than Chinese companies export here – but so far it looks like that plan isn’t working. Ford reporting that sales in China fell 43% in September compared with the same month last year and were down 30% through the first nine months of 2018. Earlier this week, the IMF published a report showing growth slowing for both China and the US in 2019. They also ratcheted down estimates for global economic growth due to recently announced trade measures. Trump and Chinese leader Xi Jinping have agreed to meet next month at the G-20 summit in Buenos Aires in hopes of resolving their trade war. The planned sit-down would represent the first direct talks since August. The problem is neither side seems to be confident that it understands the other side’s bottom line negotiating demand.


Facebook now says that a hack in September allowed attackers to harvest millions of phone numbers and email addresses. Facebook discovered and disclosed the security breach in late September, saying at the time that the issue affected 50 million accounts, with an additional 40 million deemed as “at-risk.” That number was reduced to 30 million. The company said hackers used 400,000 accounts under their control to gain the access tokens of 30 million Facebook users. Access tokens are used by Facebook users to log into their accounts without having to type in their passwords. Among the 30 million affected users, 14 million had their names, contact information and sensitive information, such as their gender, relationship status and recent place check-ins, exposed to the attackers, Facebook said. Another 15 million users had their names and contact information breached, and 1 million users solely had their access tokens stolen. Facebook has reset the access tokens for all of those users. Facebook says the FBI had asked it not to discuss who might be behind the attack. Facebook gained a fraction of a percent.


Netflix and Amazon, some of the names that took a big hits in the week’s selloff, rose 5.7 percent and 4.0 percent respectively.


Today, authorities confirmed five additional storm-related deaths, bringing the total fatalities from Hurricane Michael up to 13. Seven of the deaths occurred in Virginia, most of which were due to drowning incidents involving cars. A firefighter in Virginia also died while responding to an emergency call on the interstate. A tractor-trailer slammed into the fire engine, which was pushed into the group of firefighters. Three other firefighters were injured. Florida emergency officials have done a “hasty search” for victims or survivors over roughly 80 percent of the affected area. While the number of deaths has not been extreme given the historic severity of the storm, more deaths could still be reported. Relief workers will continue search-and-rescue efforts today and then switch focus to passing out food and water in the most hard-hit areas. The state is using helicopters to fly supplies into coastal towns made inaccessible by obstructed and damaged roads. Around 1.5 million people are without power across the South.


The storm left Tyndall Air Force Base, just south of Panama City, in ruins, with entire airplane hangers in tatters. The base has the largest group of F-22 stealth fighters, each of which costs $339 million. At least 33 F-22s were flown to safety before the storm, but the base was home to 55 total, and photos taken from the wreckage show evidence of damaged and destroyed jets.

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