Financial Review

And Bounce

…Stocks rebound on hopes of no trade war. Facebook under fire. Google facing Euro breakup. Remington BK. No crypto tweet. NY Fed’s Dudley bankers need to stop rewarding bad behavior.

Financial Review by Sinclair Noe for 03-26-2018

 

DOW + 669 = 24,202
SPX + 70 = 2658
NAS + 227 = 7220
RUT + 33 = 1543
10 Y + .01 = 2.84%
OIL – .39 = 65.49
GOLD + 6.40 = 1354.20

 

Last week was one of the worst weeks for stocks in years. Today was one of the best – the third best session in the History of the Dow, at least on a point basis. Last week, the US was talking about imposing stiff tariffs on Chinese goods, and China was talking about scaling back purchases of US Treasuries in response. And just as talk of another potential “Black Monday” was making the rounds, Steven Mnuchin of all people quelled the nerves.

 

The Treasury secretary said Sunday that he’s optimistic the U.S. can reach an agreement with China that will avert the need for Trump to impose tariffs on at least $50 billion of goods from the country. And just like that stocks were off to the races, gaining the most since 2015 as the S&P 500 jumped 2.7 percent. And while that calmed worries over trade wars, consider that Mnuchin also was asked what the president would do if congressional Republicans sent Trump another spending bill of this size later this year, Mnuchin repeated a suggestion that Trump made Friday: Congress should give him the power of “line-item veto,” i.e. the ability to veto portions of the bill without vetoing the whole. The only problem is that the line item veto has been ruled unconstitutional. But never mind that little technicality. No trade war. Or then again, maybe investors are becoming clued into Trump’s negotiating style.  The Trump administration tends take hostage, make demands, and then release then hostage – a tactic surely noted by Beijing. And stocks bounced off a strong level of technical support – those support levels could be retested, but for today at least – they held. You could make arguments that there’s other external drivers, but we stopped right at the 200-day, right near the February lows. Stocks were probably oversold last week and ripe for a bounce.

 

The rebound was aided by the sense that the recent selloff has made stocks a bargain. Goldman Sachs sent a research not to clients claiming that companies are set to become even more profitable this year, as they benefit from a lower corporate tax rate. Goldman analysts expect the S&P 500’s return on equity to rise to 17.6 percent for 2018, its highest since 2007. Last year, the S&P 500’s ROE expanded by 180 basis points to 16.3 percent. “The reduction in the corporate tax rate alone will boost ROE by roughly 70 basis points.”

 

The tech sector posted its biggest daily percentage gain since January 2016 and financials had their best day since March 2017. Energy shares moved higher even as crude oil slipped.

 

Microsoft pulled the indexes higher, gaining 6.6 percent. Morgan Stanley upped its price target on Microsoft, saying its market value could hit $1 trillion on improved margins and growth in cloud computing.

 

Intel rose 6.3% after brokerage Raymond James upgraded the company to “market perform”.

 

Facebook shares struggled, as the U.S. Federal Trade Commission announced it was investigating how the social network allowed data of 50 million users to get into the hands of Cambridge Analytica. Scrutiny by the Federal Trade Commission, which generally confirms the existence of an investigation only in cases of significant public interest, adds to pressure from lawmakers in the United States and Europe for Facebook Chief Executive Mark Zuckerberg to explain how his company handles user data. The Senate Judiciary Committee said it had invited the CEOs of Facebook, Alphabet Inc and Twitter Inc to testify at an April 10 hearing on data privacy. A bipartisan coalition of 37 state attorneys general also wrote to Facebook, demanding to know about the company’s role in the Cambridge Analytica manipulation of users’ data and its policies and procedures for protecting private data. The House Energy and Commerce Committee and Senate Commerce Committee have already formally asked Zuckerberg to appear at a congressional hearing. Earlier in the day in Europe, the European Union Justice Commissioner asked Facebook if the company is “absolutely certain” that the Cambridge Analytica incident could not be repeated.

 

Facebook shares briefly dipped below $150 for the first time since July 2017, before recouping losses and finishing the session with a .67 cent gain. At the intraday session low the company had lost $100 billion in market value since March 17, when newspapers first reported that Facebook member data was improperly used by consultants Cambridge Analytica to target U.S. and British voters in close-run elections. The investigation is broader than looking into whether Facebook violated a 2011 consent order it reached with the FTC over its privacy practices. If the FTC finds Facebook violated terms of the consent decree, it has the power to fine it thousands of dollars a day per violation, which could add up to billions of dollars.

 

Apple CEO Tim Cook has weighed in on the Cambridge Analytica data. During a public speech in China on Saturday, Cook said the situation is “dire” and that he believed regulation is necessary— without specifically mentioning Facebook by name.

 

Meanwhile, the European Union holds “grave suspicions” about the dominance of internet giant Google and has not ruled out breaking it up, according to a warning by the EU’s antitrust chief. The European Commission is in the process of drafting a new regulation aimed at regulating e-commerce sites, app stores and search engines to be more transparent in how they rank search results and why they delist some services. Late last year, the European Commission slapped a $3 billion fine on Google and told the firm to stop favoring its own shopping service.

 

Twitter will start banning cryptocurrency advertising, joining Facebook and Google in a clampdown that seeks to avoid giving publicity to potential fraud or large investor losses. Bitcoin dipped below $8,000 today.

 

Remington Outdoor, one of the biggest gunmakers, has filed for bankruptcy protection as it struggles against a mountain of debts and falling sales. The 202-year-old company filed for chapter 11 protection in Delaware bankruptcy court on Sunday. The official filing came during a weekend of March For Our Lives protests across the US of children calling for greater gun control laws after 17 deaths in a school shooting in Parkland, Florida.

 

Shares of Red Hat surged nearly 5 percent after hours after the open-source software company reported its fourth-quarter earnings. The company reported earnings per share and revenue that beat estimates. Sales rose 23 percent year over year to $772 million in the fourth quarter.

 

Shares of General Electric dropped below $13 today. In the absence of positive news, the company’s stock fell as far as $12.86, the lowest level since July 2009. Pressure on GE has not let up this year, with the stock sliding more than 25 percent. GE shares dropped 42% last year. A Wall Street Journal report Sunday said GE Capital’s portfolio still has assets it has been unable to sell, with the added possibility GE may be held liable for some assets it unloaded since the 2008 financial crisis.

 

New York Fed President William Dudley says banks need to stop rewarding the kind of bad behavior that led to the Wells Fargo fake accounts scandal and other banking misdeeds. With Congress pushing through rollbacks to the Dodd-Frank reforms passed following the financial crisis, Dudley said the lessons from the systemic failure of the banking system shouldn’t be ignored. While acknowledging some need for fine-tuning in the regulations, he pushed for several other changes to make sure the mistakes of the past aren’t repeated. Dudley cited several high-profile bank scandals: the Wells Fargo case, in which employees trying to meet sales goals created some 3.5 million fake accounts; trader manipulation of the London Interbank Offered Rate, an overnight fee that banks charge each other to borrow; and manipulation in the forex market. In each of the three cases, financial incentives drove bank employees to cheat.

 

Dudley proposed several changes to combat the way bad behavior is rewarded. Among them: Making managers, not shareholders, more personally liable for fines and “other legal liabilities” incurred through violations. Changing compensation structure away from cash and deferred stock grants to reward performance not focused just on the short term. Keeping a database of “rolling bad apples,” or violators who move from one firm to the other, unbeknownst to their employers. Conducting an industry-wide survey focused on assessing corporate culture and risk-taking.

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