Financial Review

Backtrack Flip Flop

…Nasdaq record high. Amazon and Netflix rebound, sorta. Trump returns from Eurozone, backtracks, and flip flops. J. Powell testifies. Wages slip. Industrial production up. Continental and CSX have earnings beat. MGM hits new level of sleaze.

Financial Review by Sinclair Noe for 07-17-2018


DOW + 55 = 25,119
SPX + 11 = 2809
NAS + 49 = 7855
RUT + 8 = 1687
10 Y + .01 = 2.86%
OIL – .45 = 67.61
GOLD – 13.00 = 1228.00


The Nasdaq Composite hit a record high. The S&P 500 closed back above 2800, which has proved a tough level of resistance. Amazon hit a record high; they fixed the crash website, took down pictures of sad looking dogs and got back to selling everything under the sun. And they claim they are selling faster than ever; despite the glitch, sales are running ahead of last year’s pace.  Netflix started the day down 14%, which we knew from after-hours trade. Netflix delivered a good earnings report, but revenue and subscription growth missed estimates. Still, Netflix is an incredible earnings story, and some people saw 14% discount and bought at bargain prices. Bank of America Merrill Lynch said the drop presented a “compelling” buying opportunity, noting the company “never misses twice” when it comes to subscriber growth. And a little more sizzle on the steak, new research claims that an estimated 5 million U.S. consumers will cut the cord in 2018, a move that will cost the pay-TV industry billions in lost subscription revenue but should help fuel the Netflix growth story.


Johnson & Johnson rose 3.5 percent after reporting earnings and revenue that topped expectations; that helped lift the Dow. Goldman Sachs also posted better-than-expected earnings, but its stock fell 0.6 percent. The bank also announced that David Solomon will take over the CEO role from Lloyd Blankfein on Oct. 1. Meanwhile, Charles Schwab jumped 3.6 percent on stronger-than-forecast results.


The markets continue to claw higher despite an outbreak of crazy in Washington. Trump returned from his European summer trip to absolutely lousy reviews. Russia’s ongoing attack on our democracy amounts to an act of war. But instead of confronting Russian President Putin at a joint press conference in Finland on Monday, Trump praised him. Instead of standing up to Putin, Trump stood by him. So today, Trump tried to backtrack his comments in Helsinki. During Monday’s news conference, Trump said, “I don’t see any reason why it would be” Russia who interfered in the election. Today, he claimed the sentence should have been: I don’t see any reason why it wouldn’t be Russia. Which makes no sense in the context of what he was saying Monday.


He went on to voice support for US intelligence agencies — a day after he had refused to accept their findings on Russia’s election interference over Putin’s denials — and vowed to take action to prevent further attacks. “I accept our intelligence community’s conclusion that Russia’s meddling in the 2016 election took place,” Trump said. But diverting from his typewritten notes, the President added: “It could be other people also. A lot of people out there.” So, a flip-flop on the backtrack. And Wall Street continues to whistle past the graveyard.


Federal Reserve Chair Jerome Powell traveled to Capitol Hill today to deliver his semi-annual testimony before the Senate Banking Committee; tomorrow he’ll talk to the House. Today, Powell said the economy is running at a fast enough pace to justify continued interest rate increases. Powell described a stable economy with a low unemployment rate, that could go a little lower. Powell said: “Robust job gains, rising after-tax incomes, and optimism among households have lifted consumer spending in recent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. And while housing construction has not increased this year, it is up noticeably from where it stood a few years ago.”


Meanwhile, inflation is running around the Fed’s 2 percent target for the first time in several years, while the unemployment rate is at 4 percent and consistent with a level that most economists consider near to full employment. Powell said wages are growing faster than a year ago but not enough to stoke inflation fears. And he added that he is not particularly concerned about the yield curve. This is the first time Powell has delivered the semi-annual testimony before Congressional reps, and the economy is about as good as he could hope. And it will stay that way until it doesn’t.


In an environment marked by geopolitical tensions; a Federal Reserve that is becoming less accommodative, contributing to a flattening yield curve; and an earnings season that may not be strong enough to fuel further gains, expectations have fallen sharply. And the economy’s prospects may be bleaker due to what fund managers see as the biggest risk the stock market has faced in years: a global trade upheaval. According to the July BofA Merrill Lynch survey of fund managers, the percentage of those polled who expect the global economy to be stronger a year from now is at its lowest reading since February 2016, and this reading has been dropping like a stone. Currently, a net of negative 11% expect the global economy to be stronger in 12 months, down from positive 40% at the start of 2018. A primary factor behind the sentiment shift in the survey was the threat of a trade war. According to the survey, 60% of those polled said that trade was the biggest tail risk facing markets; this issue had the highest investor conviction of any since the European Union debt crisis in 2012. Such extreme bearishness could be a positive contrary indicator; BofA noted that European banks surged in the three months after that issue was cited as a major concern. That’s the longer term, or at least not the short-term. Right now, the market seems to be in a bit of a buying frenzy, also known as earnings reporting season.


After the closing bell, United Continental reported second-quarter profit topped expectations and raised its outlook for the year. Net income in the three months ended in June was $684 million, down nearly 17 percent, largely due to a 43% jump in fuel costs. But United’s sunnier outlook for the year appears to have calmed some investor worries. The airline expects to earn a full-year per-share profit of $7.25 to $8.75, up from an estimate in April of $7.00 to $8.50. The revenue per each seat United flew a mile in the last quarter, a key measure of performance for airlines, rose 2.8 percent in the second quarter. The company said it expects that growth to climb by as much as 6 percent in the three months ending in September.


CSX Corp. shares jumped 3.2% in extended trading, after the railroad company beat earnings and revenue estimates. Importantly, CSX’s operating ratio, which measures operating expenses as a percentage of revenue, set “an all-time company quarterly record” of 58.6%, an improvement from 67.4% a year prior.


According to the Labor Department, median weekly earnings fell 0.6% in inflation-adjusted dollars in the second quarter, compared to the same time period of 2017. That’s now the third straight quarter where inflation has outpaced wage growth. In a report last week, the BLS said real average wages were unchanged over the previous 12 months. Among the major occupational groups, persons employed full time in management, professional, and related occupations had the highest median weekly earnings — $1,463 for men and $1,080 for women. Men and women employed in service jobs earned the least, $615 and $512, respectively.


Industrial production rose 0.6% in June to more than offset a similarly sized decline in May. Production expanded at a 6% annual pace in the second quarter and by 3.8% over the past year, reflecting a big pickup in growth after a lackluster start to 2018. Many companies complain they can’t find enough skilled workers or get ready access to cheap supplies. Auto makers stepped up production of cars and trucks by almost 8% after a fire at a major parts supplier temporarily disrupted supply chains in May.


The National Association of Home Builders’ monthly confidence index was unchanged at 68 in July. That’s a level the industry group calls “healthy,” but it’s also the full-year average from 2017, signaling little progress since then. The gauge of views on the current state of sales was unchanged at 74, but views of future sales fell 2 points to 73. Washington’s trade wars have taken a toll. Earlier in the year, the group estimated that new tariffs were adding nearly $9,000 to the cost of each new single-family home.


MGM Resorts International has filed federal lawsuits against more than 1,000 victims and relatives of last October’s mass shooting in Las Vegas in a bid to squelch liability claims against the hotel-casino giant. MGM owns the Mandalay Bay resort which was the site of a concert where 58 people were killed and more than 500 were wounded. The company’s lawsuits, filed in federal courts in Nevada and California, noted that more than 2,500 victims and related persons have either filed or threatened to file complaints against MGM, claiming negligence and responsibility for death, injury and emotional distress related to the massacre.


But MGM’s suits argue that those current and potential claims against the company must be dismissed because of a 2002 federal law that grants liability protection to any company that uses anti-terrorism technology. MGM asserts that the security company hired for the festival, Contemporary Services, was protected from liability as it was certified by the Department of Homeland Security. MGM said such protection extends to itself since it hired the security vendor.


So, it looks like the casino lawyers might have found a loophole in the law, but there is a catch. The FBI has not labeled the shooting as an act of terrorism. Meanwhile, this represents a new level of sleaziness, even for Las Vegas.


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