Financial Review

Black Thursday

…. Another crash, Dow down 1,032. This is turning into a real problem. Markets are panicky. Fear over inflation and higher rates, and maybe a currency war with China. Also, waiting on a budget deal. Meanwhile, we found a few (long) winners. …

Financial Review by Sinclair Noe for 02-08-2018


DOW – 1,032 = 23,860
SPX – 100 = 2581
NAS – 274 = 6777
RUT – 44 = 1463
10 Y + .01 = 2.85%
OIL – 1.37 = 60.42
GOLD + .20 = 1319.30


This past Monday, Black Monday, was the worst single day point loss for the Dow Industrial Average – down 1,175. Today was close. And I know that in percentage terms, this is not the worst decline, but in real dollar terms, we have a problem.


Again, we saw a sharp sell-off in the final couple of hours, a more than 600-point decline. The Dow Industrials did not take out the lows from Tuesday at 23,778 – so that is a level of short-term support. The Dow has now wiped out all the gains going back to the end of November; and is down more than 10% from record highs – meaning we are in correction territory; and more than 1,200 points south of the 50-day moving average. The S&P 500 did take out the lows from earlier in the week, and closed below those lows – so now, we start looking for longer-term support levels and you are looking at 2450 to the 2500 range. That doesn’t mean we are going there, it just means watch out. Today was the third worst point decline for the S&P 500 in history; the worst was on Monday.


The yield on benchmark 10-year Treasury note rose as high as 2.88 percent intraday. Traders clearly have mispriced interest rates. Not only is the economy humming, but inflation is starting to accelerate at the same time. This is happening as the government is about to dump a lot of bonds, pursuing its goal of at least doubling its debt sales this year to more than $1 trillion to make up for the lost revenue from the tax cuts. And the Federal Reserve is reinvesting fewer proceeds from its maturing bond holdings in the market. When the Fed was purchasing bonds, they pushed down interest rates, forcing investors to take on more risk to generate decent returns. The fear is that any balance-sheet reduction would have the opposite effect. The Federal Reserve has promised a reduction in its balance sheet that would be gradual as a way to avoid disrupting markets. While this sounds great in theory, any whiff of inflation could force the Fed to move at a much faster pace. The markets became complacent in the face of incremental tightening by the Fed, and mispriced debt as a result.


The combined impact on the deficit of the Republican tax cuts and the spending deal over the next two years will likely exceed the $580 billion economic stimulus added in 2009 and 2010 during the depths of the recession. Only, we are not in a recession now, so the effect is like pouring gasoline on the fire, not using it to start the fire. Deficit-financed tax cuts and spending increases in a full-employment economy will result in more Fed tightening and higher interest rates. This is basic economics.


So, the question of the day – Is this a buying opportunity? Well, the economy is still strong for now, with low unemployment and growing wages. But growth could stumble if the sell-off continues and begins to dent consumer and corporate confidence. If you are already in the market, the best advice comes from Elon Musk’s red Tesla Roadster, hurtling through outer space – Don’t panic. That may be the best advice but that doesn’t mean it is happening. The VIX, the volatility index popped 5 points higher to 33.46 – basically screaming with fear. The SPDR Dow Jones Industrial Average ETF, ticker DIA, suffered its worst daily outflow since May on Wednesday, as $659 million was pulled from the fund. The massive redemption comes just after the biggest ETF in the world, the SPDR S&P 500 ETF, ticker SPY, saw nearly $20 billion flee over a four-day span. Meanwhile, high-yield ETFs are down. Two exchange-traded funds that track junk bonds have fallen to their lowest levels since December 2016 as the rout in other risk assets persists.The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK) sank for a second straight day


But wait, there’s more. Speculation is rising that a currency war in which finance officials and central bankers seek to talk or otherwise push their currencies lower may be looming. It started a couple of weeks ago in Davos, when U.S. Treasury Secretary Steven Mnuchin said a weaker dollar would be good for U.S. trade. The comments drew rebukes from policy makers including European Central Bank President Mario Draghi and others who highlighted an existing agreement among G-20 nations not to jawbone their currencies. And today, China let its tightly controlled yuan drop the most since the aftermath of its shock 2015 devaluation after data showed the country’s trade surplus more than halved last month. In what some traders took as a sign that China’s authorities would like to see a weaker yuan after its biggest annual gain since 2008, a front-page commentary in China’s Economic Daily said more fluctuations in the currency are likely.


Congressional negotiators are still scrambling today to lock in enough votes to pass a two-year budget deal ahead of a midnight deadline. Leaders in the House were whipping votes for the plan, and Kentucky Sen. Rand Paul’s push to include his own amendment appeared to be preventing a vote in the Senate, leaving the plan’s path forward unclear. The colossal bill, which lawmakers had been negotiating for months, would be a game changing piece of legislation, clearing the decks for Congress in dealing with major spending issues, as well as hiking the debt ceiling and doling out disaster relief money. The plan, however, does not address the high-profile issue of immigration, a key sticking point for many Democrats, but does increase spending caps by $300 billion for the Pentagon and domestic priorities, a crucial incentive for getting enough votes from both parties. The proposal also represents a sharp change in tone for Republicans who once railed strongly for fiscal austerity and warned about a ballooning national debt, and are now in effect removing barriers to spending previously put in place in part by leaders from their own party. The Senate is expected to pass the deal later today, sending it back to the House. But it’s not clear if there are enough Republican votes to pass it in the House, meaning most likely some Democrats would have to vote for it to reach a simple majority. Many Democrats are outraged that the spending deal would give away leverage on immigration issues, as it’s not clear if a DACA solution would advance without firmer commitments from GOP leaders. House Speaker Paul Ryan has refused to commit to bringing DACA up for a vote.



There were some winners today. Stocks in the green include Virtu Financial on the back of an earnings beat as the HFT firm is seen as benefiting from all the market volatility; Woodward, on reports Boeing is in talks to buy the aero-parts maker for $4.8 billion; and Twitter, with shares jumping to a 52-week high as Twitter easily beat on earnings and revenue, with daily active users up 12% from a year ago.


Nvidia reported a better-than-expected 34 percent jump in quarterly revenue on Thursday, underpinned by strong demand for its graphics chips used in data centers, gaming devices, self-driving vehicles and in cryptocurrency mining. Net income rose to $1.12 billion, or $1.78 per share. Nvidia’s revenue from gaming, for which it is best known, rose 29 percent to $1.74 billion, accounting for a little more than a half of its total revenue in the fourth quarter. Nvidia beat estimates on the top and bottom lines. The company’s shares rose 6 percent to $231 in extended trading. They have surged about 83 percent in the past 12 months.


Chipmaker Qualcomm said its board had unanimously rejected Broadcom’s revised $121 billion buyout offer, saying the proposal “materially undervalues” Qualcomm and falls short of the firm regulatory commitment it would demand given the significant downside risk of a failed transaction.


American International Group posted a $6.7 billion fourth-quarter loss as the insurer booked a big charge related to U.S. tax reform and losses from global catastrophes. AIG booked $762 million of catastrophe losses during the quarter, largely from wildfires that raged through California and caused significant damage to homes and businesses.


Shares of GrubHub shot up more than 27%  after the company announced a partnership with Yum Brands Inc. under which Yum will acquire $200 million in GrubHub shares. The deal is aimed at driving online sales and delivery to Yum’s chains KFC and Taco Bell. Pizza Hut, Yum’s other restaurant chain, already fills more than 100 million delivery transactions each year in the U.S. and manages a fleet of drivers.


A group of 31 U.S. senators said they had written to the leadership of the Consumer Financial Protection Bureau (CFPB) demanding information on the consumer watchdog’s stalled probe into credit reporting agency Equifax’s massive data breach. The CFPB had pulled back from an investigation into how hackers were able to steal data Equifax had gathered on around 143 million Americans.


The number of Americans filing for unemployment benefits unexpectedly fell last week, dropping to its lowest level in nearly 45 years as the labor market tightened further, bolstering expectations of faster wage growth this year. The second straight weekly decline in claims reported by the Labor Department  also pointed to strong job growth momentum, which could further drive the unemployment rate lower. Initial claims for state unemployment benefits decreased 9,000 to a seasonally adjusted 221,000 for the week ended Feb. 3.

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