Financial Review

Boring Record Highs

….Dow, S&P and Nasdaq just keep hitting records. Trump talks tax cuts and welfare reform. Iraq squashes Kurdish independence. Madrid squashes Catalan independence. Netflix beats. Nordstrom’s won’t go private. SCOTUS to review Microsoft and AmEx.

Financial Review by Sinclair Noe for 10-16-2017

 

DOW + 85 = 22,956
SPX + 4 = 2557
NAS + 18 = 6624
RUT + 0.02 = 1502
10 Y + .03 = 2.31%
OIL + .42 = 51.87
GOLD – 8.80 = 1295.50

 

This year, the S&P 500 index has hit records on almost four dozen different occasions, with the single biggest drop from the latest record amounting to less than 3 percent. More than $3.2 trillion of market value has been added to U.S. equities, and volatility is at an all-time low. With the S&P already up 14 percent so far this year, investors are looking to justify the relatively high valuation of stocks through the earnings. The S&P 500 hasn’t experienced a decline of at least 3% since Nov. 7, 2016. That 237-day span registers as the second-longest period without a single-session drop of that magnitude since the 241 days from Jan. 26, 1995 to Jan. 9, 1996 – so, if we make it to next Wednesday without breaking down – this will officially become the most boring stock market of all time. The VIX index is reflecting that complacency, hovering around levels last seen in 1993. Just a reminder – the absence of risk doesn’t mean the elimination of risk.

 

Asian shares rallied to a decade high after figures showed China’s producer prices beat market expectations to rise 6.9 percent in September from a year earlier, suggesting the Chinese economy is growing much faster than expected. Upbeat data from China came before the Communist Party Congress on Wednesday and third-quarter economic data on Thursday. Japan’s Nikkei climbed to a level not seen since 1996.

 

Wide-ranging comments from Trump on tax cuts and health-care reforms following a luncheon meeting with Senator Majority Leader Mitch McConnell did not move the market. However, both issues are critical for the market as lower taxes are seen as crucial to supporting a continued rally in stocks. The House is on recess this week, and when it returns, it will have just 28 days left on its calendar to tackle issues including taxes and funding the government.

 

Trump also told reporters he is looking at reforming the welfare system. The White House began circulating a draft order in late September, calling on agencies to review regulations and propose new rules that conform to a broad set of principles, streamline or eliminate duplicative services, set metrics to measure accountability and create greater cooperation with state and local governments. Trump’s proposed fiscal 2018 budget called for a massive reduction in funding for social safety nets, such as food stamps, Social Security disability insurance benefits, and the Temporary Assistance for Needy Families program. The problem is that there’s very little welfare left to reform. The Temporary Assistance for Needy Families program has a budget of $16 billion, which is unchanged since 1996; even though inflation has reduced its actual value by a third since then. In 1979, more than 80 percent of families living below the federal poverty line received welfare benefits under the old Aid to Families With Dependent Children program. By 2015, that figure had fallen to just 23 percent. That doesn’t mean poverty has been reduced significantly, just that the states have made it much tougher to get welfare assistance.

 

Iraqi government forces captured the major Kurdish-held oil city of Kirkuk. The military action was in response to a Kurdish election 3 weeks ago, that called for Kurdish independence. Baghdad refuses to recognize Kurdish control of the area. Iraq is the second-largest producer within the Organization of Petroleum Exporting Countries, pumping most of its 4.47 million barrels a day from fields in the south and shipping it from the Persian Gulf port of Basra. Kirkuk’s oil fields and deposits inside the adjacent Kurdish region were exporting about 600,000 barrels a day through a Kurdish-controlled pipeline to Turkey. Best estimate is that Iraq taking control in Kirkuk could cut shipments by 450,000 barrels daily until the federal government repairs its own disused pipeline to Turkey or reaches a revenue-sharing deal with the Kurds. Crude oil climbed to a 2-week high intra-day.

 

The Spanish government has given Catalan leaders until Thursday to drop their push for independence, signaling to could act to strip the Catalonia region of its autonomy if they do not comply. The move came after Catalan President Carles Puigdemont ignored an ultimatum from Madrid to provide a clear answer on whether the region has declared independence. That lack of response, seen as an act of defiance, has opened the door for the central government to take over control of the region. Meanwhile, Monday night in Spain, 2 Catalan leaders were arrested for investigation of acts of sedition.

 

Federal Reserve Chair Janet Yellen said that the central bank expects to continue to raise interest rates gradually as solid growth, a strong labor market and a healthy global economy lift prices even as she recognized that inflation has been surprisingly low. Yellen said: “The biggest surprise in the U.S. economy this year has been inflation,” or more specifically the lack of inflation, which according to the Fed’s preferred gauge is running at 1.3%, for the core rate. Still, it looks more and more that the Fed will raise rates at their December policy meeting. The Fed voted last month to begin unwinding their balance sheet, and Yellen reiterated on Sunday that they do not intend to use that process as an active monetary policy tool. Here’s a thought – maybe the Fed could keep buying debt for just one more month – they could buy all of Puerto Rico’s debt, probably pick it up for about 30 cents on the dollar, and then just let it fade away on their balance sheet. Just a thought.

 

After the closing bell, Netflix report earnings of 37 cents per share, topping estimates of 32 cents. Revenue of $2.98 billion just barely beat estimates. But for Netflix, the key number is new subscribers. The company now has about 109.3 million subscribers globally. Netflix said it added 850,000 subscribers in the U.S., ahead of the 810,000 estimates for the quarter. It boomed internationally, signing up 4.45 million subscribers versus the 3.69 million estimates. The subscription additions were up 49 percent year over year.

 

It’s official: Nordstrom’s quest to go private is over — at least for now. This morning, the family members who own the department store chain suspended their attempt to sell the company to a private equity firm through the end of the year. The family struggled to raise enough debt to finance the deal. The news sent Nordstrom’s shares down more than 6%, and then the declines rippled throughout the rest of the retailers.

 

Food services company Aramark said it would buy Avendra LLC, majority owned by Marriott International, and uniform and linen supplier AmeriPride Services for a total of $2.35 billion.

 

Reuters reports T-Mobile and Sprint plan to announce a merger agreement without any immediate asset sales, as they seek to preserve as much of their spectrum holdings and cost synergies as they can before regulators ask for concessions. The companies are expected to make a merger announcement within the next month.

 

The Supreme Court agreed to resolve a privacy dispute between the Justice Department and Microsoft over whether prosecutors should get access to emails stored on company servers overseas. The justices will hear the Trump administration’s appeal of a lower court’s ruling last year preventing federal prosecutors from obtaining emails stored in Microsoft computer servers in Dublin, Ireland in a drug trafficking investigation. The Microsoft dispute is the second that the justices have agreed to hear in their current term that touches upon digital privacy rights. The other case concerns whether police officers need a warrant to access information on the past locations of cell phone users that is held by wireless carriers. Rulings in both cases are due by the end of June.

 

The Supreme Court also agreed to decide whether American Express is violating federal antitrust law by forbidding merchants that accept its credit cards from encouraging customers to use rival cards that charge lower fees. The justices will hear an appeal by 11 states led by Ohio that had sued American Express of a 2016 lower court ruling that endorsed the legality of the company’s “anti-steering” provisions in contracts with merchants. Merchants annually pay more than $50 billion in so-called swipe fees to process credit card transactions, and these fees can be passed along to customers through higher prices. American Express charges merchants higher fees relative to the other credit card networks.

 

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