Financial Review

Bouncing in Limbo

…Stocks bounce. Waiting on earnings and data. John Williams scores NY Fed post. OK teachers walkout. Home prices accelerate. Auto sales up in March. EPA makes a stand for dirty air. Spotify debuts. Trump v. Amazon – round 4. Atlanta hacked.

Financial Review by Sinclair Noe for 04-03-2018

DOW + 389 = 24,033
SPX + 32 = 2614
NAS + 71 = 6941
RUT + 19 = 1512
10 Y + .05 = 2.78%
OIL + .56 = 63.57
GOLD – 8.60 = 1333.20


Stocks bounced today, following a 450-point loss yesterday for the Dow Industrials and a 58-point loss for the S&P that pushed that index below its 200-day moving average. A bounce was expected but the question is whether a rally can be sustained. Today’s rebound was not matched by higher volume. Part of the reason for the recent volatility is that most stocks are in a quiet time – just before first quarter earnings are announced, companies clam up. Rather than sales, orders and profit margins, things such as politics and the economic data can take on more relevance. During this quiet time, the bears have picked up on a couple of troubling trends: 1) The Federal Reserve is getting aggressive about raising interest rates; 2) the stock market is swooning; and 3) the yield curve is flattening. The kicker is that the economy might be slowing – maybe. It appears economic growth was mediocre during the first three months of the year. After growing at nearly 3% for the previous three quarters, gross domestic product looks like it grew at 2% or less during this last quarter, with a broad-based slowdown in final sales, such as consumer purchases, business investment and residential investment. Earnings season begins next week as the big U.S. banks report results, and first-quarter profits overall are forecast to have risen 17 percent from a year earlier. That might deliver more than a one or two-day bounce, provided the earnings are solid. The recent pullback means that valuations don’t look stretched.


Tomorrow we will get a boatload of economic data, including: the ADP employment, Markit composite, ISM non-manufacturing, factory orders and durable goods reports. Plus, minutes from the last FOMC meeting.


John Williams, the president of the Federal Reserve Bank of San Francisco has been picked to head the New York Fed.  Williams will succeed William Dudley on June 18, in what is seen as the second-most influential position at the US central bank. The New York chief is traditionally among the Fed’s three core policymakers and unlike other district presidents has a permanent vote on rates. The job also oversees market operations including the management of some $4.4 trillion in assets and supervises the largest US banks.


Oklahoma teachers walked out of classes for a second straight day, closing schools in the state’s two biggest cities, as they demanded higher state spending on public education. Hundreds of teachers crowded into the state capital, Oklahoma City. Teachers, parents and students staged sympathy rallies around the state. The protests reflected rising discontent after years of sluggish or declining public school spending in Oklahoma, which ranked 47th among the 50 U.S. states in per-student expenditure, and 48th in average teacher salaries in 2016. Oklahoma’s first major tax hike in a quarter century was approved by legislators last week and signed into law by Governor Mary Fallin – a $450 million revenue package intended to raise teachers’ salaries by about $6,100 a year and avert a strike. Teachers said that package fell short and demanded lawmakers reverse spending cuts that have forced some districts to impose four-day school weeks. Monday’s walkout by up to 30,000 educators in Oklahoma forced the cancellation of classes for some 500,000 of the state’s 700,000 public school students.


Home prices picked up steam in the first few months of the year. The Home Price Index from real estate data provider CoreLogic showed national yearly price growth of 6.7% in February. That’s up from a 6.1% annual price gain in the prior three months. Prices aren’t just rising, they’re accelerating. CoreLogic considers about one-third of largest metropolitan areas “overvalued,” it said in a release.


Major automakers reported higher new vehicles sales for March. The strong results for March followed a weak performance in February. Last year, U.S. auto sales fell 2 percent after hitting a record high of 17.55 million units in 2016. Sales are expected to fall further in 2018 as interest rates rise and push up monthly car payments. Also, millions of nearly new vehicles will return to the market this year after coming off lease, providing a lower-cost alternative for consumers. General Motors posted a 16 percent jump in new vehicle sales from the previous March, led by a 14 percent increase in higher-margin retail sales to consumers. Fiat Chrysler reported a 14 percent increase and said it saw a 45 percent spike in sales of its popular Jeep models, giving the brand its best sales month on record. Ford reported a 3.4 percent increase in overall sales for March, led by an 8.7 percent rise in fleet sales. Toyota reported a 3.5 percent increase in sales in March, with double-digit increase in SUV and pickup truck sales offsetting a 6.1 percent decrease in sedan sales. Nissan bucked the trend for the month with a 3.6 percent decline in sales.


For Tesla, the story is not sales, it is production. Tesla announced today that they are producing just over 2,000 Model S autos per week – that is short of their target of 2,500 per week, but it was good enough to squash any speculation it might need to raise more capital this year. Tesla shares gained almost 6% today. Tesla delivered 8,180 Model 3s in the first three months of the year. That compares with 6,468 deliveries for Toyota’s Prius Prime plug-in hybrid and 4,375 for GM’s Chevy Bolt; which means Tesla is now the best-selling electric car in the U.S.


Today, Trump unveiled a list of Chinese imports his administration aims to target as part of a crackdown on what the president deems unfair trade practices. Sectors covered by the proposed tariffs include products used for robotics, information technology, communication technology and aerospace. The U.S. Trade Representative, which announced the list, says it targets products that benefit China’s industrial plans “while minimizing the impact on the U.S. economy.” The administration alleges that China has improperly taken U.S. intellectual property. The U.S. could levy tariffs on $50 billion to $60 billion of Chinese imports annually. The announcement said the total value of imports subject to the tariff increase is equal to “the harm caused by China’s unreasonable technology transfer policies.”


Also today, Environmental Protection Agency Administrator Scott Pruitt announced that his agency will weaken car-emissions limits, standards that called for auto makers to gradually double the fuel efficiency of new cars and light trucks through 2025. The standards that the EPA agreed to in 2012 culminated in a level of more than 50 miles per gallon, or about 36 mpg in real-world driving, by 2025. It’s important to note that the standards do not apply to every car made but to the average efficiency of an automaker’s entire fleet. But it might not work out that way. California has the right to establish its own car-pollution rules because the state was already setting limits on tailpipe emissions when Congress passed the Clean Air Act in 1970. The state’s Air Resources Board receives waivers from the federal EPA to enforce its own stricter regulations, most recently from the Obama administration. The Clean Air Act not only authorizes California’s standards but allows other states to follow them, and 12 states and the District of Columbia have chosen to do so. Together, they add up to about a third of the U.S. car market. California’s attorney general has promised to sue, if necessary, to preserve the state’s waiver to set its own standards. So there may well be a long legal battle ahead.


Spotify shares began trading on the New York Stock Exchange today with an opening price of $165.90 per share, then closed just under $150, giving the music streaming service a market cap of about $28 billion – making it bigger than some well-known names such as Hewlett Packard or General Mills.  Spotify has never made a profit. The streaming music leader has structured the stock market listing to allow existing investors to sell directly to the public while offering no shares of its own.


Trump took to Twitter for the fourth time in one week to bash Amazon, today claiming that the US Postal Service is losing money delivering Amazon packages. The claim is unsubstantiated. While its contract with Amazon is confidential, the Postal Service has argued that its e-commerce services benefit the organization and its mail customers. It is legally prohibited from charging shippers less than its delivery costs. Further, taxpayers don’t directly support the Postal Service’s operations. Bloomberg reports that according to White House aides, there are no active plans to change the deal between the Postal Service and Amazon – that rate is set by an independent commission. Amazon pays sales tax, but they do not collect sales tax from independent third-party vendors – individual states could deal with the sales tax issue. Beyond that – the tweet attack is more bark than bite. Still, it helped knock about $75 billion off the market cap of Amazon over the past week. Shares bounced back today, gaining almost 2%.


Another data breach – this time it is not Facebook or Equifax – it’s Atlanta. A nine-day-old cyber-attack that plunged the city into technological chaos and forced some city workers to revert to paper. This appears to be a ransomware attack that corrupted all sorts of files. Hackers demanded $51,000 worth of bitcoin to provide digital keys to unlock scrambled files. Some major systems were not affected, including those for 911 calls and control of wastewater treatment. But other arms of city government have been scrambled for days. The Atlanta Municipal Court has been unable to validate warrants. Police officers have been writing reports by hand. The city has stopped taking employment applications. Maybe the scariest part of this is that the strategy only works if breaking into systems is so easy that $50,000 represents a substantial profit vs. the time spent doing it.

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