….Stocks and bonds drop. A busy week on tap: SOTU, FOMC, earnings season, Jobs Report Friday. Consumer spending up, consumer savings down. Dr. Pepper and coffee. More M&A. Crypto-heist in Japan. McCabe out. Wynn in hot water. Falcon Heavy and other Musk flamethrower. Tax day cometh.
Financial Review by Sinclair Noe for 01-29-2018
DOW – 177 = 26,439
SPX – 19 = 2853
NAS – 39 = 7466
RUT – 9 = 1598
10 Y + .04 = 2.70%
OIL – .62 = 65.52
GOLD – 9.40 = 1340.90
The Dow and the S&P 500 indexes marked their biggest one-day percentage declines in about five months. The S&P 500 is still up 6.7% in January. 10-year Treasury note yields hit their highest since 2014.
This should be a very interesting week. Tuesday evening brings the State of the Union speech. The White House announced last week that the president would release his complete immigration policy framework before the State of the Union, so this will almost certainly be a centerpiece. Also, expect a victory lap for the recently passed tax legislation, plus the record setting stock market, plus the years low unemployment rate, which has gone from 42% in the summer of 2016 to just 4.1% in December. Now that Trump’s in office the data have become reliable again — another thing we should give him credit for.
Wednesday brings the Federal Reserve’s FOMC meeting – the last for outgoing Fed chair Janet Yellen. She’s leaving the central bank in good shape, and Jerome Powell is poised to continue her plan of slowly lifting interest rates. Three interest rate hikes are likely coming this year but don’t expect one this week.
There are 125 S&P 500 companies, including 10 Dow components and high-profile tech firms, reporting earnings this week, including some of the big tech names: Apple, Amazon, Facebook, Alphabet, and Microsoft. Today the Nikkei reported that Apple is cutting production targets on the iPhone X for the first three months of the year to around 20 million units. Apple’s market value has slipped by $45 billion over the past week. Just a reminder that we’re not just looking in the rear-view mirror at fourth quarter earnings, but also looking through the windshield at the first and second quarter guidance. And while the FANG stocks have been market darlings, you could have done better with the MCBMs – that’s McDonalds Caterpillar, Boeing, and 3M.
Friday brings the January Jobs Report. In December, the economy added a disappointing 148,000 jobs – still it marked the 87th straight month of gains. Plus, unemployment was at its lowest level in 17 years.
Consumer spending increased 0.4 percent last month after an upwardly revised 0.8 percent increase in November. Consumer spending accelerated at a 3.8 percent annualized rate in the fourth quarter, the fastest in three years, after rising at a 2.2 pace in the third quarter. The gain came at the expense of savings, which dropped to a 10-year low. Households continued to dip into savings to maintain spending amid sluggish income growth. Savings are now at levels last seen in December 2007, when the economy slipped into recession, and are a red flag for both consumer spending and economic growth. Personal income rose 0.4 percent last month after advancing 0.3 percent in November. Wages increased 0.5 percent last month. Income rose 3.1 percent in 2017, picking up from 2.4 percent in 2016.
Consumers aren’t the only ones with a spending problem. As Congress limps toward the likely passage next week of another stopgap spending bill to avert a government shutdown, a Washington think tank has estimated the federal budget deficit is on track to blow through $1 trillion in 2019. The Committee for a Responsible Federal Budget, a Washington fiscal watchdog, said the red ink may rise in fiscal 2019 to $1.12 trillion. If current policies continue, it said, the deficit could top a record-setting $2 trillion by 2027.
Dr Pepper Snapple is merging with Keurig. The new company will be called Keurig Dr Pepper. It will combine Dr Pepper, 7UP, Snapple, A&W and Sunkist with Keurig’s franchise of single-serve coffee pods, which includes the Green Mountain Coffee Roasters and The Original Donut Shop brands. Keurig Green Mountain and its investors will own 87% of the combined company. Keurig was bought by German conglomerate JAB Holding in 2015. JAB also owns the coffee chains Peet’s, Stumptown and Caribou as well as Krispy Kreme and Panera. Dr Pepper Snapple also recently bought Bai Brands, which produces antioxidant drinks, for $1.7 billion. Dr Pepper Snapple will own the remaining 13% of Keurig Dr Pepper. JAB will invest $9 billion in Dr Pepper Snapple. Shares of Dr Pepper Snapple jumped over 32% today.
Food and beverage companies have been pairing up to cut costs and better position themselves for a tougher pricing world. The grocery business is increasingly dominated by Walmart and Amazon, especially after Amazon bought Whole Foods. Both Walmart and Amazon aim to keep prices low, which squeezes the profit margins of big food companies. One way to combat that is to get bigger.
WestRock agreed to buy smaller rival KapStone Paper and Packaging for about $3.5 billion. KapStone’s shares jumped about 30%. KapStone, which produces containerboard, unbleached kraft paper and corrugated products, will be integrated into WestRock’s corrugated packaging business. Separately, WestRock said sales in its first quarter jumped about 13 percent on higher price and shipments.
French drugmaker Sanofi has agreed to buy Belgian biotech company Ablynx for $4.8 billion, beating Novo Nordisk and marking its second big deal this month after buying Bioverativ.
Dell Technologies could emerge as a public company through a reverse-merger with VMware, the $60 billion cloud computing company it already controls. The reverse merger, whereby VMware would actually buy the larger Dell, would then allow Dell to be traded publicly without going through a formal listing. It would also likely be the biggest deal in tech industry history, giving investors who backed Dell’s move to go private in 2013 a way to monetize their deal, while helping Dell pay down some of its approximately $50 billion debt.
Part of the potential promise of blockchain technology is that it is safe and secure. Turns out – not so much. A cryptocurrency exchange in Japan says hackers stole $530 million from its users. The exchange, Coincheck, has promised to partially refund the 260,000 cryptocurrency investors affected by the theft, although it didn’t say when it would do so or where it’s getting the money from. Japanese financial authorities are supervising the company’s response to the theft. The hacking at Coincheck, which bills itself on its website as “the leading bitcoin and cryptocurrency exchange in Asia,” came to light over the weekend. If confirmed, it’s expected to rank as the biggest such theft on record, eclipsing the estimated $400 million in bitcoin stolen from Mt Gox in 2014. The Coincheck hack is the latest in a series of attacks targeting digital currency exchanges. Last month, South Korean bitcoin exchange Youbit filed for bankruptcy after being targeted by cybercriminals twice in the space of a few months. In a separate incident last month, hackers made off with more than $70 million worth of bitcoin from NiceHash, a digital currency trading platform based in Slovenia.
Deputy FBI Director Andrew McCabe — one of Trump’s top targets in his feud with the US law enforcement community — will step down effective immediately. McCabe had been expected to leave the Federal Bureau of Investigation in March. He will remain on leave with the law enforcement agency until his retirement date. White House press secretary Sarah Huckabee Sanders said during today’s press briefing that Trump “wasn’t a part of the decision-making process to remove McCabe,” adding that the president stood by all of his previous remarks about McCabe.
Las Vegas casino mogul Steve Wynn on Saturday stepped down as Republican National Committee finance chairman. The decision followed a Friday report in the Wall Street Journal alleging that Wynn engaged in sexual harassment. Shares of Wynn Resorts have dropped nearly 20% in the past 2 sessions. Wynn Resorts has formed a special committee to investigate the allegations against its CEO. Still, the allegations hurt the brand and could result in cancellations. The worst thing that could happen to Steve Wynn is most likely happening right at this moment. Over the weekend the Macau gaming regulator expressed concern over accusations of sexual misconduct against Wynn, the billionaire founder of Wynn Entertainment. The majority of Wynn’s casino revenues come from the Chinese territory known for its gambling. Wynn’s Las Vegas casino has seen revenue decline. In 2019, Wynn and his fellow casino oligarchs will have to renegotiate their licenses to operate in Macau.
The Falcon Heavy—the most powerful operational rocket in the world—could launch for the first time as soon as Feb. 6. SpaceX’s new, larger rocket is a reusable “super heavy” launch vehicle that will allow the closely held company to bid on heavier payloads, such as larger commercial satellites and national security missions. It could also one day send paying tourists on flights around the moon. Meanwhile, Elon Musk’s The Boring Company, which wants to create a network of underground tunnels to ease traffic congestion, is offering flamethrowers for sale on its website for a cool $500. Yes, now you can own your own personal flamethrower, although I’m not sure why. Maybe you just want to get a grilled cheese sandwich in record time. Otherwise, this sounds like a very bad idea.
The IRS begins accepting tax returns today, the official start of tax season. I’m sure somebody sent in their taxes today, but it wasn’t me. Most people are still waiting on their tax forms: W-2s for wages, 1098s for mortgage interest, 1099s for independent contractors, and1099-Bs for your brokered accounts. Most tax documents should be mailed by Jan. 31. You have until April 17th to file this year. The time will sneak up on you. One bit of confusion to dispel quickly: The tax code changes passed in December don’t affect taxpayers for the 2017 filing season, so you have about a year until you become officially befuddled.