Financial Review

Buckle Up

…Stocks bounce. Brexit ministers resign. Fed monitors global growth. Oil signals slowdown. Mueller’s quiet time is over. NYT blasts Facebook. Earnings watch: Walmart, Nvidia, JC Penney, Nordstrom, Applied Materials, Sonos. GE’s bond problem.

Financial Review by Sinclair Noe for 11-15-2018

DOW + 208 = 25,289
SPX + 28 = 2730
NAS + 122 = 7259
RUT + 21 = 1524
10 Y un 3.12%
OIL + .31 = 56.56
GOLD + 2.50 = 1214.00

 

If you follow the markets from the opening bell, you have probably noticed that the major indices have been reversing over the course of the trading session. It happened again today. Stocks opened in negative territory and moved higher, turning positive a little after lunch. Yesterday was the opposite – stocks started higher, then reversed lower. Why did stocks turn higher today? Who knows. The markets have just been all over the place. Investors are having a hard time assigning valuation. And this downturn feels different. In turn, that means that normal tactics don’t really apply right now. For example, over the past few years, if there was any pullback in a stock that looked interesting, traders would buy the dip. Now, not so much. It might still be a great trading tactic, but it isn’t really happening right now. And there are still opportunities in this market. Short sellers have been pulling in profits in October and November. Defensive stocks deserve consideration for portfolios that don’t short. Most cyclical plays are underperforming, but not all. You can make money in this market environment, you just have to work a bit harder.

 

The minister in charge of helping Britain leave the European Union, Brexit Secretary Dominic Raab, abruptly resigned from Prime Minister Theresa May’s government, saying he could not support the withdrawal agreement approved by her cabinet the night before. Also quitting their posts were two other ministers and a junior minister in the Brexit ministry. The rapid-fire resignations raise the possibility that May does not have the support she needs to pursue her deal for a softer, slower-moving Brexit, a plan loaded with compromises that few in Britain like. The resignations could prove a fatal blow to May’s Brexit plan – and to her premiership.

 

Federal Reserve Chairman Jerome Powell said the central bank was closely monitoring a modest deceleration in global growth, whose strength last year had provided an important tailwind for the U.S. economy. At this point, the global slowdown is not enough to keep the Fed from continuing to hike interest rates. Powell hammered on two simple themes during an hourlong question-and-answer session in front of several hundred people at the Federal Reserve Bank of Dallas. The Fed is doing its job, he said, and the economy is doing really well. Of course, reversing monetary policy is not tough when you start with a zero-interest rate policy. Things get tricky as we work through the recovery. If monetary policy is too loose, we could face a bout of inflation or a credit crunch or who knows what. If the Fed is too aggressive with removing accommodation, it could trigger a recession. Whichever path the Fed follows, they will surely have some discontents. The historical “neutral” federal funds rate, before the 2008 credit crisis, was between 4% and 5%, but in the post-crisis environment, investors have come to believe that 3% is a more reasonable neutral rate.

 

American motorists are saving about $80 million a day, thanks to a 20-cent-a-gallon drop in the price of regular gas since Oct. 1. Business also like lower oil prices. But the lower oil prices are also signaling a possible economic slowdown, which may force businesses to rein in spending and hiring. Those fears can develop into recession. The long-running bull market is already under pressure from the Federal Reserve’s raising interest rates, from tariffs between the United States and China, and from a sell-off in technology stocks. Continued pressure on oil prices could drag stocks even lower. It’s hard to make the bullish case for stocks when oil is signaling a slowdown.

 

Fiscal stimulus from the GOP tax cuts is likely to start running out. The Federal Reserve is expected to keep bumping up interest rates. Congress is divided, and you will hear lots of talk about infrastructure, but it is doubtful that a massive spending package will find bipartisan support. It’s a little like Wile E. Coyote running over the cliff. You look down, and the ground you thought was under you suddenly isn’t there anymore. Against a backdrop of tariffs, trade wars, global economic slowdown, etc., etc., we still have to deal with a special counsel Robert Mueller, whose team was quiet during the election. Now that the election has passed, Mueller is about to pounce after his self-imposed quiet period, and any number of Trump’s allies and family members may soon be staring down the barrel of an indictment. There are unconfirmed reports that Mueller is holding “dozens of sealed indictments” involving people associated with Trump, his campaign and the administration. Indictment watch seems to kick into high gear every few days now, but one day, we might see those indictments hit – if that happens, make sure your seat belts are buckled because it’s going to be a bumpy ride.

 

A New York Times exposé outlines an aggressive push by Facebook to discredit its critics, smear its rivals and muster its supporters. The Times report also draws attention to the roles of Facebook CEO Mark Zuckerberg and, more critically, Chief Operating Officer Sheryl Sandberg in cleaning up after they were initially slow to respond to concerns, particularly that Russia had manipulated their sprawling network. Some outside consultants and company allies depicted critics of Facebook and its leadership as anti-Semitic. Facebook said Thursday it has terminated its contract with political communications firm Definers Public Affairs, a key player in the Times report, which described Facebook as hiring consultants there who spread negative stories about rivals like Google and Apple and questioned critics’ funding. Facebook denied that Definers was asked to produce articles on its behalf. Federal investigators are probing Facebook over some of the issues that sparked the damage-control efforts in the first place. The FTC announced in March it would investigate Facebook’s failure to secure the data of millions of users against improper access by Cambridge Analytica, a political consulting firm connected to Trump’s 2016 campaign. Facebook shares were just slightly lower today but the stock is more than 30% off its recent highs.

 

Although the US economy is strong, it’s a tough time for traditional retailers that are fighting for their place in a space dominated by specialty brands and e-commerce. Walmart upped its year-end forecast Thursday for earnings and sales, despite a shortfall in revenue because of currency complications. Grocery and e-commerce headlined Walmart’s performance this quarter, with online sales up 43 percent. Walmart dropped almost 2% today.

 

Conversely, JC Penney reported losses of $151 million, or $0.48 per share, falling short of revenue expectations. JC Penney is in a tough position as a middle-of-the-road retailer, trying to compete with online retailers, and struggling to cut back on bloated inventory and costly real estate. Despite a digital push, JC Penney’s brick-and-mortar stores far outperformed its website this quarter, and the company admitted it still has a long way to go in terms of pruning its inventory. Most of its success this quarter came from apparel, as well as its beefed-up toy and baby selection. JC Penney gained 11% today.

 

Nordstrom fell more than 13% in the extended session after the retailer reported mixed third-quarter earnings and tweaked its fiscal 2018 sales and adjusted profit forecasts.

 

Nvidia shares plunged 16% after hours, following a 2.6% rise to close the regular session. Nvidia posted third-quarter earnings and revenue that missed estimates.

 

Applied Materials shares fell 8% in the extended session after the company met Wall Street earnings expectations but issued weaker-than-expected guidance.

Sonos shares jumped more than 18% in after-hours trading following an earnings report that showed record revenue and a strong start for the speaker company’s latest product.

 

General Electric raised $115 billion of debt on a reputation as one of the U.S.’s safest borrowers. Now, revelations of losses and questions about its accounting have shaken investors’ confidence, driving bond prices sharply lower in recent weeks. The impact is rippling through financial markets as investors scramble to reassess the company’s risk, bearish hedge funds bet prices will fall further and banks move to limit their exposure.  Prices of GE’s various bonds have tumbled about 5% to 18% since late October to junk levels, showing that some investors expect further downgGeneral Electric Co. raised $115 billion of debt on a reputation as one of the U.S.’s safest borrowers. Now, revelations of losses and questions about its accounting have shaken investors’ confidence, driving bond prices sharply lower in recent weeks. The impact is rippling through financial markets as investors scramble to reassess the company’s risk, bearish hedge funds bet prices will fall further and banks move to limit their exposure. . . . Prices of GE’s various bonds have tumbled about 5% to 18% since late October to junk levels, according to MarketAxess, showing that some investors expect further downgrades.  A slide below investment grade by GE could squeeze credit markets and force fund managers to question how well they understand the risk in their investments.”

 

Preliminary figures for nationwide turnout in the 2018 mid-term elections are in, and they’ve reached a mark not seen in more than a century. Across the US, 49.2% of the voting age public cast ballots. In 2014 that number was 37%, and the average over the last few decades has hovered around 40%. The last time turnout for a mid-term topped 50% was 1914 – before women had the vote.

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