Financial Review

Cake and Panic

…..Wall Street finally freaks. Trump agenda in doubt. Americans rack up $12.7 trillion in debt. Earnings updates. Google I/O; the machines are learning to learn.

 

Financial Review by Sinclair Noe for 05-17-2017

DOW – 372 = 20,606
SPX – 43 = 2357
NAS – 158 = 6011
RUT – 38 = 1355
10 Y – .11 = 2.22%
OIL + .30 = 48.96
GOLD + 24.20 = 1261.90

 

Today marks the 225th anniversary of the New York Stock Exchange. On the floor of the exchange, they celebrated with cake and panic. Stocks started the session with triple digit losses on the Dow, and then drifted lower throughout the day. It was the worst loss on Wall Street since September, while the Nasdaq Composite Index plunged 2.6 percent for its steepest drop since June 24. The dollar fell by nearly 2 percent against the yen to its lowest level since April and hit a six-month low against the Swiss franc. The dollar index, which tracks the U.S. currency against six peers, fell 0.6 percent to its lowest level since Nov. 9, surrendering all of its “Trump bump” gains. The VIX, the volatility index jumped nearly 5 points, or 46%. The 10-year Treasury yield sank to 2.22 percent in its steepest decline since July. The spread between 10-year and two-year yields narrowed to the flattest since before Trump’s election.

 

Today’s drop in markets comes after Tuesday evening saw the second damaging story for President Donald Trump in as many days. The New York Times reported  that Trump asked former FBI director James Comey to end an inquiry into ties former national security advisor Michael Flynn had to Russia. And Comey documented the meeting in a memo. The Comey memo caused alarm on Capitol Hill and raised questions about whether Trump attempted to interfere with a federal investigation, something that might constitute obstruction of justice and could potentially be invoked in an attempt to impeach Trump. And this report came just a day after The Washington Post reported Trump revealed “highly classified” information to Russia’s foreign minister. Last week, Trump fired Comey, even as the FBI was investigating possible ties between Trump’s campaign and Russia.

 

The market reacting negatively to Trump-related headlines is a definite change from what we’ve become accustomed to in recent months. After the market’s violent election night reaction, stocks have more or less moved up and to the right unabated, with the political chaos in Washington seeming to have little impact on financial markets. The difference might be that several Republican leaders are now starting to say it may be time for an independent commission or special prosecutor. House Speaker Paul Ryan held a press conference this morning; he did not call for a special prosecutor, but he said, “we have an obligation to carry out our oversight regardless of which party is in the White House.” And just as important as what Ryan said, was what he didn’t say. Ryan did not attack former FBI Director Comey, a marked change from last week. And Ryan did not attack the media.

 

In a letter to acting FBI Director Andrew McCabe on Tuesday, the Republican chairman of a House oversight committee, Jason Chaffetz, set a May 24 deadline for the FBI to produce all relevant material relating to any communications between Comey and Trump. Ryan backed Chaffetz’s request. The Senate Intelligence Committee sent two letters to former FBI Director James Comey and Acting FBI Director Andrew McCabe requesting their cooperation in the committee’s ongoing investigation into Russia’s election interference. The senators have requested that Comey appear before the committee “in both open and closed sessions.”

 

Senator John McCain, who has called for the creation of a special bipartisan congressional panel to investigate the Russia matter, compared the controversies enveloping Trump to the Watergate scandal that forced Republican President Richard Nixon to resign in 1974. This is not to say that Republicans have deserted Trump – far from it, but there are some cracks in the wall.

 

Speaker Ryan insisted the Republican legislative agenda was not becoming paralyzed, but that might be wishful thinking. There is no way this controversy will help efforts to repeal and replace Obamacare, it will not aid tax reform or infrastructure efforts. That does not mean the agenda can’t move forward, just that it will be tougher. Apple stock was down 3.3% today. Apple stock was up 34% this year on anticipation that the next iPhone could spur a “super cycle” of sales as well as hopes that federal tax reform could enable Apple to bring home some of its $240 billion in cash and marketable securities that are held outside the United States at lower tax rates. Apple has suggested that if the company were able to repatriate some of its overseas holdings at a lower tax rate, it would return some of the money to its shareholders.

 

Trump leaves Friday on a 10-day trip to Saudi Arabi, Israel, and the Vatican. Today Trump told graduates of the Coast Guard Academy that he has been treated worse than any politician “in history”, although Mrs. Lincoln probably would have disagreed.

 

It took nearly a decade, but debt has made a comeback. Americans have now borrowed more money than they did at the height of the credit bubble in 2008, just as the global financial system began to fall apart. The Federal Reserve Bank of New York says total household debt had reached a new peak — $12.7 trillion, exceeding its peak in the third quarter of 2008. Student loans account for 10.6 percent of that total, up from 3.3 percent in 2003, Student borrowers today owe $1.3 trillion, more than double the $611 billion nearly nine years ago. About one in 10 student borrowers is behind on the loans — the highest delinquency rate of any type of loan tracked by the report. While mortgage balances still make up the majority of household debt, they are a smaller share of total obligations and have fallen back to 2003 levels. Auto loans totaled about $1.1 trillion, or 9 percent, of all household debt. Defaults have been creeping up in auto loans. Credit card balances shrunk by $15 billion to $764 billion, but there has been a recent uptick in delinquencies on these payments. The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also speaks to growing optimism among banks and other lenders about economic growth. Debt can fuel consumer spending, which accounts for about 70 percent of all economic activity in the United States. But debt can be risky. The good news is that the economy is stronger than it has been in some time. Consumers were delinquent on 4.8% of total debt, a marked improvement from the 11.9% of debt that was at least 30 days late at the end of 2009.

 

 

Cisco Systems, the world’s largest networking gear maker, reported its sixth straight drop in quarterly revenue, largely due to declines in its router business. The company’s net income rose to $2.5 billion, or 50 cents per share, from $2.3 billion, or 46 cents per share, a year earlier. Revenue fell 0.5 percent to $11.9 billion.

 

Target reported better-than-expected first-quarter earnings and revenue. Target reported adjusted earnings per share of $1.21, beating estimates of 91 cents. Sales, at $16.0 billion, were ahead of estimates for $15.6 billion, though they were down from $16.2 billion last year. E-commerce sales climbed 22%. Same-store sales were down 1.3%.

 

Shares of Ascena Retail Group fell more than 30 percent in after-hours trading as the owner of Ann Taylor, Loft, Lane Bryant and other brands said it adjusted its second-half outlook to reflect worse-than-expected business conditions. In what’s been a rough earnings season for retailers, Ascena it expects third-quarter comparable store sales to decline 8 percent and for full-year comparable sales to decline between 6 percent and 7 percent.

 

I/O is Google’s annual developer conference. And they had some interesting announcements. There are now about 2 billion active devices based on the company’s Android software. The big headline: Google Assistant is coming to the iPhone. It’s no longer stuck on Android. Google is also expanding its third-party support for Assistant. Before, third parties could build “actions” for the Assistant in the Google Home speaker. Now they’ll work wherever Assistant is, including Android phones and the iPhone. Google Home, the company’s connected speaker, will soon let you call any number in the US or Canada from the speaker for free. A new product, Google Lens has some of the most impressive new features. You can scan just about anything with your phone’s camera and have Assistant analyze its contents. For example, if you take a photo of a concert venue, you can listen to an artist’s music, buy tickets, and more. Or for the amateur botanists, take a picture of a flower, and Google will tell you what it is. Google’s Daydream virtual-reality platform now supports standalone headsets, not just ones that need to be powered by smartphones. Perhaps the most ambitious program is Google.ai, or artificial intelligence. Put away your machine learning degrees — artificial intelligence is now at the stage where it’s ready to replicate and improve on itself. Googlers have designed AIs that are capable of “learning to learn,” which they hope to use on every single product across the Google portfolio, including its cloud business.  Google announced a new generation of its custom AI chips today, the second version of its Tensor Processing Units. Google’s TPU represents a next generation of chip, one custom-built for the task of handling AI, and twice as fast. The new hardware will be available for developers on Google’s cloud service and for companies that want to add artificial intelligence to their operations when renting processing power.

 

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