Financial Review

Carnage Continued

…Stocks down again. FAANG turn bearish. Chips turn bearish. Oil takes another hit. Some troops home for turkey. Don’t expect a China-US trade deal soon. Home ownership up. Romaine lettuce recall.
Financial Review by Sinclair Noe for 11-20-2018

DOW – 551 = 24,465
SPX – 48 = 2641
NAS – 119 = 6908
RUT – 27 = 1469
10 Y – .09 = 3.05%
OIL – 3.86 = 53.34
GOLD – 2.80 = 1222.10

The Dow and the S&P 500 turned negative year to date. The Nasdaq Composite is still holding onto a small gain for 2018.  Energy stocks took a bigger beating than any other sector today and are now as unloved as they were during the financial crisis. Target fell 10.5 percent after reporting weaker-than-expected earnings for the previous quarter. The company also posted lighter-than-forecast same-store sales, which is a key metric for retailers. The decline sent the SPDR S&P Retail ETF (XRT) down 3.4 percent. Kohl’s, L Brands and Macy’s — which are also in the XRT — fell 9.2 percent, 17.7 percent and 3.4 percent, respectively.


For the first time, all five FAANG stocks are in bear markets. Apple dropped over 4% today, and that means Apple has dropped more than 23% from recent highs. Apple‘s last bear market started on Aug. 21, 2015, and didn’t end until Aug. 9, 2016. The stock fell as much as 32% during that downturn. What might a unanimous FAANG bear market mean for investors? The loss of leadership from the technology sector in general, and more specifically the FAANG stocks, which had been a significant driver of the markets for the past few years, is one of the reasons the broader U.S. stock market continues to struggle. Facebook has plummeted by nearly 40%, Netflix has plunged 35%, and Amazon has declined by 26%, putting all three deep in bear markets. Two others, Apple and Alphabet, have lost just over 20%. In the last six weeks, the FAANGs combined have lost almost $1 trillion in market value. Part of the FAANG bear market is just part of the general market malaise but part is tech specific. The dominance of these tech giants, and the social consequences of their power, put them increasingly in the crosshairs of politicians from the left and right. And the tech titans themselves, so often the subject of hero worship, are now facing tougher scrutiny, too. We are entering an era of growing public demand to rein in these companies, which already has hurt these stocks—and the broader market.


The SOX, or Philadelphia Semiconductor Exchange, is on the cusp of a bear market. The SOX most recently spent Nov. 12 trading under that level, along with a stint between Oct. 24 through Oct. 26. The SOX index, which is 6.3% off for the year to date, but some of the key components are suffering far worse fates. Nvidia is down 50%. Advanced Micro down over 30%. Applied Materials, the world’s largest maker of equipment used to manufacture semiconductors, confirmed an industry slowdown, but also said it will be more modest than past downturns. Overall demand in the server, PC and mobile markets is weaker than it was earlier in the year and memory prices are softening in the near term. Applied said that while it expects its fiscal first quarter to be down sequentially and year-over-year, it expects to deliver performance on par with its average quarterly run rate during fiscal 2017. The company also took pains to point out that it believes the industry has changed and it has more growth sectors with high demand, that will help shield it from a sharper downturn than in the past. Whether or not this will be an abbreviated slowdown or not is the biggest question facing tech investors right now. One factor that is different – the trade war with China. With more tariffs on Chinese goods potentially going into effect next year, there could be further fallout, if companies and consumers ultimately slow down their purchases of tech products and prices become too high.


Oil took another big hit today, with WTI finishing at its lowest price in over a year. Among the factors contributing to the steep decline, October U.S. petroleum inventory stands above the five-year average and the decline in Iranian oil exports has been less than anticipated. The market is also experiencing seasonally weak fall demand. Iranian sanctions don’t look impenetrable. Saudi Arabia is likely to pump as much oil as anybody wants, just as long as their crown prince is not arrested for murder. Trump said the U.S. was standing with Saudi Arabia; calling the kingdom, a “steadfast partner”.  Last week, the Central Intelligence Agency concluded the killing of Khashoggi was carried out under the prince’s orders. Today Trump said Crown Prince Mohammad bin Salman may not have known about Khashoggi’s killing. There are limits to cooperation. OPEC meets on December 6. If the price is anywhere near today’s price when OPEC meets, then we might expect more production cuts. The lower the price, the higher the probability of a cut.


Some of the thousands of U.S. troops ordered to the Mexican border last month could begin returning to their home bases in coming days. The Pentagon calls it a reallocation, not a drawdown. For example, troops who conduct logistics and engineering work, such as carrying and installing concertina wire for security purposes, could be replaced by other kinds of troops who provide medical support. Still, as a result of the rotations, some small number of troops may return home and not be replaced, as their skills are no longer needed.


Trump and Chinese President Xi Jinping are set to meet at the end of the month at a G20 summit in Argentina that brings together leaders of the world’s largest economies. Stiffer U.S. tariffs on Chinese-made goods are set to go into effect on Jan. 1 absent a deal, though analysts say it’s possible the two sides could agree to a delay in order to keep talking. And that might be the most we could reasonably hope for. Do not expect a deal before then; and one reason to curb enthusiasm – the U.S. on track to record its largest deficit ever with China. The U.S. has run up a $301 billion deficit in goods with China through the first nine months of this year. The deficit was $274 billion in the same nine-month period in 2017.


The U.S. has run large deficits with China for years, however, and in some cases no longer produces certain goods such as consumer electronics that are popular with Americans. It won’t be easy, and it might even be impossible, to reduce the gap much any time soon. In 2017, the U.S. posted a $375 billion-plus deficit in goods with China. Most glaring is the huge deficit in computers and electronics, but the U.S. is a net importer from China in most market segments except for agriculture. Most trade watchers still believe the two countries will reach a compromise given the dangers posed to their own economies as well as the rest of the world by a deep and protracted dispute.


More Americans became homeowners in the summer months, fresh evidence of a housing market that’s finding some stability after several rocky years. According to the Census Bureau, the national homeownership rate was 64.4% in the third quarter. That’s a half-percentage point higher than a year ago. After touching an all-time high of 69.1% in 2004 as the housing bubble inflated, the homeownership rate bottomed out at 62.9% in 2016 as waves of Americans lost their homes or sold under duress. At the same time, many Americans who would ordinarily become buyers were locked out of the market by stringent lending rules, a lack of affordable inventory and a challenging economic backdrop. All that has made the post-crisis housing market not just less accessible, but less dynamic. Still, the meager recovery to this point puts the homeownership rate only back to 1995 levels, well before the run-up to the bubble. That suggests it may be possible for many more Americans to become owners, if housing market conditions ease further. The vacancy rate for owners was just 1.5% for the second month in a row, tighter than the 1.6% it averaged throughout 2017.


The US Centers for Disease Control and Prevention is warning consumers to not eat romaine lettuce, as it may be contaminated with E. coli. Thirty-two people, including 13 who have been hospitalized, have been infected with the outbreak strain in 11 states, according to the CDC. One of the hospitalized people developed a potentially life-threatening form of kidney failure. No deaths have been reported. People have become sick in California, Connecticut, Illinois, Massachusetts, Maryland, Michigan, New Hampshire, New Jersey, New York, Ohio and Wisconsin. The Public Health Agency of Canada has identified an additional 18 people who have become sick in Ontario and Quebec. All types and brands of romaine lettuce are suspect because no common grower, supplier, distributor or source company has been identified by the CDC. Retailers and restaurants also should not serve or sell any until more is known about the outbreak. Washing lettuce won’t ensure that contaminated lettuce is safe. The best thing is to throw the lettuce away.


This story has implications beyond your Thanksgiving table. Romaine lettuce production is making its annual return to the Yuma, Ariz., region, where the bulk of the nation’s winter supply of this salad green is grown. But earlier this year, romaine from Yuma was the source of the largest E. coli outbreak in more than a decade; 210 people became ill, and five died.  Lettuce sales dropped dramatically, too. From April through June, about $400 million of lettuce was sold, about $70 million less than the same time period in 2017. In the Yuma outbreak, it took all summer to identify possible farms that may have grown the contaminated romaine—even now, investigators aren’t certain exactly which ones were responsible. This complicated the task of investigating how dangerous bacteria got on the lettuce. We do not know the source of the current outbreak but it will almost certainly cost Arizona growers, again.

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