Financial Review

Chips and Salsa

…Nasdaq hits a record. Dow drops. Tech-chips lead the way. Broadcom-Qualcomm-Intel. Federal deficit grows. Waiting on inflation. Yahoo hack implications. Goldman succession. Dropbox IPO a go. Aramco IPO on hold

Financial Review by Sinclair Noe for 03-12-2018

DOW – 157 = 25,178
SPX – 3 = 2783
NAS + 27 = 7588
RUT + 3 = 1601
10 Y – .02 = 2.87%
OIL – .66 = 61.38
GOLD – .50 = 1323.60

Early trading saw the Dow Industrial Average up a little over 100, only to slide and close down 157. Boeing and Caterpillar were the biggest decliners on the Dow. Boeing lost 2.6 percent, and Caterpillar fell 2.3 percent. Both stocks would have problems with steel and aluminum tariffs which could increase costs and hamper sales abroad. Trump last week softened his stance on tariffs by exempting Canada and Mexico, but negotiations are ongoing as the European Union and Japan also seek exemptions. The big multinational, industrial companies of the world are all taking a hit on the concern that they will be the targets of reprisal sanctions. The S&P 500 is 3.1 percent away from record highs, while the Dow is 5.4 percent away.


The Nasdaq hit a record high on Friday and continued today. Apple closed at an all-time high, briefly surpassing an intraday market cap of $925 billion for the first time, before closing at $922 billion. That puts Apple more than $100 billion ahead of the second-largest company by market capitalization, Alphabet, and more than $150 billion ahead of Amazon. Amazon also hit an all-time high to help lead the gains. Tech stocks and, in particular, chip stocks led the rally on the Nasdaq. The PHLX Semiconductor Index SOX, finished up 1% at 1,445.90 for its seventh straight session of gains, for a total gain of 7.9%. That’s the longest string of session gains since an eight-day winning streak that ended Jan. 24, in which the SOX advanced 6.6%.


Broadcom shares closed up 3.6% after the Singapore-based chip maker said it would complete its shift to a U.S. headquarters by April 3, about a month sooner than expected. Last week, the company’s hostile bid for Qualcomm fell under national security scrutiny by the Treasury Department’s Committee on Foreign Investment in the U.S. and reports surfaced that Intel is considering a bid for Broadcom if it absorbs Qualcomm. Another possibility is that Intel could try to pick up assets Broadcom might be forced to sell in order to complete a Qualcomm purchase.


In 2005, when Apple was working on the first-generation iPhone to be launched in 2007, Steve Jobs invited Intel to pitch for the CPU business for the planned smartphone. Not believing Apple’s sales projections, and not seeing any way to make money from it, Intel turned him down … Intel not only lost out on the CPU chip business, but if the proposed Broadcom merger with Qualcomm goes ahead, Intel may lose its iPhone modem chip sales too. Fearing that it may be about to be locked out of the smartphone chip business altogether, Intel is reportedly considering making a massive acquisition bid for Broadcom – a company valued at more than $100B.


Belatedly, Intel realized it needed a seat at the smartphone table. Despite troubles with its more advanced manufacturing processes, the company managed to supply some wireless modems for the iPhone 7, 8 and X. Ironically, the alliance was aided by a long standing and bitter intellectual property dispute between Apple and Qualcomm. If Broadcom’s acquisition of Qualcomm proceeds, the dispute with Apple could disappear: Broadcom is already an Apple parts supplier, and it wouldn’t want to jeopardize a good relationship with a negotiation over royalties. The exact percentage that Qualcomm charges in royalties is of the utmost importance to a standalone Qualcomm…But for a merged Broadcom-Qualcomm, the exact amount of the royalty would be less important than a good working relationship with Apple. If the dispute is settled, Intel loses its wireless modems deal with Apple. No mobile CPUs + no modems = nothing of substance. Broadcom would be in charge — they would hold all the cards. Intel would face regulatory hurdles to acquire Broadcom. There is no certainty a deal could be reached. One thing’s for sure: turning down the iPhone contract was the most expensive mistake Intel ever made, and one that continues to have expensive implications well over a decade later.


Companies have been feverishly putting the savings they reaped from the tax breaks passed in December into their investors’ pockets this year. Share buybacks in 2018 have averaged $4.8 billion a day, double the pace for the same period last year. The share repurchases have helped keep the market afloat, as investors have pulled $23.5 billion out of funds that focus on U.S. stocks this year. Since the start of February, the share buyback total is $162 billion, part of a $231 billion surge in cash deployment when including new takeovers.


The U.S. government recorded a monthly budget deficit of $215 billion in February, up 12% from the same month last year due to lower revenue and higher spending. For the first five months of the fiscal year, the government’s deficit is $391 billion, $40 billion more than the shortfall during the same period last year. Over the 12 months ended February, (Donald Trump’s first full year in office), the federal budget deficit widened to $703 billion (3.6% of GDP), up from $583 billion (3.1% of GDP) over the prior 12-month period.  Since the passage of tax cuts late last year, the 10-year benchmark yield has gained 41 basis points from 2.46%.


Inflation expectations edged higher last month, with one measure hitting its highest level in a year, according to a Federal Reserve Bank of New York survey. We’ll find out more tomorrow morning when the consumer price index is published. The CPI is forecast to increase 0.2% in February, less than half as much as the 0.5% gain in January. The chief reason: Lower gasoline prices. The CPI topped 2% in 2017 for the first time since 2012, reflecting higher prices for gas, rent, housing, hospital stays and prescription drugs, among other things. Even if gas and food are stripped out, the CPI is climbing at a 1.8% yearly pace. The Federal Reserve uses a different gauge of inflation, known as the PCE. The PCE is also on the upswing, but it’s running a bit cooler at 1.7% yearly clip. The Fed predicts PCE inflation will rise gradually in 2018 and meet its 2% inflation target. The CPI is already there.


Yahoo has been ordered by a federal judge to face much of a lawsuit in the United States claiming that the personal information of all 3 billion users was compromised in a series of data breaches. Yahoo was accused of being too slow to disclose three data breaches that occurred from 2013 and 2016, increasing users’ risk of identity theft and requiring them to spend money on credit freeze, monitoring and other protection services. The breaches were revealed after Verizon agreed to buy Yahoo’s Internet business, and prompted a cut in the purchase price to about $4.5 billion.


David Solomon will become sole president and chief operating officer of Goldman Sach as of April 20. Harvey Schwartz, who currently shares the roles with Solomon, is retiring. That solidifies Solomon as the No. 2 behind Chairman and CEO Lloyd Blankfein, who could step down as soon as the end of the year.


Dropbox priced shares for its initial public offering that would value it at up to $7.1 billion, nearly a third below the valuation it commanded in 2014. Cloud storage company Dropbox is the largest tech IPO after a protracted dry spell, and investors are carefully watching it for signs of how other highly valued tech companies will be received by the public markets. If Dropbox is a barometer for public market sentiment, it appears that investors will not endorse the valuations that many billion-dollar-plus startups now command. The spring calendar for technology offerings is relatively busy, including cyber security company Zscaler’s planned debut later this week and music company Spotify’s expected listing early next month.


It’s expected to be the biggest IPO in history. And officials in Saudi Arabia were hoping it would happen this year. Proceeds from Aramco’s stock market listing have been earmarked to fund the diversification of the Saudi economy. But the sale of shares in the world’s biggest oil company could slip into 2019. The Financial Times and New York Times both reported Monday that the timetable could be delayed. In a statement on Monday, Saudi Aramco said it continues to review options for the listing, adding that “appropriate decisions will be made in due course.” But it did not comment on the timing.

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