Financial Review

Choke

…Stocks rally then choke. Justice Kennedy will retire. SCOTUS rules against fair share for unions. Apple and Samsung settle. Disney cleared for Fox. Conagra-Pinnacle seek to control your freezer.

Financial Review by Sinclair Noe for 06-27-2018

DOW – 165 = 24,117
SPX – 23 = 2699
NAS – 116 = 7445
RUT – 28 = 2640
10 Y – .05 = 2.83%
OIL + 1.77 = 72.30
GOLD – 7.00 = 1252.60

 

This was a very discouraging trading session. The Dow Industrials started with a rally, up about 285 points in the first hour of trade this morning. And then it rolled over. That’s a 450-point swing from high to close. That retreat represents the largest turnaround lower for the Dow since Feb. 21, when the gauge rose 303.24 points to end down 166.97 points. The 200-day moving average is at 24,303. The Dow broke this critical level of support on Monday, managed a minor rally yesterday, followed by a confirming selloff today. The Dow has been sliding for the better part of the past 2 weeks; down about 1,300 from the high on June 11.

 

The S&P 500 index also marked its largest blown lead since February, after it peaked up 0.85%, but finished the session down 0.9% at 2,699, ending below a psychological, round-number level at 2,700 for the broad-market index. The S&P 500 and the Nasdaq Composite Index have also seen selling, though to a lesser degree, as the Dow’s multinational components have higher exposure to trade issues. Overseas equities have hardly been immune to this issue. China’s stock market has dropped about 13% over the past month, and it has fallen into a bear market, defined as a drop of at least 20% from its peak. The Vanguard FTSE All-World ex-US has dropped 4.7% over the past month, and it is down more than 12% from its 52-week high.

 

According to the Investment Company Institute, about $5.16 billion was pulled from equity funds (both mutual funds and exchange-traded funds) in the latest week, ended June 20. That stands as the largest weekly outflows since the week ended March 28. The week also represented the second straight week of redemptions. This was the first time that international stock funds have seen back-to-back outflows since November 2016.

 

Today’s session started with a rally which followed a White House statement that appeared to imply a more moderated approach by Trump to curb Chinese investments in US technology companies. Trump wants Congress to pass legislation to bolster the Committee on Foreign Investment in the US, or CFIUS, so it can prevent companies from violating intellectual-property rights of American companies. Bloomberg reported the administration decided not to employ the International Emergency Economic Powers Act of 1977 that would give the president broad authority to curb Chinese investments in the country. Then, National Economic Council Director Larry Kudlow rejected the notion that the US has softened its stance toward China on foreign investment. Instead, Kudlow said the approach is aimed “at protecting our technological family jewels.” Meanwhile, China’s central bank guided the yuan to a six-month low against the US dollar, sending the Chinese currency tumbling, a move some analysts described as a shot across the bow of the US.

 

While all 11 primary S&P 500 sectors had traded higher early in the session, buying enthusiasm waned in the afternoon, and only three of the 11 ended in positive territory. The information technology sector dropped 1.5% while consumer-discretional stocks ended down 1.3%, pressured by losses in both Amazon.com and Netflix. The financial sector fell 1.3% in its 13th straight daily decline, extending what had already been the longest losing streak in its history.

 

Justice Anthony Kennedy announced his retirement from the Supreme Court. Kennedy will step down on July 31. Kennedy was appointed to the bench by President Ronald Reagan in 1986, after Robert Bork’s nomination failed. While Kennedy was a Republican appointee, he was viewed skeptically by many conservatives, who believed he hewed far too closely to the ideological center for their tastes. Kennedy wrote the ruling that legalized same-sex marriage nationwide in 2015. He voted in favor of granting habeas corpus rights to Guantanamo detainees in 2008. He opposed the execution of underage criminals on constitutional grounds in 2005. And in 1992, he upheld Roe v. Wade. Kennedy’s retirement affords Trump the chance to appoint a more consistently conservative justice in his place and, in so doing, create a very clear conservative majority consisting of Chief Justice John Roberts, Clarence Thomas, Samuel Alito, Neil Gorsuch and whoever Trump picks for the Kennedy slot.

 

Earlier today, the Supreme Court dealt a huge blow to organized labor, ruling that non-union members no longer have to pay their “fair share” for union representation in collective bargaining negotiations. The closely watched case – Janus v AFSCME – could permanently weaken public unions and will impact public sector employees in 22 states. In a 5-4 decision the court overturned a previous decision that had protected the right of public sector unions to collect administrative fees from non-members, ruling it was inconsistent with the first amendment right to free speech. Without that protection, unions may not only lose fees from non-members but also lose members who are happy with the union’s work but do not want to pay for it.

 

Apple and Samsung have finally ended their seven year-long legal fight over patent infringement. The two companies have agreed to a settlement. The companies did not disclose the terms of the deal. The dispute began in 2011 when Apple accused Samsung of copying the iPhone’s design and infringing on patents for features like double-tapping to zoom. For the past 7 years, the case has dragged through the courts. Their fight eventually landed in the Supreme Court, which in 2016 reversed an appeals court ruling that Samsung must pay $399 million for patent infringement. Justices sent the case back to the lower court to determine just how much Apple should receive. The settlement comes after Apple won a $539 million jury award in May.

 

Walt Disney won U.S. antitrust approval today for its $71-billion purchase of 21st Century Fox’s entertainment assets. The Justice Department announced that it had entered into an agreement with Disney and Fox that, if the deal goes through, requires Disney to sell the Fox Sports Regional Networks. The approval is a victory for Disney in its battle with Comcast for one of the media industry’s biggest prizes. Last week, Fox accepted a sweetened bid from Disney, which upped its offer following Comcast’s competing $65-billion bid. The $38-a-share price is about $10 a share higher than what Disney offered in December — and $3 above Comcast’s bid. Comcast is now mulling its next steps, including possibly teaming up with private equity investors in its pursuit of Fox assets. Disney and Comcast are looking to use the Fox assets to bolster their content, expand overseas and fend off the threat from Netflix and other streaming upstarts.

 

ConAgra Brands — the food giant that owns Chef Boyardee, Hunt’s and Orville Redenbacher’s as well as Marie Callender’s — is buying Pinnacle Foods, the parent company of Birds Eye, Duncan Hines, Vlasic and the Hungry-Man frozen food brand. The deal is valued at nearly $11 billion. Both companies are leaders in the frozen food business, which has actually been a bright spot in the food industry, and their combination will create a frozen food giant. Sales growth for ConAgra’s and Pinnacle’s frozen food entrees has outpaced the growth of their major rivals over the past few months. The ConAgra-Pinnacle deal could wind up being the first of many in the food business. Campbell Soup’s stock surged earlier this week following a New York Post report that said Kraft Heinz — backed by Warren Buffett — and cereal king General Mills might want to buy the struggling soup company. And shares of peanut butter and jelly maker Smucker rallied Tuesday on takeover speculation.

 

The trade deficit in goods narrowed 3.7% to $64.8 billion in May. The government’s advanced report on wholesale inventories showed a 0.5% gain in May. Advanced retail inventories rose 0.4%. The trade gap in goods excludes services. Both imports and exports rose in May but exports rose at a much faster pace. Exports were up 2.1% while imports rose only marginally, up 0.2%. The narrowing of the deficit in goods points to a smaller overall trade deficit in May. The government will release overall trade numbers for May next week. Despite the improvement in the deficit in May, the US is on track to post another high deficit in 2018. The narrowing of the trade deficit in May is likely to give a boost to gross domestic product in the second quarter.

 

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, slipped 0.2 percent last month. April data was revised to show the so-called core capital goods orders surging 2.3 percent instead of the previously reported 1.0 percent rise. Business spending on equipment increased at a 5.5 percent annualized rate in the first quarter and most economists expected a similar pace of growth in the April-June period.

 

The National Association of Realtor reports pending home sales declined 0.5% to a reading of 105.9 in May. NAR’s index, which tracks real-estate transactions in which a contract has been signed but the transaction hasn’t yet closed, hit a four-month low in May. The index was 2.2% lower than a year ago. That’s the fifth straight month of negative annual readings. The problem here is tight inventory. There just aren’t many homes listed for sale.

 

A day after the American Petroleum Institute helped push crude prices even higher by estimating a 9.228-million-barrel draw in U.S. crude oil inventories, the EIA confirmed the draw, at 9.9 million barrels for the week to June 22. That was enough to push oil prices to the highest level since November 2014.

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