Financial Review

Close But No Cookies

….S&P, Nas, Russell at new highs. Senate votes on having more votes on repeal/replace, or repeal, or semi-repeal, or something. Confidence soars. Existing home sales solid. Oil prices rally. Copper hits 2 year high. Bond market tumbles as the Fed FOMC meets. 3M slammed. McDonalds all time high. Caterpillar jumps. AT&T up. GM down.

Financial Review by Sinclair Noe for 07-25-2017

 

DOW + 100 = 21,613
SPX + 7 = 2477 (record)
NAS + 1 = 6412 (record)
RUT + 12 = 1450 (record)
10 Y + .07 = 2.33%
OIL + .61 = 48.50
GOLD – 5.40 = 1250.60

 

The S&P 500 index, the Nasdaq Composite and the Russell 2000 all closed at record highs. The Dow is close but no cookies.

 

It is earnings season and there were plenty of good earnings and a few bad. 3M marked its sharpest-ever drop on a dollar-basis, off $11.43, or down 5.4%, cutting about 80 points from the price-weighted Dow. 3M’s share slide came after disappointing earnings. The Post-it Notes-and-Scotch tape maker’s share decline, however, was more than offset by a tandem of firm rallies in McDonald’s and Caterpillar which reported second-quarter results that outstripped Street estimates. A drop in Google parent, Alphabet, weighed on the Nasdaq Composite, but the Nasdaq still managed to eke out a record high.

 

Before we dig into earnings news, there was a lot going on today. The Senate voted on healthcare legislation, in a way. Senate Republicans narrowly agreed to open debate on a bill to end Obamacare, but efforts to repeal or repeal and replace the law still face significant hurdles. Senator John McCain, who was diagnosed this month with brain cancer and has been recovering from surgery at home in Arizona, made a dramatic return to the Capitol to cast a crucial vote in favor of proceeding. McCain received a standing ovation as he entered the chamber. The Senate vote was deadlocked at 50-50 and Vice President Mike Pence cast the deciding vote. Despite the successful procedural vote, there is no obvious path for any of the GOP’s various proposals to pass out of the Senate in the coming days. Republicans who voted yes to begin debate warned that they still planned to oppose final passage if the amended legislation was not to their liking. The Senate will now move to an amendment process, but if none of the ensuing proposals can get 50 Republican votes, the party will be stuck again. The Better Care Reconciliation Act has already drawn public opposition from at least four Republicans. In a speech on the Senate floor, McCain criticized both the underlying proposal and the secretive, partisan process Majority leader Mitch McConnell used to write it. McCain said he would not vote for the bill as it is today. He said the proposal must include changes demanded by Arizona’s governor, Doug Ducey, in order to win his vote.

 

The Senate’s next step is to vote on a full repeal of Obamacare – which will probably fail without a proposed bill to replace it. Then it will try an amended version of the Better Care Reconciliation Act, the latest Senate proposal; this will also likely fail since it hasn’t yet been scored by the Congressional Budget Office and thus needs 60 votes to pass rather than just 51. Then we might be looking at a skinny repeal – a more limited repeal that only gets rid of Obamacare’s insurance mandates and some of its taxes, without eliminating Obamacare’s expansion of Medicaid. However, eliminating the mandates would result in much, much higher premiums for everybody who doesn’t opt out. Today’s vote means there will be various amendments offered and there will be votes on the amendments, until the Senate can agree on something that seems to be a complete piece of legislation and then there will be a vote on that, maybe by the end of the week, if there is enough support. That means the next few days are going to be a whirlwind. President Trump says they’ll come up with something really, really wonderful. At this point I’m just hoping I can get coverage for confusion.

 

The Conference Board said its consumer confidence index rose to 121.1 this month from 117.3 in June. The confidence index is now at its second highest level in 16 years. A big reason is the creation of millions of jobs since 2010 that’s driven the unemployment rate down to as low as 4.3%. That’s the lowest level since the turn of the century. The difference between those who say jobs are “plentiful” (34.1%) and those who say jobs are “hard to get” (18%) was 16.1 points. Based on that measure, the last time the labor market was just as good was in August 2001. A “present” situation index that tracks how consumers view the economy now rose to 147.8. That’s the highest level since mid-2001. A future expectations index that tracks how consumers think the economy will perform six month from now increased to 103.3.

 

Sales of existing homes continued to show solid growth. The S&P/Case-Shiller 20-city index rose 5.7% in the three-month period ending in May compared to a year ago, down from 5.8% in the prior period. The broader national index rose 5.6% for the year in May, the same as in April. Phoenix was right in line – posting 0.6% growth in resale home prices in May, and 5.7% in the 12 months through May.

 

Meanwhile, oil prices continue to rally. Saudi Arabia said at a meeting in Russia that it would cut August exports to 6.6 million barrels a day—a million barrels less than a year earlier. Separately, Nigeria, which isn’t part of the production-cut agreement led by the Organization of the Petroleum Exporting Countries, also promised to limit its daily production to 1.8 million barrels. Oil traders have taken these developments as bullish for prices, though many do point out that the Saudis normally lower exports at this time of year because of stronger domestic demand for oil, and Nigeria’s output would still have to rise from its current level of just over 1.6 million barrels a day before the West African nation would cap its output. Meanwhile, Halliburton forecast a flat rig count in the US; that implies a potential slowdown in oil production. Anadarko Petroleum, cut its investment guidance by $300 million for the full year after posting a larger than expected second quarter loss.

 

Copper is back to its highest levels in 2 years, as base metals extended a rally in the past month brought on, in part, by economists having become more upbeat about China’s economy;  coupled with the fact that a very strong housing market is creating strong demand for the physical copper. Freeport-McMoRan shares jumped 14.7 percent.

 

It wasn’t a very good day in the bond market, where the benchmark 10-year Treasury note fell the most in a month. A couple of possible reasons: bond investors expect only modest economic growth and inflation that is stuck well below the Fed’s 2 percent target, and bond traders don’t expect the Fed to increase rates anytime soon – as in maybe December, maybe next year – certainly not tomorrow. The Federal Open Market Committee, the FOMC, started its 2-day meeting today; tomorrow they will issue a statement that they are standing pat on rates for now. Anything else from the Fed would be a major shock. The Fed’s policy is one of “normalizing” interest rates with a real emphasis that it continues to err on the side of market ease – that is, it does not want to make a mistake of disrupting markets and causing a correction. That is, it wants to see the stock market continue to rise, the policy it has been following for most of the current economic recovery. The Fed will likely indicate that it is getting closer to trimming its $4.5 trillion balance sheet and selling off Treasuries and mortgage backed securities, but the big unwinding won’t really start to kick in until sometime in 2018, so for now the rally continues.

 

In earnings news: the markets looked past a 3% drop in Alphabet, which reported after the close yesterday. Alphabet was hit with a $2.7 billion dollar fine from the Euro Union, but looking past that, the parent of Google is still reporting pretty impressive revenue and profit growth. 3M disappointed on earnings and it was punished. That seems to be the theme. Misses are punished. Slightly better than expected earnings get no love, but there is still plenty of good to great earnings news to lift the market to new highs. With more than one-fourth of the S&P 500 having reported results, earnings are now expected to have climbed 9.1 percent in the second quarter, up from a projection of an 8-percent rise at the start of the month.

 

McDonald’s posted its biggest jump in global sales at established restaurants in five years, helped by stronger traffic worldwide. McDonald’s has also focused on value for U.S. customers with discounts on soft drinks and offering custom burgers. And it seems to be working. Global same-restaurant sales climbed 6.6 percent in the second quarter, and sales at U.S. restaurants open at least 13 months rose 3.9 percent. Net income rose to $1.40 billion, beating estimates. Revenue was down slightly but still beat estimates. McDonald’s shares were up 4% and hit an all-time high and were the top gainer on the Dow Jones Industrial Average today.

 

Caterpillar shares jumped almost 6%, hitting a 5-year high. Earnings and revenue beat estimates and Cat raised its guidance.

 

AT&T’s quarterly profit topped estimates. Shares rose 2.5 percent. AT&T is locked in battle Verizon and Sprint and T-Mobile for customers in a market where most people already have cell phones. AT&T, which is in the process of buying Time Warner for $85 billion, has sought to compete by bundling mobile service with entertainment. AT&T lost 89,000 U.S. phone subscribers who pay a monthly bill – that was better than expected.

 

 

 

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