Financial Review

Cold, Cold

…Stocks slip again. Shutdown? Tariffs? Earnings? Fed? Real estate demand outstrips supply. Earnings season: CAT will raise prices because of tariffs but has plenty for buyback. Yemen turns into an oil problem for Saudis.

Financial Review by Sinclair Noe for 07-30-2018

DOW – 144 = 25,306
SPX – 16 = 2802
NAS – 107 = 7630
RUT – 10 = 1653
10 Y + .01 = 2.97%
OIL + 1.41 = 70.10
GOLD – 2.20 = 1222.00


The selloff seems to be gathering momentum. The Nasdaq Composite is down for 3 straight sessions; down 1% or more in each of those sessions. The Nasdaq has also seen a sharp uptick in the number of stocks striking 52-week lows. Today, 102 Nasdaq-listed stocks fell to their lowest price in a year or more, and only 30 stocks hit new highs. There’s an enormous amount of money in tech stocks and some of that money is rotating out or moving to the sidelines.  The S&P 500 index is sitting at the 2800 level, which had been an important level of resistance – now let’s see if it can provide support. Equities have done well of late, with the Dow up 4.8% in July. The S&P 500 has gained 3.5% in the month while the Nasdaq has jumped 2.3%, hitting multiple records along the way. Much of the rally has come on the second-quarter earnings season, which has both shown strong growth and featured a high number of companies topping analyst expectations. Of the 270 companies that have posted results, 82.6 percent have beat consensus estimates. S&P earnings are expected to grow by 22.6% when the numbers for the quarter are tabulated. The big question is how can the market top this? According to the Stock Trader’s Almanac, August ranks as one of the weakest months of the year for major indexes, with steeper losses in midterm years.


Toss in tariffs, trade wars, and threats of a government shutdown – and investors seem a bit jittery. After a meeting last week with Trump and Jean-Claude Junker, president of the European Commission, the only agreement reached was that for the time being, both sides would refrain from escalating the trade conflict that erupted when the Trump Administration slapped new steel and aluminum tariffs on EU powers and other countries around the globe. Today during a press conference with Italian Prime Minister Giuseppe Conte, Trump repeated his claim that he “would have no problem doing a shutdown,” unless he gets funding for a border wall. Apparently, Mexico is not going to pay, so the tab is landing on US taxpayers.


The U.S. Treasury expects to borrow $329 billion in the July-September quarter, $56 billion more than previously estimated. The new forecast includes an end-of-quarter cash balance of $350 billion. This is the largest borrowing in the third quarter since 2010 and is well above the $189 billion borrowed one year ago. The government will probably end up borrowing over one trillion dollars this fiscal year. Perhaps growth will eventually eat away at the deficit, but not yet.


And as the debt increases, the Federal Reserve is not replacing as many securities on its balance sheet once they mature, allowing some to “roll off” under its new policy of quantitative tightening. The Federal Open Market Committee will release a statement at 2 PM (Eastern) Wednesday after two days of talks on monetary policy. There will not be updated economic forecasts or a press conference from Fed Chairman Jerome Powell. Although the Fed always insisted it could raise rates at a non-press-conference meeting, it never has. This is the second-to-last FOMC meeting without a chance for reporters to ask the Fed chairman any questions. Powell announced last month there will be a press conference after all eight FOMC meetings in 2019. The Fed has penciled in two more moves this year, expected at the meetings with press conferences in September and December. With the economy rolling along at a 4.1% clip in the second quarter, and the unemployment rate at 4%, look for the Fed to send strong signals that they will continue on their previously announced path of 2 more rate hikes this year. Investors are already on board a September rate hike, pricing in 90% chance of a move. Treasury Secretary Steven Mnuchin suggested on Sunday it was fine for the Federal Reserve to be raising interest rates, after Trump recently criticized the central bank for doing just that. In response to a question, Mnuchin said it was responsible for Fed Chair Jerome Powell and his colleagues to be increasing rates as the economy grows faster and inflation picks up.


The National Association of Realtors says pending home sales rose 0.9% in June. NAR’s index, which tracks real-estate transactions in which a contract has been signed but the transaction hasn’t yet closed, rose to a level of 106.9 in June, but was lower than year-ago levels for the sixth month in a row, this time by 2.5%. Demand continues to overwhelm supply. Sales of previously-owned homes tumbled to a 5-month low in June, the Realtors said earlier this month. Still, June marked the first inventory increase in three years, and that may have helped pending-home sales.


Friday’s gross-domestic-product report had an ugly detail about the housing market that added to evidence of a slump: Residential investment, which includes construction and brokers’ fees, shrank in the second quarter for a third quarter out of four. Home sales help drive other parts of the economy, including consumer confidence and the pace of construction. Buyer fatigue is building, even though a strong jobs market and the maturing of millennials mean there’s plenty of demand for houses. Evidence of this fatigue came last week in several sales reports. Existing-home sales, which make up about 90% of the market, fell for a third straight month in June to an annual pace of 5.38 million units, according to the National Association of Realtors. And new residential construction, or housing starts, softened in June to an annual rate of 1.17 million units, according to the Census Bureau. In March, starts were at an annual rate of 1.33 million. Sales in both the high and the low ends of housing are slowing for different reasons. Luxury-home sales in major markets have cooled with uncertainty about the effects of the new tax law. At the cheaper end, the market has “crossed an affordability threshold” after many years of increasing prices, low inventory, slow wage growth, and, now, rising mortgage rates.


Caterpillar reported second-quarter adjusted earnings per share that rose from a year ago, and from the previous quarter. CAT shares gained as much as 2.9% but pared gains and finished up less than 0.2%. CAT said it has assumed, that for the second half of the year, that tariff-related costs would be $100 million to $200 million, but Caterpillar still raised its full-year profit outlooks as it expects a mid-year price increase to offset most of the costs. Separately, the company said it bought back $750 million worth of stock in the second quarter after buying back $500 million worth in the first quarter, and expects to spend about the same amount on repurchases in the second half of the year as it did in the first half.


Shares of CBS Corp dropped 5%. The media company’s board met today to discuss personal misconduct allegations against Chief Executive Leslie Moonves and said it was selecting outside counsel to conduct an investigation.


Food distribution company US Foods Holding said it would buy SGA’s Food Group of Cos for $1.8 billion in cash. US Foods also reported disappointing second-quarter sales, sending its shares down 15 percent.


Tyson Foods slid 7.6% after the company cut its full-year profit forecast, citing the potential impact of tariffs. The warning also weighed on shares of Hormel Foods and Pilgrim’s Pride, which ended the session down 2.5 percent and 1.5 percent, respectively.


Chipotle Mexican Grill shares are down over 3% after hours following reports that it shut a restaurant in Ohio following reports of customers getting sick after eating there. This is not the first time Chipotle has seen its share price impacted when customers are affected by food-related illness. Chipotle has not yet confirmed the problem in Ohio. This outbreak comes just days after McDonalds suffered a much larger problem as over 160 customers across 10 states were hit with a parasitic illness.


American Express said it was conducting a review with an external party after a report about bait-and-switch sales tactics in its foreign exchange business. The Wall Street Journal reported that the card company’s foreign exchange unit recruited small business customers with low currency conversion rates only to quietly raise those rates later without notification. The practice, which ended earlier this year, went on for more than a decade.


Saudi Arabia announced last week it was suspending oil shipments through the Red Sea’s Bab al-Mandeb strait after Houthis rebels in Yemen attacked two ships in the waterway. To date, no other exporters have followed suit. A full blockage of the strategic waterway would virtually halt shipment to Europe and the United States of about 4.8 million barrels per day of crude oil and refined petroleum products. Saudi Arabia is trying to encourage its Western allies to take more seriously the danger posed by the Houthis and step up support for its war in Yemen, where thousands of air strikes and a limited ground operation have produced only modest results while deepening the world’s worst humanitarian crisis. There was no official confirmation that the move was coordinated with Washington but there is a strong probability. Just one week ago, Trump threatened Iran with potential war. Iran backs the Houthis in Yemen. So, you can probably guess what happened today. Trump says he’d be willing to meet with Iran’s president Rouhani with “no preconditions”.

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