Financial Review


…About face on Syria. About face on TPP. The Fed and inflation. Banks kick off earnings season. Delta, Blackrock deliver. Bed, Bath & Beyond Bad.

Financial Review by Sinclair Noe for 04-12-2018


DOW + 293 = 24,438
SPX + 21 = 2663
NAS + 71 = 7140
RUT + 10 = 1557
10 Y + .04 = 2.83%
OIL + .37 = 67.19
GOLD – 18.50 = 1335.30


Cry ‘Havoc,’ and let slip the dogs of war; or not. Yesterday, there was the threat of missiles flying in Syria, with the implication that we could see Russia and Iran drawn into a nasty confrontation. Trump tweeted what amounted to a threat, or maybe a warning, to Russia to get ready. Today, a complete reversal. Trump tweeted “Never said when an attack on Syria would take place. Could be very soon or not so soon at all!”


I’m not sure where that leaves us, but apparently no missiles flying today is a good thing for Wall Street. But Wall Street has many concerns – for example, a possible trade war with China. Trump, in another sharp reversal, told a gathering of farm state lawmakers and governors this morning that he was directing his advisers to look into rejoining the multicountry trade deal known as the Trans-Pacific Partnership, a deal he pulled out of days after assuming the presidency. After the US defected from the TPP, other members of the trade deal went ahead with it. Last month, the 11 remaining countries signed an agreement in Chile, though it still has to be ratified by local officials in some countries. Rejoining the 11-country pact could be a significant change in fortune for many American industries that stood to benefit from the trade agreement’s favorable terms and Republican lawmakers who supported the pact. The deal was largely viewed as a tool to prod China into making the type of economic reforms that the United States and others have long wanted.


A foolish consistency is the hobgoblin of little minds. Let’s just run with that.


Initial jobless claims fell by 9,000 to 233,000 in the week ended April 7. The more stable monthly average of claims rose by 1,750 to 230,000. The number of people already collecting unemployment benefits, known as continuing claims, also increased by 53,000 to 1.87 million. The nation’s unemployment rolls have also fallen to the lowest level since 1974, based on the weekly average over the past month. And while that indicates a fairly tight labor market, it is a bit misleading because many people are not eligible for unemployment benefits due to the rise of the gig economy.


The import price index was flat in March because of the lower cost of oil. Excluding fuel, import prices rose 0.2% last month. Despite no change in March, the rate of import inflation over the past 12 months edged up to 3.6% from 3.5%. Look for that number to climb even higher in April, as oil prices have jumped to multi-year highs.


With all the tweeting and the headlines and confusion, it might be easy to overlook a couple of significant bits of data this week. Namely, import prices and consumer prices and oil prices are moving higher. You look at every bear market and they’ve always basically occurred because of an uptick in inflation and an uptick in interest rates. We have been waiting for the classic wage push inflation – the labor market tightens up and wages move higher and inflation kicks in. We haven’t seen much of that, but we keep thinking that we are getting closer. But we are seeing signs of inflation. The CPI is now firmly above 2%. Oil prices are now firmly above $60 – closing at $67.19 today.


The economy is fairly strong, and I know it sounds contrary but that is not the best environment for stocks. The best environment for stocks is a dull, boring, slightly sluggish economy which prompts the Federal Reserve to inject liquidity to prop things up. Once an economy reaches a certain level of acceleration, the Fed cuts liquidity. Instead of trying to get the economy moving, the Fed reverts to acting like the central bankers they are and starts worrying about the economy overheating – and inflation. So, the Fed tries to cool things off – by shrinking liquidity. As liquidity dries up, corporations start having to build inventory, which again takes money out of the financial assets. And when the economy is really running on all cylinders, companies start engaging in capital spending to try to keep pace. And all these actions combined tend to draw on money available for investing in stocks and stock prices go down.


But right now, the market looks like it wants to move higher. People are looking forward to earnings season. This is one of the most widely anticipated earnings seasons in recent memory as investors expect a lower corporate tax rate to have boosted the bottom line for companies. Market participants do not want to miss out if earnings are as good as the forecasts say they will be. S&P 500 earnings are expected to rise 17 percent, but financials are projected to show 24 percent gains. In just the past three months, analysts have more than doubled their expectations for the financial sector as a whole, with banks leading the way. Only energy, which has been the beneficiary of rising oil prices, has seen a higher net revision among the S&P 500’s 11 sectors.


Several big banks kick off earnings reporting season tomorrow, including JPMorgan, Citi, and Wells Fargo. The big picture view of the economy should be good for the banks: the economy is strong, taxes have just been cut, regulations are likely to be rolled back, interest rates are rising, and volatility is back. But the devil is in the details. Net interest margins—the difference between what banks make on lending versus what they pay to depositors—will expand—but banks will put aside more to cover for expected losses from loans they make. So, don’t look for eye-popping revenue growth, and earnings growth has largely been the result of cost cutting. Much of the tax cut, the promise of regulatory reforms, and the possibility of steadily rising interest rates, could already be priced in to stocks. If it’s fully priced in, the question is, for further gains what else is needed? The big banks are not the market leaders, but that can provide an idea of possible problems in the economy. If the banks say they see smooth sailing ahead, it could provide some stability for the markets.


BlackRock, the world’s largest asset manager, generated higher profit during the first quarter by luring more money from investors even as stock and bond markets fell. BlackRock benefited from its large footprint in exchange-traded funds (ETFs), which have been taking market share away from pricier investment products for several years. Blackrock’s net income rose to $1.09 billion, or $6.68 per share, in the first quarter, up 28 percent from the year-ago period. Shares gained 1.5% today.


Delta Air Lines beat quarterly earnings forecasts thanks to rising passenger and cargo traffic as well as non-ticket revenue that is growing at an even faster pace. Airlines have become increasingly reliant for sales and profits on services and products such as co-branded credit cards. Delta said American Express secured more than a million new accounts for their joint credit card in the first quarter, a record that gave the airline a sales boost through payments the company receives for frequent flier miles. Delta generated $3 billion in revenue from the card last year. Sales from businesses including the credit cards and repairs jumped 32% from a year earlier, surpassing $1 billion in the quarter through March 31. Revenue from ticket sales rose 7%, accounting for 77% of sales. Cargo revenue climbed 23%. The search for alternative revenue streams comes as the growth begins to slow from ancillary sales in services ranging from baggage charges to fees for assigned seats. These fees still generated $57 billion for airlines world-wide last year. Delta reported profits of $547 million in the March quarter compared with $561 million a year earlier. Per-share earnings rose a penny to 78 cents, with the adjusted total of 74 cents beating Wall Street estimates.


Bed Bath & Beyond reported same-store sales declined 0.6% for the fourth-quarter, however earnings and sales exceeded expectations. The company expects full-year earnings per share in the low-to-mid $2.00 range. The FactSet consensus is $2.44. A number of analysts also cut Bed Bath & Beyond’s price target citing margin pressure. Shares dropped 20% today.


In most states, public pension funds don’t have enough money to pay for benefits they’ve promised to government workers. The problem is getting worse. Overall, the shortfall across states grew by $295 billion between 2015 and 2016, according to a new report from The Pew Charitable Trusts. All together, state pension plans had just $2.6 trillion to cover a cumulative liability of $4 trillion. Many pensions have done a poor job of investing pension funds, but the problem can’t be blamed on the stock market. Many states simply don’t contribute enough money. Twenty-three states still would have fallen short of what they needed even if their investment assumptions had been correct. Lawmakers in some states have changed the pension benefits they promise to future workers as a way to stem the growing liability. Despite teacher protests, Kentucky Governor Matt Bevin signed controversial legislation this week that changes pension benefits.


The largest union for Oklahoma teachers called off its nearly two-week walkout that shut public schools statewide, saying it had secured historic gains in education funding. The move came after the Republican-dominated legislature passed its first major tax hikes in a quarter century that raised about $450 million in revenue for education. Republican leaders said they had no plans to go as high as the $600 million being sought by educators.

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