Financial Review


…Stocks crash, go figure. PPI rises. Inventories up. CVS-Aetna done deal. Wells Fargo losing customers. Sears in the dustbin of history. Hurricane Michael.

Financial Review by Sinclair Noe for 10-10-2018

DOW – 831 = 25,598
SPX – 94 = 2785
NAS – 315 = 7422
RUT – 46 = 1575
10 Y + .02 = 3.22%
OIL – 2.33 = 72.63
GOLD + 5.30 = 1195.40


Stocks crashed today. I know an 831-point decline works out to a 3.15% decline, whereas back in October 1987, a 508-point decline equated to a 22% drop. Still, today was a crash. The S&P lost 3.29%; the Nasdaq dropped 4.08%.


The session started in negative territory and then it just slipped away. The S&P 500 dropped for a fifth consecutive session, its worst losing streak since November 2016; falling below the 50-day and 100-day moving averages. As the Dow dropped, it fell below its 50-day moving average around 25,948; the 200-day moving average is down around 25,140. This was the worst day for the Dow since February.  Stocks closed right at lows for the session. All three indexes are in the red this month. But the Nasdaq has really taken it on the chin: It has plunged more than 6% already in October. Among individual stocks, here are some of the better-known names that took a hit today: Nike down 11.5%; Microsoft lost 6.4%; Apple dropped 3.3%; Netflix down 8.4%; Nvidia down 7.5%; Amazon down 6.2%. Futures for the Dow are pointing toward another challenging session tomorrow.


The best guess for rationale behind the selloff is that rates have been moving higher. And while higher rates are problematic for many reasons, it doesn’t really explain why today was the day for a big selloff. Typically when stocks fall, we see money move over to bonds in a safe haven play – not today. Bond prices fell, and that pushed the yield on the 10-year note to 3.22%. Even gold offered no sanctuary – up 5.30 at 1195.40, unable to crack 1200.  The VIX, or volatility index spiked 43%, up 7 points at 22.96%.


Yesterday, the International Monetary Fund cut its global growth forecast and cut 2019 growth forecast for China and the US, saying that tariffs will hurt the countries next year. China has been pumping more cash into its flagging economy to spark growth and mitigate effects from the trade war. Chinese officials have also turned to tax cuts, infrastructure spending and looser monetary policy in an effort to spur more economic activity. That may not be enough. Those options are not really available here in the US. More tax cuts are unlikely; the Fed is tightening, not easing; and infrastructure spending is on the back burner, or maybe behind the back burner.


So, interest rates are rising, but you could make the case that rates are rising for the right reasons – the economy is growing. The trade war with China is getting worse, but you could argue that this is a negotiating tactic and things won’t get too far out of hand. What about corporate earnings? Corporate profits for the third quarter should be really strong.  Analysts are predicting that earnings for the S&P 500 will rise nearly 20% from a year ago. We’ll get a better sense of just how well big US companies are doing later this week when Delta, Walgreens, JPMorgan Chase, Citigroup and Wells Fargo report their results and give outlooks for the remainder of the year. But after that, the earnings story will deteriorate. The first and second quarters of 2019 will see a sharp pullback in growth, in part because comparisons will be tough.


So, what do you do when the market falls hard? Don’t panic. Stick to your plan, whatever that plan is. Remain vigilant.


The producer price index climbed 0.2% last month. The increase in wholesale inflation over the past year, however, slowed again to 2.6% from 2.8%. The 12-month rate hit a seven-year high of 3.4% just four months ago. The cost of services rose 0.3%, while the cost of goods, meanwhile, fell by 0.1%. Food and gasoline prices both declined, though the drop in fuel almost certainly won’t last. Stripping out food, energy and trade margins, the core rate of wholesale inflation surged 0.4%. Although the 12-month rate of core inflation remained flat at 2.9%, it’s still at an elevated level.


Tomorrow morning the government will release September’s consumer price index, which measures prices at the retail level. Increases in Social Security benefits are tied to the CPI. Retirement benefits are likely to rise about 2.8% next year, based on the formula that determines annual cost-of-living adjustments in Social Security. It would mark the biggest gain since a 3.6% advance in 2012. In 2018 the average beneficiary got about $1,405 a month. A 2.7% increase would amount to $38 a month or $456 for a full year.


Wholesale inventories in the U.S. rose 1% in August as businesses boosted production to keep up with rising sales. Sales increased 0.8% in the month. The ratio of inventories to sales, meanwhile, was unchanged at 1.26. That’s how many months it would take to sell all the inventory on hand. One year ago, the inventory-to-sales ratio was higher at 1.30. An increase in inventories adds to gross domestic product, suggesting the third quarter will be fairly strong.


CVS has gained the US government’s approval to buy Aetna. The $69 billion acquisition, announced in December 2017, will drastically remap the health care industry. CVS is a massive drugstore chain and prescription insurer, and Aetna is one of the nation’s largest health insurers. It is the largest health insurance deal in history, far exceeding Express Scripts’ $29 billion acquisition of Medco in 2012, the last record-holder. Aetna agreed to spin off its Medicare Part D prescription drug business. CVS has more than 9,700 pharmacies and 1,100 Minute Clinics. The combination could make it easier for people to monitor diseases without having to see a doctor. Currently, CVS’ walk-in locations offer vaccinations, lab tests and diagnosis and treatment of illnesses like strep throat and ear infections from nurse practitioners and physician assistants. In the future, CVS and Aetna said that patients will be able to go to a local CVS in between doctor visits for glucose level monitoring, counseling on how and when to use medications and advice on weight loss programs and better dietary habits. The new company says it wants to create a “new front door” to the health care system. If realized, that vision could save patients a lot of time and money. How quickly customers might start saving — and how much cheaper drugs might actually be — isn’t yet clear. Advocacy groups have criticized the deal. The combination of CVS and Aetna creates an enormous market force and consolidation in a market already dominated by a few, powerful players, presents the very real possibility of reduced competition that harms consumer choice and quality.


Consulting group cg42 published a report on Wells Fargo. No surprise, the research indicates Wells Fargo customers are fed up with the bank. An industry-high 30% of Wells Fargo’s customers are at risk of dumping the bank. The report, based on an online survey of 4,000 Americans, projected that Wells Fargo could lose $93 billion in deposits over the next year. That would represent about 7% of the bank’s total deposits. Customers’ top complaint is that their bank was engaged in “dishonest, unethical or illegal practices.” Others were angry that Wells Fargo is trying to sell them products they don’t want or need. Fraudulent accounts, charging for things you didn’t provide — these are all actions that it doesn’t take a PhD to understand. The average consumer can easily relate. And they realize if they did this they would be in jail or bankruptcy.


The handwriting is on the wall: Sears appears to be nearing bankruptcy. One of Sears’ major shareholders just dumped a chunk of his stock for pennies on his original investment. The company added a new director who is familiar with bankruptcies and restructuring. Reports circulated that the company is talking to advisers and banks in preparation for a bankruptcy filing. Sears Holdings, the parent company of Sears and Kmart, faces an October 15 deadline to pay $134 million on its debt. CEO and primary shareholder Eddie Lampert told the company’s board that it was crucial it restructure more than $5 billion it owes “without delay.” Investors are giving up hope on a deal. Sears Holdings (SHLD) stock plunged 30% today. The stock has lost two-thirds of its already depressed value since Lampert announced the attempt to restructure the company’s debt on September 24. If Sears does file for bankruptcy, it could try to stay in business, using the court process to shed debt and unaffordable leases. It could attempt to emerge as a profitable company. Or it could simply go for liquidation – marking the end of a retail icon that was once the largest retailer and the largest employer in the country.


Hurricane Michael hit the Florida panhandle – near Panama City – earlier today as a strong Category 4, with winds of 155 mph. Category 5 kicks in when winds hit 157 mph. Michael’s minimum central pressure was measured at 919 millibars when the storm’s eye reached the coast, making it more powerful than Hurricane Katrina in 2005 and Hurricane Andrew in 1992. With winds like that, there will be extensive damage to buildings; downed trees will become projectiles. The hurricane is also spawning tornadoes. The storm surge was up to 14 feet in some areas. And then the storm moved northeasterly toward Georgia. Hurricane Michael is a fast moving, but it will start to slow down as it moves across land, and by the time it makes it to the Carolinas, the big problem will be rainfall, up to 6 inches.

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