…FOMC leaves rates unchanged. Crazy dog threatens 25% tariffs of $200 B of Chinese goods. Populism for billionaires. Apple to a trillion. Tesla produces. Wells Fargo caught again.
Financial Review by Sinclair Noe for 08-01-2018
DOW – 81 = 25,333
SPX – 2 = 2813
NAS + 35 = 7707
RUT – 1 = 1669
10 Y + .04 = 3.00
OIL + .17 = 67.83
GOLD – 7.90 = 1216.50
The Federal Reserve’s Federal Open Market Committee wrapped up a 2-day policy meeting and published a statement that they had voted unanimously to keep the target range for its benchmark rate at 1.75 percent to 2 percent. No surprise. However, the committee is widely expected to approve an increase at the September meeting and minor changes to language in the statement seem to point to another rate hike in December. Traders in the fed funds futures market are indicating a 91.4 percent chance of a September increase and a 68.2 percent probability for another move in December, according to the CME’s tracker. They would come on top of previous hikes in March and June.
The statement said the labor market has “continued to strengthen,” language consistent with the June meeting. However, the committee went on to note that “economic activity has been rising at a strong rate,” a more bullish view than the June characterization of “solid” growth. In addition, the statement noted that household spending and business fixed investment have “grown strongly.” That, too, is an improvement from June’s characterization that household spending has “picked up.” So, the Fed is sticking to its game plan of gradual, incremental rate hikes along with gradual incremental quantitative tightening. The Fed faces a dangerous path to normalization, but they are getting it done with no surprises to the markets.
The market seems to have plenty of shocks when it comes to trade policy – which has been all over the board. Last week, it was about the de-escalation of trade tensions with Europe; even though we still haven’t seen concrete action. Earlier this week we heard that there would be fresh talks with China, then that talks with China were not happening, and then today the threat of new, bigger tariffs against China. The latest plan calls for slapping a 25-percent tariff on $200 billion of imported Chinese goods after initially setting them at 10 percent, in a bid to pressure Beijing into making trade concessions. The new,, higher tariffs could include food products, chemicals, steel and aluminum and consumer goods ranging from dog food, furniture and carpets to car tires, bicycles, baseball gloves and beauty products.
In early July, the U.S. government imposed 25-percent tariffs on an initial $34 billion of Chinese imports. Beijing retaliated with matching tariffs on the same amount of U.S. exports to China. Washington is preparing to also impose tariffs on an extra $16 billion of goods in coming weeks, and Trump has warned he may ultimately put them on over half a billion dollars of goods — roughly the total amount of U.S. imports from China last year. Now, the plan has shifted to 25% tariffs on $200 billion worth of products, with the threat of an additional $300 billion. Stocks moved higher Tuesday on hopes of improving trade conditions. Today, stocks moved lower as the negotiations got weird, again. It is possible that crazy trade rhetoric could scare up concessions, but not likely. China knows that the barking dog is chained to economic reality; the dog might tug at the collar but will not strangle itself. The crazy threats of ever-escalating conflict are becoming all too predictable. There are real benefits for both the U.S. and China in stepping back from the brink of trade war, but that path is paved with alliances, not conflicts.
Republican Sen. Rob Portman of Ohio is proposing legislation that would make it harder for the White House to impose the sort of duties that have hit metals imports. The measure, which faces longer odds in the House than in the Senate, could be most meaningful to foreign auto makers. Trump has threatened to impose tariffs on imported autos, citing national-security concerns. Portman teamed with Republican Sen. Joni Ernst of Iowa and Democratic Sen. Doug Jones of Alabama to unveil a bill today that would give the Defense Department the power to decide whether such tariffs are justified by national-security concerns. The Commerce Department would then decide how to respond, including whether to impose the tariffs and where to set them. That would shake up the current arrangement under Section 232 of the 1962 Trade Expansion Act, which Trump in March used to impose tariffs on imported steel and aluminum.
The markets have been mainly overlooking crazy tariff talk and focusing on the strength in the economy and the profits from tax cuts. And now the Trump administration is considering a plan that would cut federal taxes on investment income, a change that independent analysts say would overwhelmingly benefit the wealthiest Americans. An analysis earlier this year by the Penn Wharton Budget Model found the proposed cut would reduce tax revenue by more than $100 billion over 10 years. Sixty-three percent of that money would flow to the pockets of the top 0.1 percent of income earners, those who had adjusted gross incomes of at least $7.31 million in 2015, according to the Internal Revenue Service. Another 23 percent of it would go to the next 0.9 percent, those with adjusted annual gross incomes of more than $1.48 million. All told, 86.1 percent of the tax cut, or more than $80 billion, would be captured by the top 1 percent of earners, with the next 4 percent of earners receiving 9 percent of the cut. The remaining 5 percent of the cut would be distributed among the bottom 95 percent of the population. The change would allow investors to account for inflation in calculating how much they’ve profited off an investment, a change that would typically reduce the total amount of taxable profit. Of course, it would still have to get congressional approval, or maybe they could bypass congress. Because, nothing says populism like giving billionaires a tax cut by executive fiat.
Apple reported fiscal third quarter earnings yesterday after the market close. Today, Apple shares gained 5.8%. Apple also revealed an adjusted outstanding share count of 4,829,926,000; that factors in hefty stock buybacks and nudges the trillion-dollar per share price to $207.05. Investors had previously been looking for a share price of $203.45 to hit the record market cap. So, another day like today, and they top $1 trillion.
Tesla’s second-quarter loss was wider than expected, but the company backed its prior forecast that calls for profitable third and fourth quarters. Tesla posted a loss of $3.06 per share versus estimates of a loss of $2.92 per share. Revenue of $4 billion was better than expected. Tesla had $2.2 billion in cash on hand at the end of the quarter, and expects its cash reserves to grow in the second half of the year. It also now expects to spend less that $2.5 billion in capital expenditures in 2018, far below the $3.4 billion it spent in 2017. Production, though, is many months behind schedule and the company has resorted to setting up assembly lines in temporary tent structures. Tesla said in July it was able to repeatedly hit its target of producing 5,000 Model 3 vehicles per week. Tesla is now aiming for a 6,000 vehicle per week rate, which it hopes to achieve by the end of August. By the end of the year, it hopes to ramp up to a rate of 10,000 per week. Tesla shares up 8.6% in after hours.
Wells Fargo has agreed to pay $2.09 billion to settle a probe into its creation and sale of faulty mortgage loans that contributed to the financial meltdown 10 years ago. In 2005, Wells Fargo set out to double production of two types of risky mortgages, known as subprime and Alt-A. As part of the push, it loosened requirements for stated-income loans. Investigators cited tests of Wells Fargo mortgages that compared them with borrowers’ tax filings, revealing that more than 70 percent of loans sampled “had an unacceptable discrepancy between stated and actual income.” And Wells Fargo knew that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information.” The Justice Department said the bank even took steps to “insulate itself” from the risks posed by such loans, screening many of them out of its own portfolio and limiting its liability to third parties. In other words, they knew they had bad loans and they sold the junk without disclosing it was junk.
The Container Store’s stock soared 40% today, for its biggest-ever one-day gain, after the retailer posted better-than-expected earnings for its fiscal first quarter and raised guidance.
Shares of Oracle took a dive into negative territory in afternoon trade Wednesday, after CNBC reported that Amazon will completely stop using Oracle software by 2020.
Wynn Resorts stock dropped more than 7 percent during after-hours trading, before recovering some of those losses. The Las Vegas-based company reported second quarter results that missed analysts’ expectations on the top and bottom line.
TripAdvisor shares plunged more than 12 percent in the extended session after the company reported disappointing second quarter revenues.
FitBit shares were up as much as 6.42 percent in extended-hours trading, before giving up some of those gains. Fitbit posted a smaller-than-expected loss of 22 cents per share against estimates of a loss of 24 cents per share. Its top-line results also beat expectations.
Last year was a banner year for the exposure of personal information, and so far this year there has been a steady drumbeat of data breaches, so many that experts worry that people are just throwing up their hands in defeat.
Today’s breach du jour – Social media network Reddit said a hacker broke into a few of its systems and accessed some user data, including current email addresses and a 2007 database backup containing old encrypted passwords.