Financial Review

Dancing with the Devil

…..Stocks higher. Earnings challenged. Charlottesville reax. Merck CEO makes a stand. GoDaddy finally takes a stand. Apple watches for Aetna. Vanguard’s climate change economics.

Financial Review by Sinclair Noe for 08-14-2017

 

DOW + 135 = 21,993
SPX + 24 = 2465
NAS + 83 = 6340
RUT + 20 = 1394
10 Y + .03 = 2.22%
OIL – 1.32 = 47.50
GOLD – 7.10 = 1282.60

 

Stock were broadly higher, with the S&P 500 Index gaining the most since April. Volatility was in retreat, as the CBOE Volatility Index fell below 12.5 after topping 16 last Thursday. After a week of market jitters, investors were calmed after South Korea’s president said resolving North Korea’s nuclear ambitions must be done peacefully and U.S. officials played down the risk of an imminent war.

 

With more than 90 percent of the S&P 500 members having reported second-quarter results, earnings growth is tracking at a 12.2 percent pace year-over-year, much better than the 8.4 percent expected at the start of the quarter. This marks the second straight quarter of double-digit growth – the fastest two quarters of growth since 2011. More than half of S&P companies topped forecasts, the highest percentage since the second quarter of 2010, although the average upside surprise was 4%, slightly below the long-term average of 5%. All sectors of the benchmark are on pace to beat projections, except energy, where less than 40 percent of companies topped earnings forecasts. Technology and health care continue to lead upside surprises, with more than 85 percent of tech companies and 75 percent of health companies posting better-than-expected earnings per share. Markets are forward looking.

 

Of the S&P 500’s 11 primary sectors, forecasts for 2018’s profits have come down for six of them. The average estimate of analysts polled by FactSet see S&P 500 SPX earnings of $141.81 a share in 2018. That’s down 0.2% from the $142.15 a share estimate that was forecast at the end of June. Forecasts have come down even more for the remainder of the current year. For 2017, analysts see earnings of $130.46 a share for the S&P 500. That’s down 3.5% from the $135.25 that was forecast at the end of April. The S&P has risen 3.5% since that date. Just a reminder, in the first half of 2016, S&P 500 companies were going through an earnings recession but earnings in the second half of 2016 recovered nicely – those earnings from last year are used as comparison for this year; so the first half of 2017 had a low hurdle for comparison – the hurdle will now be a bit tougher.

 

After department stores revealed a string of lackluster earnings last week, Home Depot, one of the sturdiest retailers in America, will report results on Tuesday. The home improvement giant is expected to post strong profits, as it continues to ward off competition from Amazon. Target posts results on Wednesday. On Thursday, Walmart will report its results. Investors will look to see whether the nation’s biggest retailer can continue to grow its e-commerce and grocery business amid intense competition.

 

By now you are familiar with the events of the weekend in Charlottesville, Virginia. A man was arrested after driving a car into a crowd of peaceful counter-protestors, causing many injuries and one death; and two officers died when a police helicopter in the area crashed. Trump said Saturday that “many sides” bore blame for the violence, without directly repudiating racial supremacists.  The president faced heavy criticism for not specifically denouncing the white nationalists and neo-Nazis. Today, under increasing pressure, Trump denounced the Ku Klux Klan, white supremacists and neo-Nazis, a move that came after the CEO of Merck resigned from Trump’s council of manufacturing executives, saying “America’s leaders must honor our fundamental values” by rejecting expressions of hatred, bigotry and group supremacy. Trump responded angrily less than an hour later on Twitter, suggesting the CEO, Ken Frazier, should use the extra time to focus on lowering “ripoff drug prices.” The president has not proposed policies to lower drug prices, but has rather suggested further deregulation of industry generally, as well as weakening purchasing pools like Medicare that could potentially negotiate better prices with the pharmaceutical industry.

 

Trump created two CEO advisory groups early in his presidency. Blackstone Group CEO Steve Schwarzman leads one described as a strategy and policy forum, and Dow Chemical’s Andrew Liveris organized a manufacturing initiative. After an initial burst of activity and press attention, the councils have fizzled with neither meeting since April. Earlier this year, Elon Musk of Tesla and Walt Disney CEO Bob Iger quit the strategy and policy panel after Trump said he would withdraw from the Paris climate pact. Former Uber CEO Travis Kalanick quit in February after Trump’s executive order on immigration.

 

Scottsdale-based GoDaddy, the web hosting company, closed down the domain for Daily Stormer, a neo-Nazi and white supremacy website after the site posted an article mocking Heather Heyer, the 32-year-old woman who was killed in Charlottesville. The company had been asked in July why it did not take action against the website, after Daily Stormer had published an article promising to “track down” the relatives of CNN staffers. At the time, a GoDaddy spokesperson cited the First Amendment in defending his company’s business with the organization. The website tried to transfer the domain to Google but Google cancelled the registration.

 

On Sunday, Trump said he may pardon former Arizona sheriff Joe Arpaio, who was found guilty two weeks ago of criminal contempt for defying a state judge’s order to stop targeting suspected undocumented immigrants for traffic stops. Arpaio was convicted by federal Judge Susan Bolton of misdemeanor contempt of court for willfully disregarding an Arizona judge’s order to stop the anti-immigrant traffic enforcement. He is expected to be sentenced on Oct. 5.  The former Maricopa County sheriff was an ardent Trump backer who also backed his birther views, arguing as recently as December that ex-President Obama’s Hawaii birth certificate was a fake.

 

In an interview with The Associated Press, William Dudley, president of the Federal Reserve Bank of New York, said he thinks the Fed has adequately prepared investors for a reduction in the Fed’s $4.5 trillion balance sheet. With the economy now much healthier, the Fed is ready to begin selling some of those bonds. Dudley also said that he would favor a third increase this year in the Fed’s benchmark short-term rate if the economy remained strong. On Wednesday, the Federal Open Market Committee will issue minutes from a July policy meeting that may hold clues on the next rate hike.

 

As negotiators prepare for the start of round one of NAFTA negotiations on Wednesday, Trump administration officials are taking a careful stance on the task of modernizing the 23-year-old pact. White House chief economic adviser Gary Cohn said in a statement on Saturday, “NAFTA needs to be reformed to help protect American workers and create more jobs at home. We should keep the parts that work, especially for much of American agriculture, but fix the parts that don’t.” His remarks hinted that there would be limited renegotiation of NAFTA. Trump is about to find out how hard it is to get an agreement that satisfies not only those workers who feel ‘shafted by NAFTA’ but also the powerful business interests currently benefiting from billions of dollars in cross-border sales. Even if negotiators from all three nations are able to come to consensus quickly on a new deal in the coming months, Trump still has to get the agreement through Congress, which past votes on trade issues have shown is no easy task.”

 

Apple and insurance company Aetna held talks late last week to bring Apple’s fitness-tracking smartwatch to Aetna’s 23 million members. Aetna, which currently offers an Apple Watch to its 50,000 employees as part of a wellness program, is negotiating to offer free or discounted watches to members.

 

Google is paying Apple up to $3 billion a year to remain the default search engine on iPhones and iPads, up from $1 billion just three years ago, and Google’s licensing fees make up a large bulk of Apple’s services business. For what it’s worth.

 

US shale drillers will keep posting strong gains in August and September. The Energy Information Administration projected output in several key oil producing regions will grow by 117,000 barrels a day to 6.15 million barrels a day in September. The region’s output is seen topping 6 million barrels a day in August. The forecast for this month is significantly higher than a prior estimate

 

Vanguard manages about $4 trillion and is often the top shareholder in big US corporations through its massive index funds – giving it a major voice in setting corporate agendas. And now Vanguard wants companies to disclose how climate change could affect their business and asset valuations. A spokesperson for Vanguard said the request for more info “is not a matter of ideology, it’s a matter of economics. To the extent there are significant risks to a company’s long-term value proposition, we want to make sure there is long-term disclosure of those risks to the market.”

 

The Arizona Regional Multiple Listing Service (ARMLS) reports overall residential sales in Greater Phoenix area for July were up 3.0% year-over-year.  Active inventory is now down 8.9% year-over-year. With flat inventory in 2016, prices were up 4.8%. This is the ninth consecutive month with a YoY decrease in inventory, and prices are rising a little faster this year (2.5% through May or 6.2% annual rate).
 

 

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