Financial Review

Davos Populism

…Record highs for Dow, S&P, and Nasdaq. 4Q GDP at 2.6%; economy grew 2.3% for 2017. Dec. durable goods up 2.9%. Trump floats America First in Davos. Dollar continues to crater. States sue over SALT. The final days of Sears? Bombardier ok.

Financial Review by Sinclair Noe for 01-26-2018


DOW + 223 = 26,616
SPX + 33 = 2872
NAS + 94 = 7505
RUT + 6 = 1608
10 Y + .04 = 2.66%
OIL + .62 = 66.13
GOLD + 2.00 = 1350.30


More record highs for Wall Street. For the week, the Dow rose 2 percent, the S&P 500 gained 2.2 percent and the Nasdaq advanced 2.3 percent.


Intel was the big winner in the Dow, up over 10% after posting strong earnings with strength in their higher margin data-center business. Intel shares hit their highest level since September 2000. Drugmaker Abbvie gained about 13% after boosting its 2018 earnings forecast with help from U.S. tax reform and announcing it will accelerate dividend growth and share buybacks. Fourth-quarter earnings growth for the S&P 500 is now estimated at 13.2 percent, according to Thomson Reuters data, up from 12 percent at the start of the year. The dollar was on track for its worst week since May after comments from senior US officials this week backing a weak currency.


The first estimate of fourth quarter gross domestic product growth came in at 2.6%. That was short of expectations, and it ended a run of 2 quarters of 3% growth, but still a solid number. The economy grew 2.3% for the year. That’s well ahead of the 1.5% growth in 2016, but slower than 2015. Consumer spending accelerated to a 3.8% annual pace of growth, the fastest pace in almost two years. Americans spent more on new cars and trucks, clothing and health care, among other things. Businesses also got into the act. They increased spending on equipment by 11.4%, while investment in new housing jumped 11.6%. Reduced inventories and a big trade gap shaved 1.8 percentage points off fourth-quarter GDP.  Falling inventories might not be a problem. There are two reasons inventories drop: it could mean businesses growing more pessimistic about the future and cutting back stockpiles, or it could mean that sales were strong in the holiday shopping season and businesses didn’t adequately forecast demand ahead of time and had to sell out of their stockpiles. Imports rose 13.9% to easily outpace a 6.9% increase in exports; higher oil prices played a key role. Consumer confidence is high, the unemployment rate is low and businesses are investing more. That should bode well for the economy moving into the new year.


A separate report shows durable-goods orders accelerated by 2.9% in December, led by higher demand for airplanes and autos. The burst in new orders at the end of last year was mainly for large commercial planes. Bookings leaped almost 16%. Orders for autos also rose 0.4%. Business investment, meanwhile, slipped 0.3% based on a closely followed measure known as core capital goods orders. Despite the small year-end drop in core orders, businesses ramped up investment in 2017 to the fastest pace since 2011.


The United States is firing a series of volleys over world trade agreements to explicitly protect US industries. Trump took his “America First” message to the world’s elite in Davos, Switzerland saying the US would “no longer turn a blind eye” to what he described as unfair trade practices. Trump became the first sitting US President in 18 years to address the annual conclave of the rich and powerful at the Swiss ski resort of Davos. Trump took the stage backed by a marching band. Sticking to the teleprompter, Trump declared the United States “open for business”. He said he would always promote “America First”, as he expected other world leaders to do on behalf of their own countries, but he swiftly turned to a theme of demanding tougher enforcement of trade rules, accusing unidentified countries of unfair practices. Trump wants the world to invest in America and buy American, saying, “We are creating an environment that attracts capital, invites investment, and rewards production.” But global trade is a two way street; if they buy our stuff, we have to buy some of their stuff.


Tuesday’s State of Union speech is expected to put trade at the top of this year’s agenda. Last year, he scuppered TPP and now he is pushing to rethink and possibly walk away from NAFTA as well as setting in motion two major investigations, one into China’s intellectual property practices and another into steel tariffs. This week the administration also slapped 30 percent tariffs on washing machines and solar panels to show it was prepared to put words into action. What’s more, there’s widespread concern in Europe the tax reforms themselves breach world trade rules on fair competition between European multinationals and U.S. counterparts. And speculation is rife the IP and steel investigations are now in and will form the basis for more action.


The dollar index has been in a year-long decline, defying forecasts that it should strengthen from the fact that the Federal Reserve is raising interest rates and normalizing monetary policy faster than its counterparts. But the opposite has happened, and the dollar weakened as flows increased into the euro and yen, as those economies improved, and central bankers in Europe and Japan provided accommodation. Then this week, U.S. Treasury Secretary Steven Mnuchin claimed dollar weakness was good for the US, a sentiment quickly walked back. But the market continues to sell the dollar and selling could accelerate if the administration takes broader trade actions that are seen as protectionist. NAFTA is a test case for how the US may behave on the broader world stage. Even as Trump says he wants a “strong dollar,” his administration’s policies, which focus on eliminating or reducing trade deficits, suggest his administration would prefer the dollar to stay weaker to boost exports. And while a weaker dollar makes exports from the US cheaper abroad, which should mean more sales, it also means US financial assets lose value. Why would a foreign investor buy US Treasuries when the dollar is dropping 10%?


Janet Yellen holds her final meeting as head of the Federal Reserve next Wednesday with the dollar on its weakest run since 2010-2011 when the Fed was printing money hand over fist. Jerome Powell has already won confirmation as the next Fed chair. Look for a passing of the baton, and no change in monetary policy.


New York, New Jersey and Connecticut announced they had launched a coalition to sue the federal government to challenge the recently passed tax bill and its reduction in state and local tax deductibility. Governors of the three states said in a statement that the tax-law changes “unfairly target” states whose residents have come to rely on being able to deduct big local tax burdens from their federal tax returns. New Jersey Gov. Phil Murphy called the changes “a clear and politically motivated punishment of blue states – like New Jersey and our neighbors – who already pay far more to the federal government than we receive.” In New York, Gov. Andrew Cuomo has also pledged to “launch a repeal-and-replace strategy,” and to “explore the feasibility of a major shift in the structure of state tax policy.”


Sears is at risk of defaulting on its debt according to credit rating agency Standard & Poors. And that sent its already battered stock to record lows Friday. S&P downgraded Sears Holdings to the lowest rung of junk bond status. Sears is trying to get some lenders to accept late payments on $1.3 billion of its debt, and S&P warned that if lenders agree it expects to downgrade the retailer further to “SD,” which stands for “selective default.” The company owed a total of $4.4 billion as of Oct. 28, the most recent figure it has disclosed, so it’s trying to delay payments on roughly 30% of its overall borrowing. Shares of Sears Holding are down 20% in the past 2 days of trading.  It has already lost 29% of its value so far this year after a 61% plunge in 2017. Even if Sears does default, that doesn’t necessarily mean that the company will file bankruptcy. They still have assets they can sell. It’s not clear that Sears’ strategy is to file for chapter 11, but it is a further sign that Sears is struggling to survive with its current debt load.


Bombardier has scored a big victory in a trade dispute with Boeing involving Delta Airlines jets. The US International Trade Commission rejected Boeing’s claims that Canada’s Bombardier had sold CSeries planes below cost in the US market, and discarded a Commerce Department recommendation to slap a near 300 percent duty on sales of the jets for five years.


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