Financial Review

Debasement

….Dow hits another record high. Cat, 3M lead earnings parade. Blackrock downgrades US credit. Tax plan soon, maybe. Corker and Flake speak up. Jobs of the future. Happy online holidays.

Financial Review by Sinclair Noe for 10-24-2017

 

DOW + 167 = 23,441
SPX + 4 = 2569
NAS + 11 = 6598
RUT + 2 = 1500
10 Y + .03 = 2.41%
OIL + .55 = 52.45
GOLD – 5.70 = 1277.30

 

Another record high close for the Dow Industrial Average. Caterpillar and 3M delivered results that topped estimates, while General Motors and Fiat Chrysler also rallied on earnings. Japanese equities built on recent gains, with the Nikkei climbing for a record-breaking 16th consecutive session.

 

Caterpillar’s earnings announcement reinforced the view that the international economic expansion is the most synchronized since the start of the decade. Cat projected 2017 sales of $44 billion, marking a third straight increase in annual revenue forecasts. But what stood out was the breadth of demand for its products. Sales surged 27 percent in North America as the U.S. oil and gas industry cranked up, while China’s growing construction market helped sales in the Asia Pacific region balloon 31 percent. Dealers’ replenishing of inventories boosted sales in Europe, Africa and the Middle East by 22 percent and “stabilizing economic conditions” in Latin America lifted sales by 24 percent. Caterpillar earnings were more than 50 percent higher than what analysts were expecting. Shares popped by 6.7% today.

 

3M’s third-quarter earnings beat the highest analyst estimate, and the company increased its projected profit for the year. United Technologies also raised its profit forecast amid strength in demand for jet engines. Orders for business equipment in the US have also been increasing in recent months, which probably helped boost third-quarter growth.

 

AT&T’s quarterly results missed Wall Street estimates as the US No. 2 wireless carrier lost video subscribers to traditional and online TV competitors and fewer of its existing customers upgraded their devices ahead of Apple’s launch of the iPhone X. AT&T, which owns satellite television service DirecTV, said it lost 89,000 US video subscribers in the quarter

 

BlackRock downgraded US credit to neutral from overweight, citing  “increased vulnerability to downside risk.” Credit spreads have tightened around the globe. The extra premium investors demand to own riskier corporate debt over U.S. government bonds is at the narrow end of a 17-year range. Tight spreads leave little safety cushion against rising interest rates or an increase in default risk. BlackRock says the market is running at “relatively hot levels, versus a more neutral stance in U.S. equities compared with recent history.” That could make for a crowded exit should sentiment sour. Credit quality has been eroding in pockets of the debt market.

 

Tax legislation is coming soon, depending on who you listen to. House Freedom Caucus Chairman Mark Meadows said he’s been promised that the House Ways and Means Committee will release its plan about seven days after this Thursday’s scheduled vote on a budget resolution. That would mean a bill text would be published on or before Friday, Nov. 3. Ways and Means Chairman Kevin Brady said only that the timing for a bill “is very shortly.” But the House decided to vote on the Senate’s version of the budget. And Senate Finance Committee Chairman Orrin Hatch said his own panel needs to produce a plan in the next two to three weeks. Whenever the tax legislation is rolled out, it might be a bumpy ride.

 

Republican Senator Bob Corker has expressed concern about the impact of the tax plan on the deficit and this morning Corker slammed Trump, saying: “When his term is over I think the debasing of our nation, the constant non-truth-telling, just the name-calling, the debasement of our nation will be what he will be remembered most for, and that’s regretful.” Trump responded with a tweet calling Corker — who is chairman of the Foreign Relations Committee and isn’t seeking re-election — a “lightweight” who “couldn’t get elected dog catcher” in his home state. In a separate interview, Corker said the president should stay out of the tax debate. It’s silly to expect any Republican politician to abandon long-held policy positions just because he thinks the Republican president is unfit for office. Still, let’s put Corker in the “undecided” category, at least for now.

 

 

Then, this afternoon, Arizona Republican Senator Jeff Flake announced he won’t seek re-election and then delivered a blistering attack on Trump on the Senate floor saying: “We must stop pretending that the conduct of some in our executive branch are normal. They are not normal. Reckless, outrageous and undignified behavior has become excused as telling it like it is when it is actually reckless, outrageous and undignified…It is often said that children are watching. Well, they are. And what are we doing to do about that? When the next generation asks us, why didn’t you do something? Why didn’t you speak up? What are we going to say? I rise to say, enough!” (Here’s the speech.) Again, it’s not at all clear that this will matter when it comes to tax cuts, but let’s put Senator Flake in the “undecided” category, at least for now.

 

And while Corker and Flake might be in the undecided category, along with a few other Republican senators – the public is coming down against Trump’s tax plan. A new Reuters/Ipsos poll released today finds fewer than one-third of Americans support the tax plan. The poll found that more than two-thirds of registered voters said reducing the federal budget deficit is more important than cutting taxes for the wealthy or for corporations. Among Republicans surveyed, 63 percent said deficit reduction should take priority over tax cuts for corporations, while 75 percent said deficit reduction should take priority over tax cuts for the wealthy. The poll also found that the more people know about the tax plan, the less they like it.

 

A decade from now, the American economy could look much the way it does today — only more so. More dominated by the service sector jobs and fewer manufacturing jobs. More polarized in both earnings and geography. More tilted toward jobs that require at least a bachelor’s degree. That, at least, is the future foreseen by experts at the Bureau of Labor Statistics, which released its projections of what the United States employment picture will look like in 2026. (The estimates are based on long-term trends, not the short-term strength or weakness of the economy.) The projections reflect some familiar patterns. Jobs in health care and clean energy will continue to grow rapidly. Manufacturing jobs will shrink, as will occupations involving data entry or other tasks that are increasingly being done by machines or algorithms. Overall job growth will continue to be slow, partly as a result of the aging of the baby boom generation; by 2026, even the youngest boomers will be approaching retirement. The BLS thinks the fastest growing jobs will be solar photovoltaic installers, wind turbine service technicians, home health aides, personal care aides, and physician assistants. The report suggests that the polarization that has increasingly defined the United States economy will only increase over the next decade. High-paying jobs in health care, computer science, and other fields heavy in math and science will grow quickly; so will low-paying jobs caring for older adults or waiting on tables. But continuing a decade-old trend, many job categories in the middle of the pay spectrum are growing slowly or disappearing.

 

For the first year, Americans are expected to spend more money online than in stores this holiday season. According to a survey from Deloitte, shoppers plan to spend 51% of their holiday shopping budget online, compared to 42% in stores. This is the first year that online sales are expected to exceed in-store sales. Deloitte’s survey looks at shoppers’ entire “holiday budget.” However, similar trends are expected to play out over Black Friday weekend.

 

So, what happens to all those stores that don’t have shoppers anymore? Well, many are closing. And one of the most iconic retail stores, Lord & Taylor announced it would sell its flagship building on Fifth Avenue in Manhattan to a company called WeWorks, a 7-year old office space start up. Lord & Taylor will rent a small portion of the building, but the rest will be used for offices. Across the United States, retailers are rethinking the uses of their physical spaces, as more shopping moves online and consumers prefer to spend less time in stores. Many struggling malls have converted their stores into rock-climbing gyms, movie theaters and community colleges. Other shopping centers stand mostly empty. And its not just shopping malls that are being re-purposed. In some regions of the country, shuttered manufacturing plants are being reopened for use as warehouses to fulfill the orders Americans are placing online.

 

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