….Dow hits another record. Others slide. 1987ish. Amazon does its thing. Intel, Twitter, Starbucks, et al. Foxconn goes to Wisconsin. Skinny repeal on tap.
Financial Review by Sinclair Noe for 07-27-2017
DOW + 85 = 21,796
SPX – 2 = 2475
NAS – 40 = 6382
RUT – 8 = 1433
10 Y + .03 = 2.31%
OIL + .08 = 49.12
GOLD – 1.50 = 1259.60
The major stock indexes moved to all-time intraday highs, only the Dow held on for a record close. The Dow Jones transportation Average dropped to its lowest level in nearly two months, with UPS offering a weak outlook and FedEx falling in tandem. Volume was heavy today. The Nasdaq Composite and the Nasdaq 100 or QQQ just fell off a cliff around midday. With a higher high and a lower low than yesterday, we have an outside reversal, a fairly strong bearish move – but it isn’t necessarily conclusive. Tech has been leading the markets, and now the FAANG stocks have all reported earnings; so it might be nothing more than buy the rumor, sell the news. A JPMorgan derivatives strategist thinks it might be more; claims low volatility has led to more leverage; recommends buying S&P 500 puts as a kind of portfolio insurance. For anybody old enough to remember 1987, portfolio insurance has nasty connotations.
A milestone was passed this week when one-month Treasury bill rates rose above 1 percent for the first time since 2008. That may not seem like much until you consider that the rate averaged a paltry 0.07 percent between 2008 and 2016.
With nearly half the S&P 500 having reported, second-quarter earnings are expected to have climbed 10.7 percent, compared to an 8-percent rise expected at the start of the month.
Amazon is the world’s biggest online retailer but they don’t earn much profit. Net income fell to $197 million, or 40 cents per share, in the second quarter, from $857 million, or $1.78 per share, a year earlier. Net sales rose 24.8 percent to $37.96 billion. Instead of booking profit, Amazon plows the money back into the business. Amazon has stepped up spending to expand globally, to build warehouses and on new areas. The company also plans to create more than 130,000 full-time and part-time jobs by mid-2018 to speed up delivery. And they are in the process of buying Whole Foods Market. Amazon Web Services public cloud generated $916 million in operating income on $4.10 billion in revenue in the second quarter of this year. The results and forecast show the world’s biggest online retailer is preparing for stepped up competition from Wal-Mart, and cloud-computing challengers Microsoft and Alphabet. Spending is always a concern with Amazon, but investors eventually give Amazon a pass because Amazon invests in growth opportunities. Amazon shares dropped about 2% in after-hours trade, but still hanging in above $1,000, with market cap right at $500 billion. For a while today, Amazon shares were up, and Jeff Bezos was the richest man in the world for a while, at $92.3 billion – briefly passing Bill Gates at $90.8 billion. Bezos holds about 17% of Amazon, and Amazon has grown to be the 1800 pound gorilla of online retail. Gates and his colleagues at Microsoft can tell Bezos a thing or two about how an antitrust probe or two can slow progress down and consume years and millions of dollars in resources.
Intel, the world’s largest chipmaker, reported a 9.1 percent rise in quarterly revenue, helped by strength in its data center and personal computer businesses. Net income for the quarter rose to $2.8 billion, or 58 cents per share, from $1.3 billion, or 27 cents per share, a year earlier. Revenue rose to $14.7 billion from $12.5 billion.
In 144 characters or less: Twitter 2Q net loss widens. Revenue down. Flat user growth. Guidance lower. Shares down 14%.
Starbucks reported quarterly profit that matched analysts’ estimates, tempered expectations for the current quarter and said it would close all 379 of its Teavana stores. Net income fell to $691 million, or 47 cents per share, down from $754 million, or 51 cents per share, a year ago. Same cafe sales rose 5% in the quarter.
Electronics manufacturing giant Foxconn unveiled plans to build a massive factory in Wisconsin to make flat-screen displays. Foxconn plans to invest $10 billion in Wisconsin. Wisconsin will invest $3 billion in Foxconn in tax breaks, to be passed and provided by the state government. Those kinds of tax incentives can get a manufacturer to plant a factory in a given location—but generally at a significant cost to the state budget, and without doing much to help the economy overall. The company said it planned to hire 3,000 workers over four years, whereas the state said the new facility would create 13,000 jobs with an average salary of nearly $54,000, along with 10,000 temporary construction gigs and an eventual 22,000 “indirect and induced jobs,” from firms supplying goods and services to Foxconn and its workers. (To give a sense of scale, Wisconsin currently has around 472,000 manufacturing workers.) Wisconsin reported beat out six states in a hush-hush bidding war to attract the plant. Whether it is 3,000 jobs or 13,000, the state is spending a lot to win Foxconn’s investment. The Washington Post estimates that the breaks could cost the state as much as $230,700 per job created. To its credit, Wisconsin has tied its breaks to the number of jobs that Foxconn creates and has vowed to claw back money if “the jobs and investment are not kept in Wisconsin.” And as of now, nothing has been built. Foxconn made a splashy and lavishly praised promise to build a new, high-tech factory in central Pennsylvania a few years ago. It never followed through.
Shipments of key U.S.-made capital goods increased in June for a fifth straight month, suggesting that business spending on equipment helped to boost economic growth in the second quarter. The increase in equipment spending has mostly been driven by the energy sector, where oil and gas drilling has increased significantly. The trade deficit narrowed in June. The bullish reports came on the eve of the government’s advance second-quarter gross domestic product estimate due out tomorrow. The economy grew at a 1.4 percent pace in the first quarter. Estimates for second quarter GDP are running from around 2.5% to as high as 3.5%
Senate Republicans have tried to repeal and replace Obamacare. That failed. Then they tried repeal only. That failed. Now they are trying to repeal bits and pieces, including the mandate that Americans must obtain health insurance or face a fine, as well as a partial repeal of the mandate that employers with more than 50 employees provide healthcare coverage. A vote is expected later tonight. That would not repeal the entire Affordable Care Act but it would effectively kill it in slow motion. There was also discussion about abolishing a tax on medical device manufacturers, but it was unclear whether that provision would be included. If all or part of the so-called skinny repeal is approved, it would set up a committee of House and Senate lawmakers to meld the two competing versions into a single comprehensive bill that would be wider in scope than the skinny bill. The skinny repeal would be a nightmare for insurance companies. Making the purchase of coverage compulsory is meant to distribute risk evenly among healthy and sick people and keep overall costs down. But many people, especially, younger and healthy people opt for the less expensive fine instead. Insurers have taken notice. Many have raised premiums or pulled out of certain markets as healthier people decide to forgo coverage. They warn that overturning the mandate will only create more instability and result in even higher premiums. According to the Congressional Budget Office, a skinny repeal would still leave somewhere close to 16 million more people uninsured over a decade and increase premiums immediately.