Delayed Not Dead
…..Trumpcare Senate vote delayed for lack of support. Fedspeak: Yellen says valuations rich, Fischer says P/E is high, Williams says stock market is running on fumes. IMF throws shade on Trump. Case Shiller – home prices pull back. Google gets EU’s biggest fine. Ransomware attack goes global. Brazil’s president criminally charged.
Financial Review by Sinclair Noe for 06-27-2017
DOW – 98 = 21,310
SPX – 19 = 2419
NAS – 100 = 6146
RUT – 13 = 1403
10 Y + .06 = 2.20%
OIL + .34 = 43.72
GOLD + 2.20 = 1247.70
Last week, Senate Majority Leader Mitch McConnell unveiled Trumpcare, the Better Care Reconciliation Act of 2017, the Senate version of the American Health Care Act, which was the House version of a plan to repeal and replace Obamacare. Yesterday, the Congressional Budget Office published its analysis, or score for Trumpcare and it was ugly. The Senate legislation would repeal Obamacare’s taxes and insurance mandates and phase out its Medicaid expansion, but it drew criticism from Republican senators on both ends of the ideological spectrum. Conservatives were miffed that it did not fully repeal the 2010 health law, while moderates opposed its deep cuts to Medicaid and blanched at a projection from the Congressional Budget Office that it would result in 22 million fewer people having insurance over a decade.
McConnell said he wanted a vote by Thursday or Friday, before senators recessed for the July 4th holiday. But that won’t happen. Today, McConnell says the vote will be delayed; they will try to make adjustments to the bill to make it acceptable. GOP leaders had argued that more time would not help the public perception of the bill, which is broadly similar to legislation the House passed last month that polls show is deeply unpopular. Now, lawmakers will go home for the holiday, and they are going to hear from constituents. And it will get loud. The president invited all 52 Republican senators to the White House for a meeting this afternoon after initially having little involvement in the Senate’s deliberations. Under the reconciliation process, the bill only needs 51 votes to pass; 50 senators plus the vice president. That means if 3 Republicans vote against the bill, it does not pass. But at least 6 GOP senators—Susan Collins of Maine, Dean Heller of Nevada, Ron Johnson of Wisconsin, Mike Lee of Utah, Rand Paul of Kentucky, and Ted Cruz of Texas – said they would vote against even bringing the bill up for debate this week unless changes were made. And there are others stepping up: Senator Jerry Moran of Kansas tweeted that he, too, was against the bill. Senators Rob Portman of Ohio and Shelley Moore Capito of West Virginia followed suit soon afterward. Senators Cory Gardner of Colorado and Lisa Murkowski of Alaska are likely to jump ship, or at least press for a better deal. That’s at least 11 republican senators who are not on board.
Conservatives like Johnson, Paul, and Cruz were pushing for amendments that would lower premiums and eliminate—or allow states to opt out of—Obamacare insurance regulations, including the provision prohibiting companies from charging higher rates to people with preexisting conditions. Portman and Capito, meanwhile, wanted tens of billions of dollars more to help states fight the opioid epidemic and changes that would soften the billions in cuts to Medicaid. So far, McConnell has not open the bill to negotiation. For now the plan is to squeeze holdouts, but it doesn’t seem to be working. Yet it would be premature to consider the bill dead. House Republican leaders were also forced to put off a vote on their bill earlier this year only to work out a compromise that allowed it to pass weeks later.
While the delivery of health care is of vital social importance, Wall Street is focused on the next thing – tax reform. But to get there, the administration must work through health care first so that its impact on the budget can be determined. Without a deal on health care, representing one-fifth to one-sixth of GDP, it is difficult to figure out taxes. Wall Street has generally risen since President Donald Trump’s election in November, in large part due to hopes that his economic agenda—including massive tax cuts and deregulation—would accelerate economic growth. However, his administration has seen few legislative successes, raising questions about whether the broader market’s valuations are justified if the thesis that drove them higher fails to come to fruition. This does not mean that tax reform is dead, just slightly delayed. This means that GOP donors are going to turn up the heat on senators over the coming days pushing for health care and/or tax reform, and the donors will be pushing hard.
Fed Chairwoman Janet Yellen told an audience in London that asset valuations are “somewhat rich.” She repeated plans to hike interest rates gradually. Fed Vice Chairman Stanley Fischer told an International Monetary Fund event that price-to-earnings ratios now stand in the top quintiles of their historical distributions. Fischer also said rising valuations in equities and in other parts of the global market are partly explained by a brighter economic outlook but also by elevated risk appetite. San Francisco Fed President John Williams gave the bluntest assessment, telling an Australian television station that the stock market is running on “fumes.” Both Yellen and Fischer touted the capital built up at the nation’s biggest banks. Ahead of the release of the second stage of the stress tests due Wednesday, Fischer pointed out that regulatory capital at large banks is now at multidecade highs. Yellen went further and said another crisis like the one that caused the Great Recession isn’t likely in our lifetimes. And of course, Chair Yellen will be absolutely and totally correct, as long as we all die by Friday. The Fed famously was not particularly contrarian in identifying risks before the Great Recession.
The IMF, coincidentally, blessed the Fed’s rate hike cycle in their annual review of the US. The IMF isn’t terribly optimistic on the US economy, projecting 2.1% growth this year and seeing growth slow from there. The IMF also said there were “larger than usual” risks to the US economy, given policy uncertainties. They threw some shade on Trump’s pro-growth agenda, say that even with an “ideal constellation of pro-growth policies,” the Trump administration’s forecast that it would boost GDP by 1 percentage point is “unlikely.” The IMF said the US dollar is moderately overvalued, by 10% to 20%.
Home prices pulled back slightly in the latest Case Shiller report. The S&P/Case-Shiller 20-city index rose 5.7% in the three-month period ending in April compared to a year ago, down two ticks from the 5.9% annual gain notched in March. Despite those decelerations, prices continued to reflect sturdy demand. Only one metro in the 20-city index, Cleveland, saw a monthly decline, while in Seattle, prices surged 2.6% for the month. Phoenix posted a 0.8% increase for the month and a 5.7% gain over the past 12 months.
European Union antitrust regulators have leveled a $2.7 billion fine against Google. EU antitrust regulators said Google abused its dominance in search to promote its own comparison shopping service while demoting those of competitors. Alphabet said it disagreed with the decision and would consider an appeal. Alphabet had $92 billion in cash or equivalents at the end of the first quarter. That means the fine represents less than 3% of Alphabet’s cash position. Considering the company generated an average of about $68 million a day in cash during the first quarter, it could raise the cash to pay for the fine in just 40 days, or by Aug. 8. The market hit was bigger, Alphabet lost about $16 billion in market capitalization today. Regulators promised Google was in for years of monitoring to guard against further abuses. And Google will have to prove that rivals have made substantial inroads into its businesses before there is much chance of it being let off the regulatory hook. Google does not want to change its search business model but the economics of continuing the fight aren’t really in Google’s favor. Google has 90 days to comply or face an additional daily fines.
A ransomware cyberattack has hit Europe and spread to the US. The “Petya” ransomware attack was first reported in Ukraine, where the government, banks, state power utility and Kiev’s airport and metro system were all affected. The radiation monitoring system at Chernobyl was taken offline, forcing employees to use hand-held counters to measure levels at the former nuclear plant’s exclusion zone. The food giant Mondelez, legal firm DLA Piper, Danish shipping and transport giant AP Moller-Maersk and Heritage Valley Health System, which runs hospitals and care facilities in Pittsburgh, also said their systems had been hit by the malware.
Brazil is bracing for a fresh bout of political turmoil after the president, Michel Temer, became the country’s first sitting head of state to be formally charged with a crime. Less than a year after taking power following impeachment of Dilma Rousseff, the deeply unpopular leader was formally accused of corruption by the attorney general Rodrigo Janot and could now face a lower house vote on whether he should be tried by the supreme court for taking bribes. In a damning indictment to the supreme court, Janot alleged Temer took millions of dollars in bribes from meat-packing giant JBS. The attorney general said the president had “fooled Brazilian citizens” and compromised the image of the country. These allegations followed the release of a secret recording of a conversation earlier this year between Temer and the JBS executive Joesley Batista, in which the president appeared to endorse hush money payoffs to former house speaker Eduardo Cunha, a member of Temer’s party who is serving a 15-year sentence for corruption. Temer’s predecessor Dilma Rousseff – who was ousted in an impeachment plot in May 2016 – was quick to note that her former running mate was now accused of greater crimes than those for which she was removed from office last year. She tweeted: “The result of the 2016 coup: leaving the country in the hands of the only president indicted for corruption.”