Financial Review

Did It Again

…Nasdaq new high. China-US might talk. Powell concerned. CPI inches up; we have inflation. Housing inventory thaws. Broadcom bombs. AT&T-Time Warner appeal. Oops, Papa John did it again.

Financial Review by Sinclair Noe for 07-12-2018

DOW + 187 = 24,887
SPX + 19 = 2793
NAS + 92 = 7808
RUT + 6 = 1689
10 Y + .01 = 2.85%
OIL – .11 = 70.27
GOLD + 5.90 = 1247.90


Today’s rally pushed the Nasdaq Composite to a new record high. So, yes, much of the leadership in the market is tech related. The Dow is wobbling around breakeven for the year to date. The S&P 500 has only been able to post modest gains. All three indexes posted their fifth gain of the past six sessions. The day’s gains were broad, with 10 of the 11 S&P 500 sectors ending higher on the day. However, the biggest boost came from the information technology sector, which rose 1.8% in its biggest one-day percentage gain since June 1, a rally that took the sector to record levels. Facebook and Amazon, both reached all-time highs. Microsoft and Alphabet also hit intraday records.


Bloomberg reported late Wednesday that officials from both the US and China have raised the prospects of restarting a conversation on trade and tariffs at a high level. Fears of a full-blown trade war possibly developing between the world’s two largest economies have weighed on equities around the globe in recent months, although markets have remained somewhat resilient, with major indexes largely holding in a tight trading range; not quite believing that we are on the edge of a nasty trade war. All that optimism comes as investors await the unofficial start of the second-quarter earnings season, with a number of significant banks, including JP Morgan, Wells Fargo and Citigroup, set to report Friday. Earlier today, Delta Air Lines reported better-than-expected quarterly results.


Federal Reserve Chairman Jerome Powell weighed in on trade wars today. The disputes might end up with sustained “high tariffs on a lot of products and a lot of traded goods and services…[and] that could be a negative for our economy,” Powell said, in an interview with Marketplace. “You can imagine situations which would be very challenging, where inflation is going up and the economy is weakening,” Powell added. Alternatively, it would be a good thing if the Trump White House succeeds in its goal of lowering tariffs. So how will it turn out – too soon to call, according to the Fed head.


The S&P 500 is up more than 4 percent year to date but it has not been a smooth ride. At one point, the index was down more than 10 percent from an all-time high set in January. This year has also been much more volatile than 2017. The S&P 500 has had 36 days where it rises — or falls —at least 1 percent. In all of 2017, it recorded just eight moves of such magnitude on a closing basis. Market volatility has spiked this year as investors grapple with a number of different factors combining to make this year quite unique. A massive corporate tax cut took effect early this year that has boosted corporate earnings. Inflation is rising, sparking fears the Federal Reserve will have to tighten monetary policy faster than expected.


Consumer prices rose in June at the highest yearly rate since 2012. The increase in the cost of living rose to a 12-month pace of 2.9% from 2.8%, marking the highest level in more than six years. A year ago, the 12-month rate stood at just 1.6%. In June, the consumer price index increased 0.1%. A more closely followed measure that strips out food and energy, called the core CPI, advanced 0.2% last month. The yearly increase in the core rate edged up to a more modest 2.3%. Core CPI hasn’t grown faster than 2.3% since the Great Recession. The cost of food rose by 0.2% last month, but the increase was more than offset by a 0.3% decline in the price of energy. Although gasoline prices rose again, the cost of electricity and natural gas both fell sharply. Rents and medical care, meanwhile, continued to rise in price. So did new and used cars.


Inflation has shot up over the past year owing to rising oil prices, higher rents, more expensive medical care and growing bottlenecks in the economy for skilled workers and certain key materials. The trucking industry says it can hardly find any more drivers.  That’s causing shipping costs to go up. Inflation is not coming from an overall increase in wages, but in specific sectors. Overall, wage growth remains missing from the picture. The jobs report for June showed average hourly earnings rose 0.2%, keeping the year-over-year rate at 2.7%. Though wages are on the rise, they have struggled to keep up with inflation, suggesting an erosion of consumers’ purchasing power.


Even as consumer prices have steadily risen, hitting a year-over-year 2.9% pace in June, yields for long-end Treasuries have not risen but have stayed range-bound, leaving debt prices well-supported. Yields and prices move inversely. Current yields at the long end reflect investors’ expectations for consumer prices to turn lower by the end of the year, maintaining a downward trend well into 2019. And this is reflected in the flattening of the yield curve, with the 10-year note at 2.85% and the 2-year note at a yield of 2.59%, the spread is a mere 26 basis points. The curve is getting flatter – and that means the bond market thinks all this inflation is nothing more than a blip on the screen.


Corporations taking advantage of new, lower tax rates reduced their payments to the federal government last month. The Treasury Department says government receipts fell 7% in June compared with the same month a year earlier, including a 33% drop in gross corporate taxes. Individual withheld and payroll taxes were down 5% from June 2017, while non-withheld individual taxes rose by 7%. More broadly, the federal deficit is swelling as government spending outpaces revenues. The budget gap totaled $607.1 billion in the first nine months of the 2018 fiscal year, 16% larger than the same point a year earlier. Even though revenues fell, the budget deficit narrowed to $74.86 billion in June, compared with $90.23 billion in June 2017, due to a 9% drop in government outlays. The spending decline largely reflected some accounting shifts and not actual spending changes.


The supply of homes for sale in the second quarter of 2018 rose at three times the rate of the same period in 2017. According to Trulia, a real estate listing and research company, the inventory jump was the largest quarterly improvement in three years and could be signaling a slight thaw in today’s housing market. But it is just a start. The supply of homes for sale is still down 5.3 percent compared with a year ago. Thirty of the nation’s 100 largest cities now have more supply than a year ago. Supplies are increasing because sales are slowing, and sales are slowing because prices are so high.


On Wednesday after the market close, Broadcom announced it had entered into an agreement to purchase software company CA Technologies for $18.9 billion. Today, Broadcom shares declined 14.3 percent, representing a drop in stock value of nearly $15 billion. One Wall Street firm said the change in strategy to buy a software company versus its historical pattern of purchasing semiconductor companies will hurt management’s standing with investors.


In one of the largest U.S. antitrust cases in decades, U.S. District Judge Richard Leon ruled last month that the merger between AT&T and Time Warner could go on despite the government’s resistance. The feds did not seek a stay that would have prevented the merger from taking place, and AT&T and Time Warner closed the deal directly after Leon’s ruling. The ruling was seen as a green light for other companies to pursue mergers, and in the ensuing months, bidding wars have erupted between Comcast and Disney for big chunk of 21st Century Fox’s assets. Judge Leon issued a rather harsh ruling, essentially saying the Justice Department would have to be complete idiots to continue to oppose the merger. Today, the Department of Justice officially filed for an appeal.


John Schnatter, the founder of Papa John’s Pizza, has resigned as chairman of the board of Papa John’s International, hours after he apologized for using a racial slur in a comment about black people during a conference call in May. The company, one of the largest pizza chains in the United States, with more than 5,000 locations around the world, said that its independent directors had accepted Schnatter’s resignation and would appoint a new chairman in the coming weeks. Schnatter will remain on Papa John’s board. Major League Baseball decided on Wednesday to suspend its Papa Slam promotion, which provided discounts to Papa John’s customers each time a player hit a grand slam. And the reaction spread to Schnatter’s hometown Jeffersonville, Ind., where the mayor stripped a local gym of his name. Schnatter set off an uproar in November by blaming the National Football League — with which Papa John’s had a sponsorship deal — for a slump in sales during a conference call with investors. He complained about the league’s handling of football players who protested racism and police brutality by kneeling during the national anthem.


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