Dog Days Drag On
Bank of England cuts rates. More data just before the July Jobs Report. Importing more oil than we produce. Tech deals and IPOs. Maybe the Chamber wants to try an inversion. Earnings news. Nike drops golf. An actual Moon shot. Apple Energy.
Financial Review by Sinclair Noe for 08-04-2016
DOW – 2 = 18,352
SPX + 0.46 = 2164
NAS + 6 = 5166
10 Y – .04 = 1.50%
OIL + .89 = 41.72
GOLD + 2.70 = 1361.40
Another day on Wall Street without conviction. The major indices continue to trade in a very, very tight range.
The Bank of England cut interest rates 25 basis points to 0.25 percent. The bank also announced it would expand its quantitative-easing program by 60 billion pounds and purchase corporate bonds. The basic argument for the rate cut is to stimulate economic growth by encouraging people to borrow and invest. This, in turn, should help to spur inflation. The rate cut was widely expected. The extension of bond buying was not as widely expected. The introduction of corporate bond buying will be of particular interest to the markets since it has only briefly been experimented with in the past. The BoE left its forecast for growth this year steady at 2.0 percent, but 2017 brings a sharp downgrade to growth of just 0.8 percent from a previous estimate of 2.3 percent. Businesses in the U.K. are looking beyond the Bank of England and are calling on Chancellor of the Exchequer Philip Hammond to deliver a “bumper” fiscal stimulus.
The number of Americans filing for unemployment benefits rose last week. Initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 269,000 for the week ended July 30. Claims have now been below 300,000, a threshold associated with a strong labor market, for 74 consecutive weeks, the longest streak since 1973.
In separate report, global outplacement consultancy Challenger, Gray & Christmas said employers in the U.S. announced plans to cut 45,346 workers from their payrolls in July, a 19 percent increase from June. Though it was the second straight monthly increase, layoffs were 57 percent lower than in July last year. Job cuts in the energy sector surged 796 percent to 17,725 last month.
Tomorrow is the monthly jobs report from the Department of Labor. The past couple of months have been anything but normal. Employers added a meager 11,000 workers in May, the fewest in almost six years. Payrolls rebounded by 287,000 in June, the most in eight months. Most estimates are calling for 180,000 or so new jobs in July. Job gains averaged 172,000 a month in the first half of this year. The jobs report is also projected to show the unemployment rate fell to 4.8 percent after climbing to 4.9 percent in June as more people entered the labor force. As joblessness has reached the Fed’s threshold for full employment, economists are anticipating the pace of payroll growth will slow further. Even if the economy adds just 150,000 new jobs each month, it would push the unemployment rate lower. Wage growth remains flat. A tightening labor market should prompt hiring managers to offer more pay to attract and retain skilled and experienced workers but we really haven’t seen wage pressure.
The US is importing more oil than it’s producing. Domestic production in the U.S. remains under pressure, down 1 million barrels a day in July from a year earlier, while crude imports surged to the highest level since 2012. A large OPEC supply has caused the US to import more oil than it has produced for the first time since January 2014. According to an analyst’s report from Commonwealth Bank, “the increase in US oil imports reflects OPEC’s strategy to target market share instead of price.”
Revenue from tech deals is at its highest level since the dot-com bubble. Tech mergers and acquisitions have brought in $1.9 billion this year, according to Dealogic. That’s up 11.8% from the same period last year and trails only the same period in 2000 ($2.2 billion) for the highest total. There have been 54 IPOs through July this year, down 54% from 118 deals during the same period in 2015. These IPOs raised $11.5 billion, down 50%. It was the worst year-to-date since 2009. Of the 54 IPOs, 23 were healthcare companies. Their 43% share of all IPOs so far this year is the highest on record, according to Dealogic. Another 11 were in finance. Only 9 were in technology. Only two IPOs – Twilio and Line – have priced above range, down from 31 last year, the lowest year-to-date number on record. There simply isn’t a whole lot of appetite for overpriced and overhyped IPOs.
The US Chamber of Commerce and the Texas Association of Business filed a lawsuit in Texas federal court that said a regulation from the U.S. Treasury Department in April exceeded what the law allows the department to do. The lawsuit is the first to challenge a rule on inversion, or transactions used by a company whereby it becomes a subsidiary of a new parent company in another country for the purpose of falling under beneficial tax laws. Typically they are used by US companies to move to countries with lower tax rates, even though they still maintain much or most of their operations in the US. A wave of inversions largely ended after Treasury moved against the deals. A Treasury spokeswoman said in a statement that its action was based on strong policy interests and clear legal authority. It said the department would continue to defend the regulations to slow the erosion of the US corporate tax base.
JPMorgan Chase said US and British authorities ended probes into its activities involving Libor and other benchmark rates without issuing new fines. JPMorgan paid $89 million to the European Union’s antitrust unit in 2013 as part of a multi-firm settlement in relation to Yen Libor. The bank said at the time this concerned “the conduct of two former traders during a one-month period in early 2007.” Now regulators from both countries say they have closed their investigations without further action.
Toyota slashed its forecast. The world’s largest automaker says full-year operating profit will come in at 1.6 trillion yen ($15.7 billion), down from its previous forecast of 1.7 trillion yen. That would represent a 44% drop in profit, caused mostly by the strength of the Japanese yen. Every Toyota and Lexus model available in the U.S. has posted sales declines in 2016, a trend putting Volkswagen on course to surpass its Japanese rival as the world’s top-selling automaker.
In other earnings news: Shares of the mobile payments company Square rose after it reported strong second-quarter results and raised its projections for the year. The stock rose 8.43 percent. The hamburger chain Jack in the Box reported better-than-expected results and raised its forecasts for the year. Its stock gained 10.56 percent. The travel website operator TripAdvisor reported lower revenue growth and profit margins in the second quarter, disappointing analysts. The company also said terrorism was one thing making it harder to predict how its business will perform. Its stock lost 8.49 percent. LinkedIn reported quarterly earnings that beat analysts’ expectations, as sales popped across the board, with revenue up 31%. MetLife, the largest U.S. life insurer, reported a quarterly profit that widely missed analysts’ estimates, largely due to weaker underwriting and tax-related adjustment in two of its largest markets. Shares dropped about 4% in after-hours trade.
U.S. government researchers have begun their first clinical trial of a Zika vaccine. Meanwhile, funds to fight the virus are expected to run out in the coming weeks due to congressional inaction. The number of locally spread Zika cases has jumped to 15 in Florida and the number of U.S. states affected has reached 45. As of July 27, 1,658 travel associated cases of Zika were reported across the continental U.S. and Hawaii.
Daily fantasy sports games are resuming in New York after Gov. Andrew Cuomo likened the contests to a “game of skill” rather than “based on chance” and signed a bill that will allow operators like DraftKings and FanDuel to obtain registrations. The law requires them to pay an annual fee of as much as $50,000 with a 15% tax on their revenue. It also bars anyone younger than 18 years old from playing and prohibits college and high school matches.
Just do it! Except for golf – don’t do that. Nike is getting out of the golf equipment business. Nike said it would stop making clubs, golf balls and golf bags, instead devoting its resources to shoes and apparel. And Tiger Woods’s golf bag is going to have a different look whenever he returns. Sales at the Nike Golf division fell 8.2% to $706 million in the fiscal year that ended in May, making it the company’s worst performing major category. Shares of Callaway Golf jumped almost 9% this morning.
Meanwhile, Golfsmith International, the retailer of golf clothing and equipment, is considering filing for bankruptcy. Golfsmith hired the investment bank Jefferies LLC to solicit buyers for the roughly 150-store chain, without success so far.
After six years of effort and about $30 million in investments, space-exploration startup Moon Express has become the first commercial venture to get U.S. regulatory authorization for a mission beyond Earth’s orbit. The company expects to send a small robotic lander to the moon in late 2017, and eventually plans to send people there and may get involved in lunar mining.
Apple spent $850 million last year on a 130-megawatt solar farm near San Francisco, and now Apple can begin selling power into wholesale markets, joining Google parent Alphabet in the energy-trading business. Apple’s subsidiary Apple Energy LLC may sell energy, capacity and other services needed to maintain reliable power, according to an order by the Federal Energy Regulatory Commission. Apple, together with Google, are among a group of tech companies outside the utility industry ramping up investments in energy projects. In addition to the California solar farm, Apple Energy owns 19.9 megawatts of generation capacity in the Nevada Power Company service area and 50 megawatts in the Salt River Project service area in Arizona. Apple may begin wholesale power sales Saturday.