Financial Review

Dollar Down the Slopes

….Dow record high close. Mnuchin and Ross talk dollar in Davos. I’ve seen smarter cabinets at Ikea. Punishing sanctuary. Existing home sales slam up against tight inventory. Earning season rolls along. Toys R Us closing 20% of stores. Bank of America charges usurious rates for deposits.

Financial Review by Sinclair Noe for 01-24-2018


DOW + 41 = 26,252
SPX – 1 = 2837
NAS – 45 = 7415
RUT – 11 = 1599
10 Y + .03 = 2.65%
OIL + 1.43 = 65.90
GOLD + 16.80 = 1358.70


Speaking at the World Economic Forum in Davos, US Commerce Secretary Wilbur Ross said US trade authorities were investigating whether there is a case for taking action over China’s infringements of intellectual property. Treasury Secretary Steven Mnuchin told reporters in Davos, Switzerland, that short-term weakness “isn’t a concern at all.” He added, “A weaker dollar is good for trade.” Such remarks are a bit unusual. For his part, Wilbur Ross thinks only a cynical person would interpret “weaker dollar is good for U.S. trade” to mean “weaker dollar is good for U.S. trade.” But Mnuchin didn’t just want to not say a weaker dollar is good for trade by talking about how a weaker dollar is good for trade. He also wanted to talk about the Treasury market amid “rumors” that China is considering slowing or halting purchases of U.S. debt. “[I’m] not particularly concerned about the Treasury market,” Mnuchin mused, adding that “it’s not an issue in all [my] conversations with Chinese counterparts.”


The dollar index dropped about 1%. Crude oil and gold both jumped today on a weaker dollar. The truth is that administration officials do not have ultimate control over the dollar. A strong dollar is typically associated with a strong US economy. Right now, the world economy is recovering. So, investors may be moving money away from the US and into Europe and emerging markets.  The US has a big fiscal deficit, which it has to finance from abroad; foreigners won’t be keen on buying fixed-income securities in a declining currency. Ten-year Treasury bonds now yield 2.65%, up 16 basis points in the last month; the five-year yield is up half a percentage point in the last year.


It appears the administration thinks that it can use a weaker dollar as a cudgel to convince other countries to agree to new trade terms that are seen as more favorable to the U.S. It’s seen as hardly a coincidence the remarks come the same week Trump signed an executive order imposing tariffs on washing machines and solar panels, prompting concerns of a potential trade war with South Korea and China. There are few more efficient ways to accelerate trade wars than to publicly denigrate your own currency, making foreign exporters suffer. Trump is scheduled to speak Friday at the World Economic Forum in Davos, Switzerland where he is expected to push his “America First” message.


The Trump administration escalated its battle with sanctuary cities. The Justice Department told 23 local governments that they must prove they are abiding by an immigration law if they want to continue receiving money under a federal crime-fighting program.  The letters from the Justice Department demanded proof that the cities’ police and sheriff’s deputies are sharing information with federal immigration agents. If the communities refuse to respond, a Justice Department official said, the government would issue subpoenas ordering them to comply. The letters said they would not be awarded new grants, and that the government might come after them to return money they’ve received from previous grants if they are found to be out of compliance. Members of the bipartisan U.S. Conference of Mayors, whose annual winter meeting in the nation’s capital kicked off today, had been slated to sit down with Trump later in the day to talk about the opioid epidemic and infrastructure. But the group’s leader canceled the official session, citing the letters.


The National Association of Realtors reports existing home sales hit a 5.57 million seasonally adjusted annual rate in December. Sales of previously owned homes tumbled in December as an ongoing inventory crunch worsened. Existing-home sales were down 3.6% for the month, though they were up 1.1% compared with a year ago. The biggest force in the housing market is still lopsided supply and demand. Inventory in December dropped 11.4% for the month, and 10.3% for the year. It marked the 31st month in which supply was lower compared with a year ago. At the current pace of sales, it would take 3.2 months to sell all available inventory, the lowest since NAR began tracking in 1999. That pushed prices higher — again. The median sales price in December was $246,800, up 5.8% compared with a year ago.


Earnings season continues to come in strong, with S&P 500 growth expected at 12.4 percent, according to Thomson Reuters data through Wednesday morning. Of the 88 companies in the index that have posted results, 78.4 percent have topped expectations versus the 72 percent beat rate for the past four quarters.


General Electric posted a wide loss for the quarter, although it did stick to its full-year profit forecast, which many analysts feared it wouldn’t. GE forecast further weakening of its troubled power business and reported a $10 billion loss and a 5-percent fall in revenue. Also weighing on the stock: The SEC has opened a probe into GE’s accounting.


United Continental vows to match low fares from its competitors and expand capacity. United plans to raise capacity by 4% to 6% in 2018, and by similar levels in 2019 and 2020. The airline will also match the aggressive pricing of smaller, low-cost competitors. Investors fear already tight margins will be squeezed even further. United dropped about 11%. After the closing bell yesterday, United posted better-than-expected fourth quarter results.


Texas Instruments, the largest maker of analog chips offered a sales forecast that missed estimates because of weak demand from mobile handset manufacturers.


Ford Motor posted a lower-than-expected quarterly net profit, hurt by rising commodity costs and unfavorable currency exchange rates, and said it expects more pain to come from higher raw material prices in 2018. Ford has been alone among the major automakers in warning that higher prices for metals like aluminum and steel will take a bite out of earnings, and last week its shares took a dive after executives said they could cost the company $1.6 billion in 2018.


Toys “R” Us will close up to 182 stores as part of its plan to emerge from Chapter 11 bankruptcy. The closures amount to about 20% of its stores and are scheduled to begin next month with the majority of stores closing mid-April. The decision about whether to close all of the stores will depend on landlord negotiations, and whether they can strike a better deal on lease terms and rent reductions. A number of locations will be converted into co-branded Toys R Us and Babies R Us stores. Last month, Toys “R” Us reported a disappointing holiday quarter, as revenue fell 7.5% and same-store sales dropped 7%.


Bank of America will eliminate its eBanking accounts, which didn’t charge monthly maintenance fees if customers received paperless statements and didn’t use bank tellers for routine transactions. Bank of America has converted such customers to another checking account that requires them to keep more money at the bank to avoid fees that are higher. The bank has been transferring eBanking customers to its “Core Checking” account. That account comes with a $12 monthly fee, unless customers have a daily balance of at least $1,500. So, if someone has $1,000 in an account, that works out to 1.2% per month, or 14.4% per year, just for BofA to hold your money. Meanwhile, Bank of America, along with the rest of the country’s top banks, will get a significant tax windfall from the recently passed tax bill — a $3.5 billion tax windfall, to be exact, according to a Goldman Sachs report.

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