Financial Review

Don’t Blink

…Stocks finish a bad week. Russell rebalanced. EU tariffs hit. Euro cars next to take a hit? OPEC increases production but not by much. SCOTUS: get a warrant for cell pinpointing. Banks pass stress test. Bitcoin bust. Blazer hecho en Mexico.

Financial Review by Sinclair Noe for 06-22-2018

DOW + 119 = 24, 580
SPX + 5 = 2754
NAS – 20 = 7692
RUT – 3 = 1685
10 Y un = 2,90%
OIL + 3.74 = 69.28
GOLD + 2.00 = 1269.90

 

The major indices flipped roles today, with the Dow and the S&P 500 up while the Nasdaq and the Russell 2000 slipped. This was a rough week for the market but tech companies, specifically the FAANGs had been performing well and providing leadership, and the small cap, domestic companies in the Russell 2000 offered a defensive play compared to the large multi-nationals in the Dow. The trade disputes pushed the Dow Jones index lower for the past eight sessions as big industrial companies such as Boeing and Caterpillar have weighed on the index and put it on pace for its worst weekly performance in 13 weeks. For the week, the Dow lost 2 percent, its weakest weekly performance since late March. The S&P 500 fell 0.9 percent and the Nasdaq declined 0.7 percent.

 

Trading volume was very heavy today, nearly 10 billion shares. One of the world’s largest index providers, FTSE Russell, is rebalancing the large-cap Russell 1000 and the small-cap Russell 2000 indexes. This is a significant annual market event because a lot of money tracks these indexes. Roughly $8 trillion is benchmarked to the Russell indexes, and $1 trillion is passively invested in funds that just attempt to track them. Here’s how the rebalancing works: Each year, Russell ranks the top 3,000 stocks (virtually the entire stock market universe) by market capitalization, then puts the top 1,000 in the Russell 1000 and the bottom 2,000 in the Russell 2000. Due to share buybacks and other events, many companies have either increased or decreased their market capitalization and so indexers will have to buy or sell shares in direct proportion to the increase or decrease in the index. That means when you have a single day when all the stocks change their weighting in the index, heavy trading volume is going to occur.

 

Trump is essentially playing chicken with our trade partners. But they’re not blinking. Instead of making concessions, China, Canada and the European Union have all raised tariffs on imports from the United States in the same proportion as Trump has raised tariffs on imports from those nations.

 

Tariffs on more than $3 billion worth of American exports to Europe took are now in effect. The European Union has imposed additional tariffs of 25% on products such as motorcycles, orange juice, bourbon, peanut butter, cigarettes and denim — part of its response to the Trump administration’s tariffs on steel and aluminum exports from Europe. EU trade officials have described the US tariffs on steel and aluminum — justified by the Trump administration on grounds of national security -— as “illegal.” The bloc has also filed a formal complaint at the World Trade Organization. If the trade dispute continues, the European Union could target a second batch of American exports worth around $4.3 billion.

 

This morning, Trump fired back on Twitter, threatening a 20% tariff on European cars exported to the US. The threat of tariffs on autos would target Germany, and could knock about $6 billion, or nearly .2 percent of GDP, out of the German economy through lost sales and profits on cars imported directly from Germany. Think Mercedes, BMW, Audi, Porsche, and VW.

 

For now, Trump’s tariffs apply to just 4.5% of all imports, equivalent to a scant 0.5% of GDP. The economy can handle that. But if Trump wants to expand his tariffs 5- or 10-fold, there’s trouble ahead. Tariffs raise prices, push up inflation, disrupt global supply chains and impair business and consumer confidence. And just a reminder, China announced tariffs on $50 billion worth of imports from the US. China’s tariffs will be deployed in two waves — the first covering $34 billion worth of goods coming in early July. And also remember that Canada and Mexico have already imposed retaliatory tariffs. So, ready or not – we have a trade war on our hands.

 

Energy stocks were by far the biggest gainers of the day, with the group surging after OPEC reached a deal to boost output, though not by as much as some had expected. Exxon Mobil rose 2.1 percent and Chevron gained 2.0 percent, as the two biggest boosts to the S&P. The S&P energy index was up 2.2 percent, its strongest day in June, as crude oil gained 5%. OPEC members reached a deal that would result in an effective rise in production of around 600,000 barrels a day, a figure that comes as a relief to bullish traders who feared a more aggressive increase. Last year, OPEC implemented 1.2 million barrel per day production cuts, and they actually cut more than that, about 1.8 million barrels per day. So, the announcement today, just gets OPEC back to last year’s levels.

 

General Motors announced today that it will be bringing back the Blazer. The last time the Blazer was built by GM in 2005, it was manufactured in three plants that have long since closed — in Moraine, Ohio, Linden, New Jersey, and Pontiac, Michigan. The new Blazer will be built in Mexico. GM operates three assembly plants in Mexico. The company employs about 15,000 there. American auto sales have climbed since the Great Recession, and automakers have brought back many of the jobs at US plants — GM employs 103,000 in the United States, 33% more people at US auto plants than it did in 2009.

 

The Supreme Court issued a ruling today imposing limits on the ability of police to obtain cellphone data pinpointing the past location of criminal suspects. Law enforcement now cannot ask Sprint, AT&T, or Verizon, for cell tower records that reveal your whereabouts through your phone’s interaction with those towers, at least without a warrant. Chief Justice Roberts sided with the courts 4 liberal justices. The court said police generally need a court-approved warrant to get the data, setting a higher legal hurdle than previously existed under federal law. The court said obtaining such data without a warrant from wireless carriers, as police routinely do, amounted to an unreasonable search and seizure under the U.S. Constitution’s Fourth Amendment. Roberts stressed that the ruling did not resolve other hot-button digital privacy fights, including whether police need warrants to access real-time cellphone location information to track criminal suspects. The ruling has no bearing on “traditional surveillance techniques” such as security cameras or on data collection for national security purposes. Roberts said the ruling still allows police to avoid obtaining warrants for other types of business records. Police could also avoid obtaining warrants in emergency situations. And let’s be honest, if police and prosecutors want to get digital info, they are going to get a warrant. Although the ruling explicitly concerned only historical cellphone data, digital privacy advocates are hopeful it will set the tone for future cases on other emerging legal issues prompted by new technology.

 

Bitcoin dropped to a more than four-month low on Friday, continuing a downtrend after more negative headlines such as Japan’s financial regulator ordering six digital currency exchanges to make improvements on their anti-money laundering systems. So far in 2018, bitcoin has fallen nearly 56 percent. Early this week, the cryptocurrency world was racked by news South Korean cryptocurrency exchange Bithumb was hacked of $31 million worth of virtual coins. The Bithumb attack was preceded earlier this month by a “cyber intrusion” at Coinrail, a relatively small cryptocurrency exchange in South Korea, causing a loss of about 30 percent of the coins traded on the exchange.

 

The 35 largest US banks have all cleared the first stage of an annual Federal Reserve stress test, showing they would be able to maintain enough capital in an extreme recession to meet regulatory requirements. Although the banks would suffer $578 billion in total losses in the Fed’s most severe scenario to date, their level of high-quality capital would be substantially higher than the threshold that regulators demand – and higher than levels seen immediately leading up to the 2007-2009 crisis. Banks have more than doubled their capital, their main financial defense against losses. Profits are surging on the back of the stronger economy, and bank stocks have risen more than the broader stock market. So, now that the banks have passed the stress tests, they want to increase dividends and decrease regulation. A resurgence of the industry, however, is evidence to some that the post-crisis rules have not stopped the banks from making good money from their traditional businesses. The six largest American banks — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — have done particularly well. They made $141 billion in pretax profits in 2017. So, throw out the rules that led to the profit. What could go wrong?

 

CarMax shares rose to an all-time high after the company reported quarterly earnings that beat expectations. The stock closed up 12.8 percent, posting its best day since June, 2014. Hain Celestials shares are up on reports that Pilgrim’s Pride is bidding for food company.

 

United Parcel Service workers and their union have reached a tentative agreement on a five-year contract. If approved, the pact averts what threatened to be the first walkout in decades at UPS. The deal negotiated with the Teamsters covers 250,000 workers — mostly drivers and package handlers — and includes pay increases. It also lays the groundwork for Sunday deliveries by UPS. The last strike by UPS workers in 1997 lasted more than two weeks and disrupted package delivery service around the country. Union members will vote next month on the contract.

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