…Deficit grows. Retail sales stagnant. Saudis threaten to weaponize oil. Sears BK. Earnings ramp up.
Financial Review by Sinclair Noe for 10-15-2018
DOW – 89 = 25,250
SPX – 16 = 2750
NAS – 66 = 7430
RUT + 6 = 1553
10 Y + .02 = 3.16%
OIL + .38 = 71.72
GOLD + 9.20 = 1227.70
The major averages gyrated between positive and negative territory throughout the session. At its high of the day, the Dow rose as much as 142 points; it also fell as much as 96 points.
The U.S. recorded a $779 billion deficit in the fiscal year ending Sept. 30, an increase of $113 billion, as spending climbed while revenue remained nearly flat. Outlays grew by $127 billion, or 3.2%, while government receipts rose 0.4%, or $14 billion. Compared to GDP, the deficit rose to 3.9%, up by 0.4 percentage points. Interest on the public debt shot up by $65 billion, or 14%, in part because the Treasury had to increase the principal on its inflation-protected securities. Rising interest rates and a bigger debt also played a role.
Retail sales rose just 0.1% for the second month in a row. Sales at U.S. retailers barely grew in September as Americans spent less at restaurants, grocery stores and gas stations, raising questions about whether the economy slowed toward the end of summer. Sales would have fallen if not for a big month at auto dealers. After a string of strong sales, bars and restaurants saw a big dropoff. Sales sank 1.8% in September to mark the biggest decline since the end of 2016. Still, restaurant sales are up a strong 7.1% over the past 12 months. Sales at internet retailers climbed 1.1% in September. Auto dealers posted a 0.8% increase.
The Empire State manufacturing index rose 2.1 points to 21.1 in October. Firms remained “moderately optimistic” about the six-month outlook. Labor market indicators pointed to a modest increase in employment levels.
Business inventories in the U.S. rose 0.5% in August. Sales also increased 0.5% in the month. The ratio of inventories to sales, meanwhile, was unchanged at 1.34. That’s how many months it would take to sell all the inventory on hand.
For months, US stocks powered higher to records while most of the world’s markets crumbled, a divergence that analysts and investors said wouldn’t last. It didn’t. The factors that helped U.S. stocks to solidly outperform other global equity markets this year — a booming tech sector, and seemingly little concern for the pace of the Federal Reserve’s interest rate increases — faded sharply last week, when a sudden selloff left the S&P 500 down 5% for the month. We have seen a rapid shakeout of very crowded and over-owned U.S. assets.
Saudi Arabia threatened to retaliate against any punitive measures. The world’s largest oil exporter said it would hit back if Trump follows through on punishing the kingdom over the disappearance of journalist Jamal Khashoggi, noting its “vital role in the global economy.” The amount of oil the US imports from Saudi Arabia has dropped significantly since the turn of the century, as fracking increased domestic oil and gas production, and renewable energy use expanded. The US imported just 27 million barrels of Saudi crude in July, down from 59 million barrels in July 2003. As Saudi Arabia threatens massive economic reprisals against the US if held accountable for the disappearance of a WaPo columnist, just a reminder that the Trump administration formally labeled America’s top source of imported oil, Canada, as a threat to national security.
The CEOs of JPMorgan, Uber, and Ford are among the business leaders who have cancelled plans to attend an investment conference in Riyadh in light of the tensions. Shares in SoftBank fell as much as 8 percent. SoftBank depends on Saudi money more than most firms. The Saudis provided $45 billion for the Japanese technology company’s nearly $100 billion Vision Fund — the biggest tech investment vehicle in the world. The two are also collaborating on an enormous solar power project for the country. Last week, Richard Branson called off talks with Saudi Arabia over a $1 billion investment in his space companies. Trump said he had spoken to King Salman of Saudi Arabia, and that he had personally denied any knowledge of the fate of disappeared journalist Jamal Khashoggi. He also said he would send Secretary of State Mike Pompeo to Saudi Arabia for high-level discussions with the King. Trump says it could be “rogue killers”.
Sears filed for Chapter 11 bankruptcy today. The 132-year old company has been struggling with debt for several years. The final straw was a $134 million payment due Monday that it could not afford. Sears Holdings, the company which owns Sears and Kmart said it intends to stay in business, keeping stores which are profitable open, along with the Sears and Kmart online shopping sites. But it is looking for a buyer for many of its remaining stores and will shutter at least 142 stores near the end of this year, on top of 46 that are due to close next month. The bankruptcy filing to reorganize debts of the parent of Sears, Roebuck and Co and Kmart Corp follows a decade of revenue declines, hundreds of store closures, and years of deals by billionaire Eddie Lampert in an attempt to turn around the company he acquired in 2005 for $11 billion. Lampert stepped down as CEO but remains as Chairman. Shareholders generally lose all or most of their investment when a company files for bankruptcy, and the ability of Sears to escape liquidation will depend on the willingness of creditors and suppliers to keep the company afloat. Strong sales in the upcoming holiday season will be key in determining that. Ten years ago, Sears employed over 300,000 people. Now, Sears and Kmart, which is owned by the same hedge fund manager, employ just 68,000 combined.
Most large U.S. malls are controlled by REITs. But most REIT shares gained on Monday as investors focused on the potential benefits of a Sears bankruptcy. The REITs have looked forward to a bankruptcy to remove the eyesore of many Sears stores. They also will be able to raise the rent in contracts sometimes signed more than 20 years ago with extension options that kept leases very low. A bankruptcy like Sears poses an opportunity for landlords to refresh their properties with new or better tenants, provided they win control of the sites during Chapter 11, which can be complicated. Leases with new tenants could easily double or triple the rent Sears or Kmart now pay.
Bank of America beat analysts’ estimate for third-quarter profit and revenue as the nation’s second-largest bank set aside less than expected for loan losses. The bank posted earnings per share of 66 cents, a 43 percent increase from a year earlier, exceeding the 62 cent estimate. Revenue rose by a more modest 4 percent, to $22.8 billion, compared with the $22.67 billion estimate. The stock fell 1.9%.
Charles Schwab can boast another record quarter as it sets pace to surpass its 2017 profits. Third-quarter net income rose 7% to $923 million from the prior quarter. Income was up 49% from the same period a year ago.
Adobe stock rose nearly 6 percent during after-hours trading after it announced its growth strategy on Monday at its analyst meeting. It estimates that its 2019 revenue to grow 20 percent year over year and its digital experience subscription bookings to grow by 25 percent.
J.B. Hunt Transport Services fell as low as 3 percent during after-hours trading but recovered the losses as trading continued. The trucking company reported mixed third quarter earnings. The company reported earnings per share of $1.47, which beat analyst estimates of $1.38 per share. Revenues, however, missed expectations, with the company reporting $2.21 billion, coming in slightly below analyst estimates of $2.2 billion.
L3 Technologies and Harris Corporation have agreed to merge in an all-stock deal, creating a $33.5 billion military technology company. The combined company will be called L3 Harris Technologies and will be based in Melbourne, Fla.
Walt Disney has offered concessions in an attempt to allay EU antitrust concerns over its $71 billion bid for Twenty-First Century Fox’s entertainment assets.
Apple and Netflix pulled back more than 1.8 percent each. Netflix fell after Raymond James slashed its price target on the video-streaming giant. Apple dropped after Goldman Sachs said the tech giant’s earnings could fall short this year as demand in China slows. Amazon, Microsoft and Alphabet also traded lower. Netflix, Morgan Stanley, Johnson & Johnson, Procter & Gamble and Honeywell are among the companies scheduled to release third-quarter earnings this week. The outlook for banks — which have been significant beneficiaries of the tax overhaul — is strong. Another sector where earnings are set to rise significantly is energy. Oil prices have jumped more than 40 percent in the last year.
For the third quarter, analysts at the financial data firm Refinitiv, formerly the financial and risk business of Thomson Reuters, expect third-quarter profit to rise 21.5 percent for the large companies included in the Standard & Poor’s 500-stock index.
Recovery work has begun for Hurricane Michael, which struck the southeast last week in one of the most powerful storms the country has seen in this century. The death toll following the storm climbed to at least 18 people as of Saturday. Hurricane Michael left about 1.55 million people in six states without power Friday. As of Sunday, more than 58 evacuations and 403 rescues or assists had been completed by several U.S. agencies in the days since Hurricane Michael made landfall. More than 19,000 individuals or households have registered for disaster assistance,