Financial Review

Down Day Actually

….Stocks actually dropped. 10-year note hit 2.60%; China balks on buys. Import prices inch higher. Korean talks. Offshore oil drilling (not quite) plan. DACA delayed. NAFTA collapsing? Tapping home equity. Goodbye cashiers. Kadakcoin.

Financial Review by Sinclair Noe for 01-10-2018


DOW – 16 = 25,369
SPX – 3 = 2748
NAS – 10 = 7153
RUT – 0.30 = 1559
10 Y un = 2.55%
OIL + .50 = 63.46
GOLD + 3.70 = 1317.30


The S&P and the Nasdaq have closed at record highs every single day in 2018, until today.  Earnings for S&P 500 companies are expected to increase by 11.8 percent, with biggest contribution from the energy sector, according to Thomson Reuters. Crude oil topped $63 a barrel. The S&P financial index rose more than 1 percent, helped by gains in Wells Fargo and JPMorgan ahead of earnings results on Friday.


Early this morning the yield on the 10-year Treasury note hit 2.60%. Chinese officials have recommended the country slow or halt its purchases of the US bonds. Maybe the Chinese do not think US bonds are a good buy, or maybe they don’t like trade tensions that have been building between the US and China. China is the largest foreign holder of US government debt, with $1.19 trillion in Treasuries as of October 2017. When China exports goods to the United States, they get dollars in exchange for those goods and they have to do something with those dollars. As long as China continues to export goods to the US on that basis, they’ll need to invest dollars in something. So, it seems the idea of stopping bond purchases is more a political signal than a pragmatic trading decision.  Meanwhile, the Bank of Japan said it will trim its purchases of Japanese government bonds, raising speculation it will reduce its monetary stimulus this year.


US import prices recorded their smallest increase in five months in December and underlying imported price pressures were muted. The slowdown in import price growth came despite a weak dollar. Import prices edged up 0.1 percent last month after accelerating 0.8 percent in November. That was the smallest gain since July. Last month, prices for imported petroleum rose 2.0 percent after surging 8.1 percent in November. Import prices excluding petroleum fell 0.2 percent. The Labor Department also reported that export prices slipped 0.1 percent in December, declining for the first time since June, as agricultural prices fell for a second straight month. Export prices rose 2.6 percent year-on-year.


The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, has undershot the US central bank’s 2 percent target since May 2012. The Fed raised interest rates three times in 2017 and has forecast three rate hikes this year. Producer and consumer price reports on Thursday and Friday could offer fresh clues on the near-term inflation outlook. Chicago Fed President Charles Evans said Wednesday that he had urged his colleagues at the central bank’s last meeting in December to wait until next summer to decide whether to raise interest rates again because it would probably be clear by then if pressures now holding down inflation would abate. Evans was one of two Fed officials who dissented from the Fed’s decision to raise interest rates last month, the third rate increase in 2017.


North and South Korea forged a rare agreement during border talks to work toward cooperation. North Korea made a surprisingly conciliatory gesture during the talks, promising to send a delegation of athletes, cheerleaders and journalists to the Winter Olympics being held next month in the South Korean town of Pyeongchang, several news outlets reported. The North also agreed to more talks with the South, including a dialogue between their militaries, to ease tensions and improve ties. South Korean president Moon, in a nationally televised address, claimed credit for progress in the talks and also strategically recognized Trump in moving talks forward.


Last week, the Interior Department announced a plan to open up all US coastal waters to oil drillers over the next five years. Interior Secretary Ryan Zinke announced late Tuesday that he was removing Florida state waters from the proposed offshore drilling plan at the request of Governor Rick Scott, who argued that drilling poses a threat to Florida’s tourism. So, the new Interior Department plan is to open all US coastal waters to oil drillers, unless the governor of a coastal state asks politely to be excluded – or maybe just Florida gets an exemption. Nobody really knows. The governors of Delaware, North Carolina, and South Carolina, and New York are now seeking meetings with Interior Secretary Zinke to press their case that drilling would pose significant risks to coastal tourism.


Yesterday, the White House invited news cameras to an hour-long, bipartisan negotiating session on immigration policy. Late yesterday, a US District Court judge in San Francisco ruled late that Deferred Action for Childhood Arrivals (DACA), which Trump has said he will end, should remain in effect until legal challenges brought in multiple courts are resolved. Under the administration’s plan, the program for young people commonly known as “Dreamers” would be phased out over a two-year period, beginning in March. Tuesday’s court ruling could complicate negotiations between congressional Democrats and Republicans trying to reach a deal to resolve the legal status of nearly 800,000 young immigrants covered by the program. Today, Trump called the court ruling “unfair” but so far, no announcement on plans to appeal.


Reuters reports that Canada is increasingly convinced Trump will announce that the US intends to pull out of the North American Free Trade Agreement. Shares of companies and ETFs that benefited under NAFTA dropped today. General Motors shares dropped 2.4 percent, Kansas City Southern fell 3.6 percent, while Constellation Brands declined 1.2 percent after the report. Ford Motor traded down 0.4 percent. NAFTA is a big deal for the auto industry. Under current rules, 62 percent of a car must be made in the U.S., Canada or Mexico to avoid tariffs. The Trump administration has said it wants to raise that to 85 percent and wants 50 percent of that to come from the United States. That would raise costs for manufacturers. Kansas City Southern owns railroad track in the U.S. and Mexico. It offers significant cross-border transportation services for companies. Constellation Brands is an international beer, wine and spirits company with operations in U.S., Mexico and Canada. It also imports beer brands such as Corona Extra and Modelo Especial. Mexico and Canada-related ETFs also fell. The iShares MSCI Mexico ETF declined 2.2 percent, while theiShares MSCI Canada ETF dropped 1.1 percent. Mexico and Canada together represent nearly one-third of total U.S. agricultural exports. American corn farmers could be big losers if NAFTA gets tossed since Mexico was the top export market for corn last year, while Canada is also a major market for the crop as well as ethanol. Mexico already has started buying more corn from Latin American countries.


The housing market has been doing well, home values have been increasing for several years, and home owners once again have equity in their homes. No surprise, more people are now starting to tap that cash. What are they spending it on? Mostly making their homes even more valuable. Renovation spending is soaring, and 80 percent of borrowers taking out home equity lines of credit say they would consider using that money to renovate. Remodeling spending topped $152 billion in 2017, and renovations for owner-occupied single-family homes will increase 4.9 percent in 2018 over 2017, according to the National Association of Home Builders. That does not include remodeling done by investors looking to flip or rent properties, both of which are increasing as well.


UBS reiterated its buy rating on Apple shares, saying the recently passed tax reform law will free up new funds for the company. Apple is sitting on about $250 billion in offshore cash and UBS figures that when they repatriate that money, they will spend even more to buy back their own shares.


Walmart is expanding its “Scan & Go” technology to an additional 100 locations across the U.S. Kroger’s recently introduced platform, known as “Scan, Bag, Go,” will roll out to 400 of the grocery chain’s stores later this year. That will put the company ahead of Walmart, which anticipates having its “Scan & Go” service at fewer than 200 stores by the end of 2018. With “Scan, Bag, Go,” shoppers simply scan bar codes on items they will be purchasing, either with a handheld scanner or with Kroger’s smartphone app, as they walk throughout the store. Self-checkout kiosks will await customers at the end of their shopping, where valid coupons have been tallied and a final total is instantly calculated. Eventually, shoppers should be able to bypass those kiosks altogether and pay directly through the app. The process at Walmart looks similar: Using an app, customers will scan items (even produce) on their own as they walk through the store. They will be able to pay on their phones when they’re finished. A Mobile Express lane will also be situated at the front of Walmart’s stores for those shoppers to walk through, for security purposes, before they leave.


In today’s cryptocurrency update: Rochester may be a half-empty frozen industrial wasteland, but they do occasionally receive word from the outside world in upstate New York. Apparently, executives at Kodak, heard about this blockchain stuff and decided to jump on the bandwagon. Shares in Eastman Kodak more than doubled after the former camera and film heavyweight said it would launch the Kodakcoin, “a photocentric cryptocurrency to empower photographers and agencies to take greater control in image rights management.”


Day 2 of the Consumer Electronics Show in Las Vegas. And the lights went out. A blackout in the central hall left thousands in the dark. No word on the cause. Just a reminder, you need electricity to power all those electronic gadgets.


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