…..Quiet day. ISM non-manufacturing slips lower. Productivity revised higher to zero. Factory orders dip. Thursday brings election in UK. Plus, Comey testifies before Senate. Qatar on the diplomatic ropes. Trump wants to privatize air traffic control. SCOTUS rules for Wall Street; looks into 4th Amendment digital case. Winners and losers on Wall Street. FAANG still rules. Hey Siri, wake me when Apple does something cool.
Financial Review by Sinclair Noe for 06-05-2017
DOW – 22 = 21,184
SPX – 2 = 2436
NAS – 10 = 6295
RUT – 8 = 1396
10 Y + .02 = 2.18%
OIL – .27 = 47.39
GOLD + .80 = 1280.30
The markets were drifting today. After hitting record highs Friday on a very weak May Jobs Report, there just wasn’t any good news to push the markets higher. There was a bit of negative or sideways news. On the economic data side, the Institute for Supply Management reported that their non-manufacturing index slipped to 56.9% in May, down slightly from April but still in positive territory.
The government said productivity was unchanged in the first three months of 2017 instead of declining at a 0.6% annual rate. The biggest change: The increase in output, or how many goods and services companies produce, was raised to 1.7% from 1%. The amount of hours employees worked, meanwhile, was revised to a slightly higher 1.7% gain instead of 1.6%. The updated figures show that labor costs rose more slowly than initially reported, a sign companies continue to keep costs down despite a steadily expanding economy and growing shortages of skilled labor. Hourly compensation — pay and benefits — rose a revised 2.2% in the first quarter, but after adjusting for inflation workers actually lost ground. Real compensation fell 0.9%. The upward revision in the first quarter doesn’t change the underlying weakness in productivity, the key to a higher standard of living.
Factory orders dipped 0.2% in April. For the year to date, orders are 4.4% higher than in the same period a year ago. Excluding transportation, which can be volatile, orders rose 0.1% during the month, and are 5.5% higher compared to the same period in 2016. Activity is ticking up, but so are inventories. Stockpiles rose a seasonally adjusted 0.1% during the month and are 2.5% higher than a year ago.
Markets shrugged off the news of a series of attacks which killed several people and injured dozens in the heart of London on Saturday. The UK has a parliamentary election scheduled for Thursday, pitting the Conservative Incumbent Prime Minister Theresa May against Labor leader Jeremy Corbyn. With the London attack dominating attention, a reduction in the number of police officers in England and Wales by almost 20,000 during May’s six years as interior minister from 2010 to 2016 shot to the top of the election agenda. Whatever the outcome of the election, the UK still has to deal with Brexit.
The UK has slipped to become least attractive developed market for sovereign wealth funds one year after the 2016 Brexit referendum, according to a survey by asset manager Invesco. A survey of 97 sovereign wealth funds, pension funds and central banks with a combined $12 trillion in assets rated the UK 5.5 out of 10 for investor attractiveness, down from 7.5 in 2016. Germany was the most attractive market in Europe, with a score of 7.8, while Italy and France followed with 6.1. The US was the most attractive place in the world to invest, earning a rating of 8 out 10.
Also on Thursday, former FBI Director James Comey is scheduled to testify before the Senate Intelligence Committee as part of the committee’s Russia-related investigation.
Saudi Arabia, Bahrain, Egypt and the United Arab Emirates have cut diplomatic relations with Qatar, having accused Qatar of supporting terrorism and destabilizing the region. The US’ biggest concentration of military personnel in the Middle East are located at an Air Force base near the Qatari capital of Doha, and is home to some 11,000 US military personnel. The rift could cause problems for OPEC’s plans to cut oil production. With production capacity of about 600,000 barrels per day (bpd), Qatar’s crude output ranks as one of the smallest among the Organization of the Petroleum Exporting Countries, but tension within the cartel could weaken the supply deal aimed at supporting prices.
President Trump outlined a plan to privatize the US air traffic control system. The FAA spends nearly $10 billion a year on air traffic control funded largely through passenger user fees, and has spent more than $7.5 billion on next-generation air traffic control reforms in recent years. The Aircraft Owners and Pilots Association said it will not support a plan that imposes fees on small plane owners. The major airlines generally favor the idea but Delta is opposed, saying that privatization would not save money, and would drive up ticket costs and could create a national security risk. The proposal would require congressional approval. The president will hold a rally in Ohio on Wednesday to make a case for his $1 trillion infrastructure proposal.
The Supreme Court ruled 9-0 today that the SEC’s recovery remedy known as “disgorgement” is subject to a five-year statute of limitations. The justices sided with New Mexico-based investment adviser Charles Kokesh, who previously was ordered by a judge to pay $2.4 million in penalties plus $34.9 million in disgorgement of illegal profits after the SEC sued him. Kokesh was sued by the SEC in 2009 for misappropriating investors’ money. His penalties covered conduct within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that time frame. The ruling represented a major victory for Wall Street firms, whose Securities Industry and Financial Markets Association trade group had urged the justices to curb the SEC’s powers.
The Supreme Court agreed to hear a major case on privacy rights in the digital age that will determine whether police officers need warrants to access past cellphone location information kept by wireless carriers, or whether that information is protected by Fourth Amendment rights to be free from unreasonable search and seizure. The legal fight has raised questions about how much companies protect the privacy rights of their customers. The major wireless carriers receive tens of thousands of requests a year from law enforcement for what is known as “cell site location information” The justices agreed to hear an appeal brought by a man who was arrested in 2011 as part of an investigation into a string of armed robberies in the Detroit area over the preceding months. Police helped establish that the suspect was near the scene of the crimes by securing cell site location information from his cellphone carrier. The Supreme Court has twice in recent years ruled on major cases concerning how criminal law applies to new technology, on each occasion ruling against law enforcement. In 2012, the court held that a warrant is required to place a GPS tracking device on a vehicle. Two years later, the court said police need a warrant to search a cellphone that is seized during an arrest.
While the S&P 500 is up 9 percent this year, three of its 11 sectors — energy, telecommunications services and financials — are down by an average of 7.7 percent. The common factor in these 3 sectors is that they were all up big in the fourth quarter, perhaps too much, too fast; and now they have fallen back to earth. Where has the big money been flowing in this market? It’s been a great year for big tech stocks, and a pretty meager one for the small caps; the Nasdaq 100 index is up 20 percent this year, while the Russell 2000 has risen by less than 3 percent. Markets worldwide are being propped up by a secret weapon of sorts: robust cash holdings that are at their highest in almost three decades. While stocks globally have benefited from rebounding earnings growth, bonds have also rallied amid declining inflation expectations and uncertainty around the pace of Federal Reserve interest-rate hikes. Underpinning gains in both asset classes is $5 trillion of capital that is sitting on the sidelines and serving as a reservoir for buying on weakness. This excess cash acts as a backstop for financial assets, both bonds and equities, because any correction is quickly reversed by investors deploying their excess cash to buy the dip.
Goldman Sachs has issued a report looking at where hedge funds are investing and noted that technology is the favorite sector by far of professional investors. Hedge funds and large-cap mutual funds disagree about the future prospects of the financial sector, which has been a shining spot of the Trump trade since the presidential election. Hedge funds particularly love the “FAANG” stocks: Facebook, Apple, Amazon, Netflix and Google parent Alphabet. Last week, Amazon topped $1,000 per share. Today, Alphabet topped $1,000 per share. So, really, it has been pretty easy to see where the big money has been flowing.
Today, Apple dropped about 1%, even as they presented their annual developers’ conference. Apple unveiled a Siri-powered smart speaker, the HomePod. It runs $349, which is far more expensive than competing products. Apple is a bit late to the party. Amazon launched its Echo, priced at $179. Six months ago, Google introduced the Google Home speaker priced at $109. They all use voice commands to play music, tell you the weather, read news, and answer questions. Apple ran through all the big improvements its made to the software that runs on iPhones, iPads, and Macs. And they announced various tweaks to watches, computers, etc., etc., blah, blah. Sorry, but these Apple conferences just don’t carry to “wow” factor they used to. It really looked like Apple was behind the curve when it comes to AI, and other big things that might get investors excited.
Separately, Foxconn’s CEO said that Apple and Amazon will join in Foxconn’s bid for Toshiba’s chip business. Representatives for Apple and Amazon declined to comment. The Japanese government has said it will block any deal that would risk the transfer of Toshiba’s key chip technology out of the country.