Financial Review

Eight Straight

…A string of gains on Wall Street. China-US tweet strange. US companies have hearings on tariffs this week. China visit. SCOTUS rules open up sports gambling. Xerox-Fuji deal nixed. Sears’ slow destruction. Net neutrality on the line.

Financial Review by Sinclair Noe for 05-14-2018

DOW + 68 = 24,899
SPX + 2 = 2730
NAS + 8 = 7411
RUT – 6 = 1600
10 Y + .02 = 3.00%
OIL + .48 = 71.18
GOLD – 4.90 = 1314.00

The Dow Industrial Average started the session with triple digit gains, then drifted slightly lower. The Dow posted its eighth straight session of gains, the longest streak since last September. The Russell 2000 index hit 1615, a couple of points away from its previous intraday record but closed down.

 

Chinese President Xi Jinping’s top economic adviser is heading to Washington this week for more negotiations. This on the heels of a US trade delegation flop in Beijing. This morning Trump tweeted that he will help save ZTE, a Chinese electronics maker; writing that “Too many jobs lost in China.” The company was on the brink of collapse after United States officials punished it last month for breaking American sanctions against countries including Iran and North Korea. The fate of Chinese technology company ZTE has become a major flashpoint in the US-China trade tensions. Last month, the US Commerce Department blocked American firms from selling parts or providing services to ZTE, which makes smartphones and other telecommunications equipment. The ban was put in place after Washington said ZTE violated a deal in which the Chinese company agreed to pay a $1.2 billion fine for evading US sanctions on Iran and North Korea.

 

Tech supply chains are so intertwined these days that just about every product that ZTE makes has some American components or software in it — think microchips, modems and Google’s Android operating system. So if ZTE sells a smartphone to North Korea, it might also be selling a Qualcomm chip inside that phone. That’s illegal under American sanctions that prohibit the sale of United States tech to embargoed countries. Trump hasn’t explained his decision to try to help the company, other than to cite the potential for lots of Chinese workers to lose their jobs. The administration is pressuring China to make trade concessions. It may also need Beijing’s help to strike a deal with North Korea as Washington and Pyongyang plan a high-profile meeting next month in Singapore. It might also be feeling heat from US companies such as Qualcomm, Intel, and Alphabet – all do business with ZTE. The Chinese government does not trust American tech companies. ZTE has close ties with China’s government, and U.S. officials have raised concerns that its phones and other devices could be used as surveillance tools against Americans. It’s a game of spy versus spy in cyberspace.

 

Meanwhile, American companies will be airing their views on the Trump administration’s plan to slap tariffs on around $50 billion worth of Chinese goods as punishment for alleged intellectual property theft. Among the big US companies that have asked to testify at the hearings are Best Buy (BBY), HP (HPQ) and US Steel (X). Lobbying groups seeking to take part include the National Retail Federation and the National Association of Manufacturers. The hearings start Tuesday and are scheduled to last three days. The US government has published a list of 1,300 Chinese exports that it plans to target with tariffs of 25%, many of them in advanced manufacturing industries such as aerospace.

 

Optical component makers saw their stocks jump on Trump’s ZTE news, with Oclaro, Lumentum and Finisar rising 2.9 percent, 2.2 percent and 1 percent, respectively. Acacia Communications also surged 8.7 percent.

 

Chip stocks rose Monday after a report said Chinese regulators will restart a review of the proposed acquisition of NXP Semiconductors by Qualcomm. NXP shares jumped 11.9 percent on the news, while Qualcomm’s stock gained 2.7 percent.

 

The Supreme Court upheld the legality of a 2014 state law permitting sports betting at New Jersey casinos and horse racetracks and voided the federal Professional and Amateur Sports Protection Act, potentially paving the way for states to legalize sports betting. The ruling is considered a defeat for major American sports leagues.

 

The ruling takes the United States a step closer to legal sports betting in numerous states, perhaps nationwide, rather than just in select places such as Nevada, home to the gambling capital Las Vegas. The current illegal sports betting market is worth billions of dollars annually. Some states see sports betting, like lotteries, as a potentially important source of tax revenue. Some states, including Connecticut, Mississippi, New Jersey, New York, West Virginia and Pennsylvania, have already cleared the way for sports betting in expectation of a favorable ruling. Rhode Island’s governor has already included nearly $24 million in expected sports betting revenue in his proposed fiscal 2019 budget. Nearly 15 other states have proposed legislation to expand sports gambling. Some may require a voter referendum.

 

It’s difficult to estimate just how big an industry legalized sports gambling could become in the U.S. One study, commissioned by the American Sports Betting Association, found that it could add as much as $26 billion to U.S. gross domestic profit, create as many as 152,000 new jobs, and bring in between $4.8 billion and $5.3 billion in new revenue for the states. But that’s just an estimate. It would definitely shake up the scene, including other forms of legal gambling, such as lotteries. While legalized gambling has often brought an initial revenue boost, those benefits have faded over time as more states have competed for a finite pool of gambling dollars. And while casinos are anxious to jump, look for the biggest push in online wagering.

 

Jared Kushner and Ivanka Trump were in Jerusalem today to attend the new US Embassy opening, alongside Israeli Prime Minister Benjamin Netanyahu and US Treasury Secretary Steve Mnuchin. President Donald Trump gave a televised speech from Washington, insisting that America’s “greatest hope” for Israel is “for peace.” Just 60 miles away from the new US Embassy, about 40,000 Palestinians marched toward a border fence defended by Israeli soldiers. The Israelis responded with live ammunition, killing more than 55 Palestinians and injuring another 2,400. No Israeli soldiers were killed or wounded. It was the worst bloodshed since the 2014 war in the territory.

 

Xerox says it’s killing its multibillion-dollar deal to be taken over by Japan’s Fujifilm, saying it had reached a new agreement with activist investors Carl Icahn and Darwin Deason, who had bitterly opposed the Fujifilm deal. The Japanese company said it disputes Xerox’s “unilateral decision” and doesn’t think the US company has the legal right to ax the deal. Under the plan that Xerox (XRX) and Fujifilm (FUJIF) announced in January, the US company’s operations would be merged with those of Fuji Xerox, a joint venture between the two firms. The deal would leave Fujifilm holding 50.1% of Fuji Xerox, with Xerox shareholders owning the rest. But Icahn and Deason blasted the deal, saying it significantly undervalued the US company and would be its “death knell.” With a combined 15% stake in Xerox, they launched an aggressive campaign to halt the merger. They appeared to have gotten what they wanted earlier this month, striking an agreement with the Xerox board to replace the CEO and six other directors with their own representatives — and to move quickly to terminate or renegotiate the Fujifilm deal. That scheme fell apart but was resurrected this weekend. Xerox shares dropped 4.3% today.

 

Sears had some of its debt downgraded to default status for the first time this week. But the downgrade wasn’t because of a missed loan payment. It was because Sears finished refinancing of some of its debt in a move that will save the company about $60 million a year. The struggling retailer announced Wednesday that it had exchanged nearly $500 million of its debt that had been due this year or next year for debt that will not be due as soon. It also said it may be able to repay some of the debt with stock in the future. As a result, credit rating agencies Fitch and Standard & Poor’s both downgraded the debt to default status. The debt had already been at the lowest level of junk bond status. Meanwhile, Sears Holdings has formed a special committee to explore the sale of its Kenmore appliances brand, home improvement products and parts direct business.

 

CBS (the media company, not the drugstore) filed a lawsuit today to reduce the voting power of controlling shareholder National Amusements, the movie theater company owned by Sumner and Shari Redstone, in an act of defiance aimed at thwarting the Redstones’ plan to merge CBS with Viacom.

 

Facebook has suspended around 200 apps in the first stage of its review into apps that had access to large quantities of user data, in a response to a scandal around political consultancy Cambridge Analytica. The apps were suspended pending a thorough investigation into whether they misused any data.

 

The U.S. Senate will vote on Wednesday on whether to reverse a decision by the Trump administration to roll back “net neutrality” rules. The FCC repealed rules that barred providers from blocking or slowing down access to content or charging consumers more for certain content. Those rules were intended to ensure a free and open internet, give consumers equal access to web content and bar broadband service providers from favoring their own material or others. The new rules require internet providers to tell consumers whether they will block or slow content or offer paid “fast lanes.” On Thursday, the FCC said the net neutrality rules will expire on June 11 and the new regulations approved in December handing providers broad new power over how consumers can access the internet will take effect. Advocates of keeping the 2015 open-internet rules have the backing of 50 U.S. senators.

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