Financial Review

End of Easy

…Stocks down on the week, except small caps. Economy rolling into May. China give and take. Farm bill flops. NAFTA deadline passes. Another school shooting.

Financial Review by Sinclair Noe for 05-18-2018

DOW + 1 = 24,715
SPX – 7 = 2712
NAS – 28 = 7354
RUT + 1 = 1626
10 Y – .04 = 3.07%
OIL – .15 = 71.34
GOLD + 1.90 = 1293.10

 

The Dow, and S&P 500 lost 0.5% for the week, and Nasdaq dropped 0.7% for the week. The small cap Russell 2000 index knocked out 3 consecutive record highs to finish the week up 1.3%. Bonds tried to rally today but for the week, the yield on the 10-year Treasury note added 10 basis points. And oil prices topped $70 a barrel last week and continued marching higher this week, for the third straight week of price increases. You’ve probably seen the signs with $3 a gallon prices for regular gas, and we’re not even into the summer driving season yet. Meanwhile, Brent crude pushed near $80 a barrel. Gold moved higher today but is down four of the last five weeks.

 

Interest rates are rising, gas prices are rising. Tariffs and trade tensions could boil over into trade wars, but for now the economy is rolling along with second quarter GDP expected to grow slightly more than 3%. The U.S. economy is running close to full tilt, with unemployment dropping below 4% for the first time since 2000 and job openings at a record high. The strong jobs market have given Americans the money and, just as important, the confidence to spend. May is off to a strong start, with both the Dow and S&P on track for their best performance in the month since 2009. Of course, May is not typically a strong month. Midterm years have a particularly bad track record. Since 1950, midterm years have only yielded an average gain of 0.1 percent on the S&P in the May through October period, with the index also suffering an average peak-to-trough pullback of 14.7 percent, the largest of the four years in the cycle. As for selling in May, the last time the month was negative for both the Dow and the S&P was 2012. In the five years since, the S&P has climbed in the May through October period four times, with the only decline being a 0.3 percent dip in 2015.

 

Meanwhile, Morgan Stanley calls it the “end of easy”, that witching hour in global stock markets when economic growth is slowing, the Federal Reserve is tightening, and inflation is ticking up. After a long bull run, strategists the world over are getting nervous — and watching for the top.

 

Applied Materials reported earnings that beat on the top and bottom line but the stock dropped 8 percent after the chip gear maker’s disappointing forecast renewed concerns over slowing smartphone demand. The warning dragged down Philadelphia chipmaker index by 1 percent. Intel dropped 2.4 percent, and along with Applied Materials weighed the most on the S&P and the Nasdaq.

 

High-level Chinese negotiators visited Washington this week, administration officials said there was an agreement to reduce the nation’s $375 billion trade deficit with China by $200 billion. China had a different take, saying there was no deal to reduce the deficit. Still, there might be some give and take going on.

 

Chinese officials ended a months’ long delay by approving Toshiba’s sale of a majority stake in its microchip unit to a consortium led by the United States investment firm Bain Capital. The deal gives Toshiba $14 billion in cash it desperately needs after a bad bet on nuclear power.

 

Qualcomm  is getting closer to nabbing NXP Semiconductors, a deal it’s been trying to close for over a year. Qualcomm gained about 1% today. NXP gained over 4%. You’ll recall Qualcomm was forced last month to refile its application with Chinese regulators, seeking approval of the $47 billion acquisition. The Chinese regulators have re-opened the file for review. It’s not a done deal yet, but if the deal does not happen, look for Qualcomm to use the money for a big share buyback.

 

Toymaker Mattel recently rejected a merger proposal from Bratz doll maker MGA Entertainment. Mattel down about 1% today.

 

Late yesterday we told you that PayPal was acquiring iZettle, a European competitor of Square, for $2.2 billion. Paypal gained 2% today.

 

Tractor and construction equipment maker Deere & Co revised up its full-year earnings estimate on stronger demand for its construction equipment, sending shares were up more than 5 percent.

 

Campbell Soup shares down about 12.3%.  Campbell posted a $393 million first-quarter loss and said it now expects profits to decline by 5 percent to 6 percent this year, worse than earlier projections of between 1 percent and 3 percent. The CFO says tariffs are resulting in higher costs and lower margins. Also, Chief Executive Denise Morrison is leaving the company. Morrison’s departure means there are now just 23 women leading Fortune 500 companies.

 

Facebook went public 6 years ago, on May 18, 2012. A $1,000 investment six years ago would be worth about $4,800 today.

 

A sweeping $868 billion farm bill that subsidizes agriculture and funds food assistance programs has failed in the House of Representative. The House leadership put the bill on the floor gambling it would pass despite unanimous Democratic opposition. They negotiated with members of the conservative House Freedom Caucus up to the last minutes. But their gamble failed. The vote was 213 to 198, with 30 Republicans joined 183 Democrats in defeating bill. With moderate Republicans maneuvering to force a vote on legislation offering citizenship to some younger immigrants who arrived in the country as children, conservatives revolted. The farm bill became a bargaining chip as they lobbied leadership for a vote on a hard-line immigration bill. The farm bill itself became a sideshow, despite its importance to agriculture and the significant changes it would institute to food stamp programs. The farm bill broke open partisan House divisions as Democrats abandoned negotiations with Republicans over the food stamp changes, which would require adults to spend 20 hours per week working or participating in a state-run training program as a condition to receive benefits, even though most states do not have such programs in place.

 

Also today, Trump issued a proposal that would effectively stop giving government funds that subsidize birth control for low-income women to Planned Parenthood and other clinics that provide abortions or referrals. Congress provided $286 million in Title X grants in 2017 to Planned Parenthood and other health centers to provide birth control, screening for diseases and cancer, and other reproductive counseling to low-income women. The funding cannot be used for abortions, but abortion opponents have long complained that the money subsidizes Planned Parenthood itself.

 

Earlier this month, House Speaker Paul Ryan set a May 17 deadline for the Trump administration to submit a new NAFTA deal with Mexico and Canada to Congress for approval. May 17th was yesterday. The deadline was missed – not even close. There are still “gaping differences” between the US, Canada, and Mexico on several issues, including labor standards and intellectual property protections. the countries appear to be at an impasse over the US’s proposal for a five-year sunset clause that would require the countries to vote every five years on whether to stay in NAFTA. Canada and Mexico are staunchly opposed to the idea since it would create enormous uncertainty for businesses’ supply chains and investors.

 

The US is also at odds with Canada and Mexico over its desire to get rid of the “investor-state dispute settlement” (ISDS) mechanism, a provision that allows corporations to sue foreign governments in tribunals if they think they’ve been wronged by them. The Canadians in particular don’t want to let this go; if they do, it will likely leave them with less power to respond to unilateral trade barriers on Canadian goods by the US. Another difference is that the US also favors more robust intellectual property protections than Canada and Mexico. They allow American corporations like pharmaceutical companies to hold patents on their products for a longer period of time and edge out foreign competition.

 

Sorting out these differences could take months of negotiations. There’s nothing bad about that per se, but it means that the political landscape for approving the deal is probably going to change in substantial ways before they conclude. Specifically, don’t look for Congress to do anything on NAFTA before the midterm elections. After the midterm elections, there is a chance that Congress will look substantially different. And a new Congress might make new demands for a vote on NAFTA. There are other complicating factors as well. In July, Mexico will hold national elections, and the current frontrunner for the presidency is Andrés Manuel López Obrador, generally described as a far-left candidate. Obrador is pro-NAFTA, but he’s also more likely to push back hard against Trump if Trump starts to antagonize him. That could slow the pace of talks even more. I’m sure it will all work out because we all know this trade negotiation stuff is easy. We can’t lose. It just might take some time.

 

It happened again today: A shooter walked into a school and opened fire. This time, the gunman killed as many as 10 people at Santa Fe High School in Texas, near Houston; 9 students, one teacher, 10 others injured. This has become an American routine, all too common, all too frequent. And it will happen again. It is inevitable, because we don’t do anything to stop it. I wish I could tell you something more hopeful but that’s just the way it is.

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