Financial Review by Sinclair Noe for 08-26-2015
DOW + 619 = 16,285
SPX + 72 = 1940
NAS + 191 = 4697
10 YR YLD + .04 = 2.17%
OIL – .44 = 38.87
GOLD – 15.00 = 1126.40
SILV – .58 = 14.21
Stocks finally snapped a weeklong string of severe declines. The gain was the third-highest point gain in history for the Dow Jones industrials but, on a percentage basis, the 4% gain was not even in the top 20 historically. The Dow opened with a 443-point surge, pulled back and then rallied again to finish near its highs of the day, unlike yesterday when stocks surrendered their entire early gains and turned negative in the final hour of trade.
In China, the Shanghai Composite Index fell 1.3%, despite a new $22 billion injection from Beijing to shore up growth. Chinese equities have now extended their steepest five-day drop since 1996, losing half their value, or $5 trillion, since mid-June. Shares elsewhere in Asia ended mixed; European stocks were deep in the red.
We started with some strong economic data. Durable-goods orders rose a seasonally adjusted 2% last month after a 4.1% gain in June. Bookings for new cars and trucks and military hardware led the way. Orders rose 4% for autos and 22.3% for large defense goods such as fighter jets, missiles and tanks. Orders for aircraft dropped 6%. Durable goods orders minus transportation rose 0.6%. Business investment outside the volatile defense and transportation industries rose for the second straight month. So-called core orders climbed 2.2%, the biggest gain since June 2014.
The Federal Reserve’s summer symposium in Jackson Hole, Wyo., often has provided a stage for central bank officials to signal an imminent policy change. Along with several other FOMC members, Fed Chair Janet Yellen is planning to skip the annual gathering of monetary policymakers in Jackson Hole this year, marking the second time in three years the Fed’s top official won’t be traveling to Wyoming. Yellen’s predecessor, Ben Bernanke, skipped the 2013 gathering. The topic for the Aug. 27-29 conference will be inflation dynamics and monetary policy. In reality everyone will be looking for a hint about a possible rate hike in September, and even though Yellen isn’t speaking, Vice-Chairman Stanley Fischer will speak on Saturday. Fischer is considered more hawkish than Yellen, so his statements or his silence will telegraph a message.
The truth is that a small interest rate hike doesn’t really change the economy in a major way for most Americans. It isn’t going to make much difference to mortgage rates, which are tied more to long-term bond yields. Nor will it mean much for rates on credit cards, auto loans and other consumer loans.
William Dudley, president of the Federal Reserve Bank of New York, told reporters that “from my perspective at this moment” raising rates now “seems less compelling to me than it was a few weeks ago.” But he quickly noted that that “could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing.”
Dudley said economic reports this week “have actually been pretty positive. Consumer confidence showed a good increase, new-home sales were solid, the durable-goods orders report was quite strong. But you also have to look at all the other things that potentially could affect the economic outlook.” That includes China and the markets’ volatility; “international developments and financial-market developments do have relevance because they can impinge and affect the economic outlook.”
South Korea is willing to discuss North Korea’s demand for an end to sanctions, and is preparing a new channel of dialogue with the North, just a day after the rivals struck a landmark pact that defused a standoff between their forces. Tuesday’s accord saw North Korea express regret over a landmine incident that wounded South Korean soldiers and the South agree to stop broadcasting anti-North propaganda over border loudspeakers. South Korea’s KOSPI Index closed up 2.6% on the news.
In the latest escalation of Yemen’s five-month war, Houthi rebels said they’ve fired a Scud missile into Saudi Arabia while a Saudi official acknowledged sending forces into northern Yemen in a bid to stop border attacks. A Saudi-led coalition recently stepped up its ground offensive after months of airstrikes against the Houthis.
Schlumberger is acquiring oilfield equipment maker Cameron International in a stock and cash transaction valued at $14.8 billion. Cameron shareholders will receive 0.71 shares of Schlumberger stock and a cash payment of $14.44 for each share held. The deal represents a 56% premium to Cameron’s closing stock price on Tuesday.
Despite Schlumberger’s new announcement, the recent market selloff and plunging oil prices are increasing concerns that some of this year’s largest takeover deals are at risk of falling apart, including Shell’s $70 billion offer for BG Group and Halliburton’s $35 billion bid for Baker Hughes. Over the past week, the gap between the agreed price of several takeovers and the market price of the target companies’ shares has widened, which usually is interpreted as a signal of declining confidence that the transaction will be completed as planned.
Microsoft’s Windows 10 has reached more than 75 million devices in almost a month since the operating system was released. Microsoft has promised shareholders that Windows 10 would reach 1 billion users within three years, which would be its fastest adoption rate ever. If you have installed Windows 10 you may have noticed a nasty tendency for notifications to upgrade Office. It’s an advertisement really, and it’s really annoying. And no, you do not have to upgrade. The culprit is the new Get Office app that comes preinstalled on Windows 10. Simply open the Start menu’s All Apps list, right-click on the Get Office app, and select Uninstall. You’ll be asked to confirm the deletion; do so. Boom. Done.
If all this market volatility has you feeling a bit overwhelmed, you can head over to gaming.youtube.com. That’s the new gaming site on YouTube. Announced in July, the streaming service will rival Amazon-owned Twitch, boasting more than 25,000 games and channels from various publishers and YouTube creators. The gaming site launches sometime today.
Amazon will begin delivering wine, beer and spirits to US customers for the first time through its Prime Now program; this follows a trial program in the Seattle area. The move will continue testing the online alcohol delivery market, which is estimated to increase to $1.4 billion in sales by 2020. Amazon already provides quick alcohol delivery in London and offers wine sales across the US.
Fiat Chrysler Chief Sergio Marchionne presented plans for new products to a gathering of auto dealers. The new lineup will include a plug-in minivan, an updated Dodge Charger and new Jeep SUVs with improved gas mileage.
Toyota is beginning trial production of cars at the China plants that were shut following the recent explosions in Tianjin, the first step in reopening the facilities following a two-week closure. The blasts killed at least 123 people and injured 67 Toyota workers living in the area.
The US Army and Marine Corps have chosen Oshkosh Defense for a $6.7 billion contract to start light production of a replacement for the aging Humvee. Oshkosh was considered the favorite for the pact vs. AM General, the privately held maker of the original Humvee, and Lockheed Martin, which has less experience building military ground transport. The contract covers 17,000 Joint Light Tactical Vehicles.
The City of Phoenix held an election yesterday. Phoenix Mayor Greg Stanton was re-elected along with four incumbent council members; all five ballot measures passed, including Prop 104, also known as the light rail expansion, which will impose a 0.7% sales tax until 2050 to fund 42 new miles of light-rail tracks, more bus routes, and street improvement.
Wildfires continue to ravage the West. California has been suffering through a long-running drought, now the state is on fire; there are 42 active fires in California; the largest scorched over 134,000 acres. Oregon has 19 ongoing wildfires; the largest is more than 105,000 acres and only 10% contained. Washington State has 27 active fires; the largest is over 240,000 acres and only 10% contained. At some points the Columbia River is about one-mile wide, and that has not been enough to serve as a firebreak; embers lifted on 40-mile-per-hour gusts of wind have jumped the river to ignite dried grass on the opposite shore. Firefighters have been brought in from Canada, Australia, and New Zealand; National Guard troops have received quicky training and are sent out to battle blazes; active duty Army troops have been deployed; and 4,000 prisoners are being used in California; 32,000 firefighters in all – and it still isn’t enough. Three firefighters died fighting in Washington, thousands of residents have been displaced, hundreds of buildings have burned, and more than 7.5 million acres have burned nationwide this season.
Accounting for insurance costs, damages to businesses and infrastructure, this year’s fires will likely cost taxpayers $25 billion—and that’s if a whole town or city doesn’t burn, which is a distinct possibility. Some of the costs are hard to assess. Seattle City Light shut down power generation at 3 dams on the Skagit River because transmission lines were damaged. The utility is losing $100,000 in revenue each day that the lines are down. The smoke from wildfires creates a health hazard, and it is not confined to the immediate area. Hospitals across California are seeing an uptick in admissions for respiratory-related complaints, particularly asthma, which is exacerbated by exposure to smoke.
Beyond the fires, the southwest faces the prospect of El Niño in the next few months. A Niño generally produces heavy rains and higher temperatures. The rains will help ease drought conditions in California but not much; the higher temperatures mean there is a slim chance for snowpack, and snowpack is more important than rain. If this El Niño lives up to its potential, this thing can bring a lot of floods, and in areas burned bare by fire we can look for mudslides and mayhem.
Durable goods, Jackson Hole, Stanley Fischer, William Dudley, Windows 10, Schlumberger, Fiat Chrysler, Oshkosh, gaming.youtube.com, Greg Stanton, wildfires, El Niño, California drought,