Follow the Money
…Stocks drop. Fed heads unconcerned. PR still dark. Goldman – tax cuts going to buybacks. Jobless claims down. Follow the gun money.
Financial Review by Sinclair Noe for 02-22-2018
DOW + 164 = 24,962
SPX + 2 = 2703
NAS – 8 = 7210
RUT – 0.38 = 1531
10 Y – .03 = 2.92%
OIL + .94 = 62.62
GOLD + 7.40 = 1332.40
Once again, we saw an early rally on Wall Street with some weakness into the close. Still, a solid gain for the Dow and the S&P 500 today, enough to snap a multiday skid. Both the Dow and the S&P are coming off two days of losses, and the Nasdaq has been down for 4 sessions.
Even though investors want to see an improving economy, they are demonstrating a heightened sensitivity to the prospect of accelerated inflation, rising interest rates, and higher bond yields. St. Louis Fed President James Bullard tried to tamp down the growing expectations of economists that the U.S. central bank will engineer four quarter-point rate increases this year, saying “The idea that we have to go 100 basis points in 2018, that seems like a lot to me.”
Earlier on Thursday, the Fed’s vice chairman for supervision, Randall Quarles, said in Tokyo that recent low inflation readings aren’t “a great concern,” and the economy is “performing very well.”
Speaking at a media briefing in Manhattan to discuss the economic outlook for Puerto Rico in the wake of a spate of catastrophic hurricanes, William Dudley, New York Federal Reserve President, did not talk about interest rates but he said there’s a “speculative mania” around cryptocurrencies, which he described as dangerous. Dudley said it will likely take “many more months” to restore electricity and critical infrastructure to Puerto Rico, adding it was unclear how many of the tens of thousands of residents who fled will eventually return. Given the already outdated and inefficient power plants, he said, “now is a perfect opportunity for Puerto Rico to essentially start from scratch and build a resilient power generation and distribution network.”
Minutes from the European Central Bank policymakers’ meeting last month suggest that rate-setters are in no hurry to adjust policy, and are unconcerned about inflation.
The Tax Cuts and Jobs Act passed in December could provide significant fiscal stimulus, but that depends on where the savings actually go. Now, courtesy of Goldman Sachs, we know where the tax cut is really going. Surprise! It’s paying for stock repurchases by corporations, as Corporate America despairs of investing in much other than dividing the pie provided by near-record profitability into fewer and larger pieces. Buyback announcements are up 22% this year to $67 billion in just six weeks, Goldman said in a note to clients. This follows a report by benefits consulting firm Aon Hewitt finding that 83% of large companies don’t expect the tax cut to boost salaries at all – just help pay for small bonuses companies like Walmart and AT&T gave workers, which were skewed toward higher-paid, longer-tenured employees in many cases. And Goldman reports companies have raised guidance on re-investment in their businesses only 3%. Share buybacks may be nice for investors and for executive compensation but it doesn’t really help the economy grow, and a key part of the tax plan is that it will fuel tremendous economic growth. If we don’t get the growth, all we’re left with is a bigger deficit.
Goldman thinks tax cuts will add 0.7 percentage points to inflation-adjusted GDP growth this year and 0.6 points next year, before flattening out. That’s less than the impact on the deficit — in essence, if forecasts other than the Trump administration’s projections are right, we charged a little bit of extra growth on a credit card. And we’ll borrow more to make it happen than the growth is worth. But even if the tax cut causes little growth, its impact on corporate profits is real and meaningful — and now twofold. Consensus earnings estimates per share for this year for companies in the Standard & Poor’s 500 stock index rose about 7%, to $158, after the tax cut passed. It wasn’t complicated: If you take the same pretax earnings, then reduce the statutory tax rate by 14 percentage points, you boost after-tax profits at least 7%.
The Treasury was able to dump $258 billion of debt on traders this week without blowing up the bond market. Still, the highest yields since 2011 and earlier are were not high enough yet to really attract the type of demand that would prevent the cost to borrow from continuing to rise. This week’s auction was capped by the sale of $29 billion in seven-year notes. Investors placed bids for 2.49 times the amounts offered, below last month’s bid-to-cover ratio of 2.73 times for that maturity despite a yield of 2.84 percent, the highest since 2011. But wait, there’s more. Overall, the US is forecast to at least double its debt sales this year to more than $1 trillion, the most since 2010. What makes that number even scarier to traders is that the Federal Reserve is simultaneously pulling back from that market, reinvesting fewer of the maturing proceeds from its holdings in new bonds. As bond prices dipped this week, the yield on the 10-year Treasury note inched closer to 3%, which seems like an important level, likely to freak traders when we eventually, or inevitably, hit it. The last time the 10-year yield traded above 3 percent was in January 2014.
Initial U.S. jobless claims fell by 7,000 to 222,000 in the seven days ended Feb. 17, marking the second lowest level since the end of the 2007-2009 recession.
The Conference Board’s leading economic index jumped 1% in January, the fourth straight gain and the biggest monthly rise in three months. Building permits and the financial subcomponents were the main drivers of the strong gain, the Conference Board said, as 8 of the 10 indicators were positive.
Following the shooting massacre in Parkland Florida last week, there has been a renewed debate about gun control. We’ve all heard it before. This time might be different because now it looks like people are starting to follow the money. Blackrock, the world’s largest asset manager with more than $5.7 trillion under management, indirectly owns shares in several gun-making companies through the many exchange-traded funds under BlackRock’s iShares umbrella. The funds track indexes such as the S&P 500 and various sector indexes as well. BlackRock says it has heard from investors who don’t want their money tied into weapons manufacturers. Blackrock is essentially required to hold shares of a company included in a given index, but they could exert pressure on the index providers to remove the gunmakers from their listings. Today, New Jersey state lawmakers moved to restrict the state’s public pensions from investing in the stocks of gun manufacturers. And First National Bank of Omaha said it would not renew a contract to issue an NRA sponsored credit card after “customer feedback has caused us to review our relationship with the NRA.”
Shares in Roku plunged 17% in heavy trading after the streaming-video company issued a disappointing outlook, along with better-than-expected quarterly earnings.
Pandora Media lost 7.5% after the music service late Wednesday posted stronger-than-expected quarterly revenue, although the adjusted net loss was wider than expected.
Car-rental giant Avis Budget Group gained 15% after its better-than-anticipated results.
Cheesecake Factory gained almost 4% even as its results late Wednesday revealed weaker-than-expected quarterly revenue.
Wayfair dropped 21% after the online home retailer reported a wider-than-expected fourth-quarter loss.
Chesapeake Energy up 20% after the company topped earnings estimates for the fourth quarter. The stock was one of the biggest boosts to the energy sector, which rose more than 2% as one of the best-performing industries of the day on a percentage basis.
When you think about luxury car brands, your first thoughts might not be Hyundai, however the Korean company’s Genesis line beat out German rivals to be named 2018’s best car brand in the U.S. by Consumer Reports. In its debut year, Hyundai’s luxury line bumped Volkswagen AG’s Audi from top billing to the No. 2 spot, with BMW, Lexus and Porsche rounding out the top five. South Korea’s Kia Motors snagged sixth place, ahead of Subaru, Tesla, Honda and Toyota. At No. 8, Tesla remained the highest-rated American auto brand. But it doesn’t make the best electric car. That honor went to GM’s all-electric Chevrolet Bolt, which won in the new Compact Green Car category. At the bottom of the list – Jeep and Fiat.