Financial Review

Follow the Money

….Stocks slip. Risks are high. Jay Powell confirmed. ISM slips. Trade deficit jumps. Deutsche Bank subpoenaed, maybe. Public hates the tax plan. Russia banned from Olympics. More fire in Cal.

Financial Review by Sinclair Noe for 12-05-2017

 

DOW – 109 = 24,180
SPX – 9 = 2629
NAS – 13 = 6762
RUT – 20 = 1516
10 Y – .02 = 2.36%
OIL – .88 = 57.48
GOLD – 9.70 = 1266.90

 

The Dow slipped after posting its 64th record high close yesterday. Not a surprise given the weak finish in the markets yesterday. Today was another example of stocks closing near the lows for the day. And for the broader market, the S&P and Nasdaq have now posted three consecutive losing sessions – we haven’t seen that since August. A Tuesday pause aside, it’s been a rough week or so for technology shares, which have been the victim of a violent rotation that’s seen investors flee what’s been by far the hottest sector of 2017 for companies expected to get a bigger boost from tax legislation working its way through Congress. Meanwhile, telecom shares, which have been the worst-performing sector of the year, were world beaters last week. And financials, which were also laggards, have also enjoyed a shot in the arm. In case you were wondering – yes, it is very rare for the tech sector to fall at least 2% while the S&P or Dow posts gains.

 

Risks “are high and rising” from the potential for a sudden drop in the stock and bond markets, according to the Office of Financial Research, the government agency tasked with looking for threats to the economy from the financial sector. The report highlighted vulnerabilities to cybersecurity incidents, obstacles to resolving failing systemically important financial institutions and structural changes in markets and industry as three key threats to the financial system. Stock valuations are high by historical standards. The report noted that the cyclically adjusted price-to-earnings ratio of the S&P 500 is at its 97th percentile relative to the last 130 years. In the bond market, sensitivity of bond prices to interest rate moves has steadily increased since the crisis. At current levels of duration, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index; and that doesn’t include high yield, or fixed-rate mortgages and fixed income derivatives. Some investors have been financing long-term asset with short-term loans and therefore a correction could trigger financial instability, according to the OFR annual report.

 

It looks like the bond market is worried that the Federal Reserve, which is due to raise interest rates for a third time this year next week, is being overly cautious and may end up curbing growth too much, especially since there’s few signs that inflation is accelerating. The fundamental story among bond investors is one of a central bank committed to the removal of accommodation late in a very long economic expansion.

 

The Senate Banking Committee backed the nomination of Jerome Powell to lead the Federal Reserve, in a vote that basically cements the likelihood he’ll run the central bank. Powell was backed by all of the panel’s Republicans and Democrats except for Sen. Elizabeth Warren. Warren said she disagreed with Powell’s statement in his nomination hearing there was no danger of banks that are “too big to fail.” Good point, the big banks are bigger now than in 2008. At some point you might think too big to fail might not be the best policy, but it will likely be policy for the next several years under the Powell Fed.

 

The Institute for Supply Management’s index of service-oriented companies fell to 57.4% in November from a 12-year high of 60.1% in October. Numbers over 50% are viewed as positive for the economy, however, and anything over 55% is considered exceptional.

 

The US trade deficit increased to a nine-month high in October due to rising oil prices and the widening of America’s long-standing deficits with China and Mexico. The Commerce Department said the trade gap widened 8.6 percent to $48.7 billion, the highest level since January. The politically sensitive U.S.-China trade deficit increased 1.7 percent to $35.2 billion and the deficit with Mexico surged 15.9 percent to $6.6 billion. The worsening trade deficit came even as exports to China and Mexico were the strongest in more than three years, which challenges the argument that the United States was being disadvantaged in its dealings with trade partners.

 

Deutsche Bank AG has reportedly been told to hand over information about its dealings with President Donald Trump, as part of the U.S. investigation into suspected Russian meddling in the 2016 election. The German bank received a subpoena from Special Counsel Robert Mueller several weeks ago, asking for data on client accounts held by the president and his family, according to reports from Bloomberg and German newspaper Handelsblatt. Trump owed Deutsche Bank about $360 million in real-estate loans before he became president. In June, the lender — Germany’s largest — rejected demands by House Democrats to share information on its dealings with Trump, citing privacy laws. The bank said at the time that it would hand over details if it received a formal request to do so. Trump’s lawyer Jay Sekulow and White House press secretary Sarah Sanders say it’s not true that Special Counsel Robert Mueller has subpoenaed Deutsche Bank, as Handelsblatt and other media outlets have reported. “No subpoena has been issued or received,” Sekulow said in a statement. “We have confirmed this with the bank and other sources.”

 

This summer, Trump said he considered his family’s personal finances a “red line” that Mueller should not cross. But by targeting Deutsche Bank with a subpoena for more information about Trump’s accounts, Mueller may well be crossing that line. More important perhaps, he is digging into a massive Trump conflict of interest and one of the biggest questions regarding Trump’s business empire: Why would this German bank lend him so much money when US banks wouldn’t? Trump’s history with Deutsche Bank dates back to the 1990s, when his personal finances were at an all-time low. Trump’s reputation with major lenders was in tatters. So when he set out to relaunch his empire, he turned to Deutsche Bank for the financing he couldn’t find elsewhere. Deutsche Bank went on to back several lucrative deals. In the summer of 2016, The New Yorker detailed how Deutsche Bank was involved with a complex scheme to move as much as $10 billion out of Russia on behalf of powerful individuals facing sanctions in the West. Since Trump came to office, the Justice Department investigation into the Russian money-laundering scandal had gone dormant. It is not clear why. There is no public indication of precisely why Mueller subpoenaed the bank.

 

American voters say the Republican tax plan that both chambers of Congress have passed benefits the wealthy the most, a new poll finds. Quinnipiac University found that 64% of Americans — including 61% of independents and 94% of Democrats — say the plan benefits the wealthy the most. An analysis of the final Senate bill by the Tax Policy Center shows that the voter assessment is correct. While the bill will not pay for itself, the Joint Committee on Taxation found an earlier version of the Senate tax bill would lift GDP by about 0.8% over a decade. The Quinnipiac poll finds Americans disapprove of the bill by a 53% to 29% margin. A Gallup poll found that 29% of people surveyed approved of the tax bill, while 56% disapproved. The data-journalism site FiveThirtyEight found that the current legislation was one of the least popular tax-related bills dating to 1981 — even less so than two bills that hiked taxes in the 1990s.

 

Disney and Twenty-First Century Fox are closing in on a deal, and it could come as soon as next week. CNBC has been reporting that Disney has held talks with the Rupert Murdoch-controlled media company to acquire its studio and television production assets, leaving Fox with its news and sports assets. Fox is also talking with CNBC parent company Comcast, but the talks with Disney have progressed more significantly.

 

Nestle is buying Canadian vitamin maker Atrium Innovations for $2.3 billion.

 

Bitcoin powered to a record high of $11,850 It started the year at less than $1,000. Cboe plans to start trading bitcoin futures on Dec. 10 while CME Group has set Dec. 18 as its start date. Bitcoin itself is currently bought and sold on platforms that are virtually unregulated.

 

Russia’s team has been barred from the 2018 Winter Olympics in South Korea. Government officials will be forbidden from attending, the flag will not be part of the opening ceremony, and records will show that Russia didn’t win any medals. Some qualifying Russian athletes who have passed several drug tests will be allowed to compete at the IOC’s discretion, but they will do so in neutral uniforms. The decision comes after a 17-month investigation by the IOC into what was deemed to be state-supported doping. It confirmed other findings that Russian officials had tampered with samples to conceal evidence of its systematic doping of top athletes.

 

California has already suffered a brutal season of massive fires. Now tens of thousands of people are being evacuated as a Ventura wildfire rages over 45,500 acres. Fire fighters in Ventura County say the prospects for containment are not good. The blaze, dubbed the Thomas Fire, broke out on Monday evening in the foothills above Ventura. Winds quickly drove it west into the city some 50 miles northwest of Los Angeles. More than 250,000 homes were without power. All schools in the Ventura Unified School District were closed.

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