Financial Review

Friday the 13th

…Nasdaq record; S&P tops 2800. JPMorgan, Citi, and Wells Fargo post earning: good, bad, ugly. Amazon eyes networking; next week – Prime. Mueller indicts 12 Russian officers, days before Trump-Putin summit.

Financial Review by Sinclair Noe for 07-13-2018

DOW + 94 = 25,019
SPX + 3 = 2801
NAS + 2 = 7825
RUT – 3 = 1687
10 Y -.02 = 2.83%
OIL + .25 = 70.58
GOLD – 5.90 = 1242.00

 

The S&P 500 is up about 4.5% year to date – nothing to get excited about. The S&P is still trading about 70 points shy of its high in late January, but today it did close above the 2800 barrier. A rally in March stalled at the 2800 level, so today’s close is more than just a round number, it a break above resistance. The top five performing stocks in the S&P 500 so far this year: AMD, Twitter, Tripadvisor, Abiomed, and Netflix. The Nasdaq Composite inched higher but it was good enough for another record high close. Stocks posted strong weekly gains, with the Dow, S&P 500 and Nasdaq all rising more than 1.5 percent. Just over 5 percent of S&P 500 companies have reported second-quarter results thus far. These companies have posted earnings growth of 16.6 percent.

 

Second-quarter earnings reports from JPMorgan Chase, Wells Fargo, and Citigroup this morning showed the banking sector is benefiting from policy changes in Washington that have lowered their taxes, boosted interest rates and allowed them to buy back more stock. Shares in U.S. banks have underperformed the broader market this year, in part because investors think the record profits are the result of one-time tax cuts and share buybacks rather than underlying strength in their businesses. Wells Fargo was the only one of the three lenders whose profit did not meet Wall Street expectations. Although Citigroup beat profit estimates, its revenues fell short of expectations.

 

JPMorgan Chase reported a profit of $8.3 billion for the second quarter, an increase of 18% from a year ago and not far off from JPMorgan’s record quarterly profit of $8.7 billion in the first quarter. JPMorgan CEO Jamie Dimon said in a statement that “the healthy US consumer” helped drive big gains in its credit card and money management businesses. Deposits grew at a solid clip as well. Dimon also said that JPMorgan posted record fees in its global investment banking unit in the first half of the year, thanks to a boom in trading revenue, mergers and IPOs. Dimon warned that clients are worried about a global trade war after Trump ramped up his protectionist rhetoric in recent weeks. Trade disputes, particularly with China, are creating uncertainty, but he insisted, “If you’re looking for potholes out there, there are not a lot.”

 

Citigroup reported weaker-than-expected quarterly revenue. The company’s earnings per share, however, topped estimates. Earnings came in at $1.63 per share vs $1.56 forecast. Earnings per share grew by 27 percent on a year-over-year basis, but that came from a lower effective tax rate, which fell to 24 percent from 32 percent. Revenue of $18.46 billion was just shy of estimates. Citigroup delivered disappointing results for deposits and trading. Meanwhile, fixed income trading missed estimates.

 

Wells Fargo reported lower-than-expected earnings for the second quarter and said it set aside nearly half a billion dollars to pay additional state taxes in the wake of a recent Supreme Court decision. Wells Fargo posted net income of $5.2 billion, or 98 cents per share, on revenue of $21.6 billion for the quarter ended June 30, both declines from the same quarter a year ago. Earnings fell short of Wall Street expectations of $1.12 a share for the quarter. The bank said earnings would have been closer to estimates, at $1.08 a share, if not for a $481-million expense related to state taxes. Wells Fargo reported that it put more money aside for those taxes after the Supreme Court ruled last month that states can demand sales taxes from online retailers and other companies that do not have a physical presence in those states. But the bigger problem is Wells Fargo continues to pay for bad behavior. The bank spent $619 million in the quarter on refunds and other costs related to bad practices in its consumer businesses that have come to light over the last year. That includes forcing auto-loan customers to pay for insurance policies they did not need, charging improper fees to some mortgage borrowers and overcharging some trust accounts. Wells Fargo tries to claim they are starting fresh after a long string of scandals, but the bad behavior is bone deep. After the earnings report, it was learned the bank is setting aside another $285 million to refund foreign-exchange clients and institutions such as pension funds that were overcharged.  Wells Fargo also reported shrinking loan balances and deposits. Gee, wonder why?

 

JPMorgan Chase dropped 0.3%. Citi fell 2.2%. Wells Fargo lost just under 1%.

 

Networking company stocks dropped following a report that Amazon Web Services is considering selling its own network switching devices. Cisco dropped 4 percent by the end of trading, representing a loss in stock value of roughly $8.5 billion. Juniper gave up more than 2 percent. Arista Networks dropped more than 4 percent, and F5 Networks dropped roughly a percent. Broadcom, which makes chips used in switching devices, was down more than 3 percent on the day following the report, extending a rough week for the stock.

 

Next week, Amazon will get back to its longtime business of disrupting the retail world. Amazon Prime Day is prompting competing retailers like Target, Macy’s, and J.C. Penney to offer massive Black Friday-style sales in July. Target, for example, is kicking off a sale Tuesday — while Prime Day, which begins Monday, is still ongoing — offering discounts of 30% off Target-exclusive home brands, select baby gear, and Google products, as well as 25% off beauty and personal-care items. J.C. Penney, meanwhile, held its biggest two-day sale this week and will hold another three-day promotion, called “Cyber-in-July,” starting on Monday. Macy’s is holding a “Black Friday in July” promotion this week, offering 25% off most of the site, and Lowe’s is offering 10% off sitewide on Monday and Tuesday for new and existing MyLowe’s Customers. Lowe’s is also giving out free Google Home Mini devices to shoppers who spend more than $150 on Lowes.com.

 

The U.S. economy is more vibrant than it has been in years, yet the bond market insists a recession could be on the horizon. That warning comes from the Treasury yield curve, which gets flatter, day by day. A flattening curve is a warning about economic weakness ahead, but should the curve invert— where the short end yield, like the 2-year, is actually higher than the 10-year—that would be viewed as a very solid recession warning. Today, the gap between the 2-year yield and 10-year yield narrowed to just 25.5 basis points, a new 11-year low.

 

The University of Michigan consumer sentiment index fell in July to a reading of 97.1, below June’s level of 98.2. With unemployment near an 18-year low and job growth continuing, sentiment is still quite strong. The biggest drop came in the index for current conditions, which fell to 113.9 in July from 116.5; expectations were nearly unchanged at 86.4 in July vs. 86.3 in June. The biggest negative concern – tariffs.

 

The special counsel Robert Mueller’s office on Friday indicted 12 Russian intelligence officers related to the hacking of the Democratic National Committee before the 2016 US election. This is the first time Mueller’s office has directly pointed a finger at the Russian government for meddling in the race. Mueller’s office charged the intelligence officers with 11 counts related to conspiracy, aggravated identity theft, and money laundering. In addition to accusing the officers of engaging in malicious cyber operations to steal and disseminate information, the indictment specifically names the Russia-linked hacker Guccifer 2.0 and the website DCLeaks. The indictment says the conspirators — in this case, Guccifer 2.0 — also communicated with US persons about the release of stolen documents. In one instance, it says, the conspirator posing as Guccifer 2.0 contacted a person who was “in regular contact with senior members of the presidential campaign of Donald J. Trump.” The document does not name or charge any Americans with crimes. Previous reporting has found that Roger Stone, the longtime Republican strategist who informally advised the Trump campaign, was in touch with Guccifer 2.0 before the election. The indictment also alleges that the intelligence officers transferred stolen documents to an unidentified third-party organization and used it to release information and discuss the timing of those releases, so they would have the maximum impact during the campaign. Russian hackers targeted Clinton emails the same day Trump called for them to find “missing” emails. Though the document does not name the organization, evidence strongly suggests it was WikiLeaks. Stone was also in touch with WikiLeaks, as was Trump’s eldest son. An unidentified American congressional candidate allegedly asked for, and received, stolen documents about his or her opponent from the Russians. The indictment claims Russian officers hacked the website of a state election board and stole information about 500,000 voters, but the indictment does not allege that any of the actions the Russians took changed the vote count or altered the result of the election.

 

Trump is in the UK but he is scheduled to meet with Russian President Putin in Helsinki on Monday for a summit that includes a one-on-one meeting with only interpreters present. Earlier today, Trump met with Queen Elizabeth before flying to his luxury golf resort in Scotland. The Trump hurricane swept through southern England, uprooting protocols, rattling institutions and leaving politicians with a sense of whiplash. For the most part, Trump avoided the tens of thousands of protesters that lined the streets of London. Britain may have to accept that for Trump it was a mere stopover between hammering the German chancellor, Angela Merkel, at the NATO summit in Brussels and renewing his warm relationship with Putin, in Helsinki.

 

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