Financial Review


…GDP pops to 4.1%. Stocks drop. FAANGS lead lower. Disney buys 21st Century Fox. Twitter purges fake accounts. Exxon stumbles.

Financial Review by Sinclair Noe for 07-27-2018

DOW – 76 = 25,451
SPX – 18 = 2818
NAS – 114 = 7737
RUT – 32 = 1663
10 Y – .01 = 2.96%
OIL – .57 = 69.04
GOLD + .80 = 1224.20


Shares of Microsoft dropped 1.8% and Alphabet fell 2.5%; both companies recently reported strong quarterly results. Alphabet shares touched an all-time high earlier in the session but reversed course. Intel shares sank 8.6 percent after the chipmaker’s data center business missed estimates. The pressure on tech stocks started on Thursday after Facebook gave a dismal forecast that caught investors off guard about growth prospects in a sector that has led the market’s march toward record highs. Twitter posted disappointing quarterly results and the shares dropped 20.5% – that is actually a bigger percentage drop than Facebook suffered this week, but Twitter is nowhere near the size. Twitter reported a decline in monthly active users, versus the increase analysts had expected, and warned of further drops as it deletes phony accounts. Amazon proved the exception among tech stocks. Amazon shares jumped as much as 4 percent to a record high of $1,880.05 after the company forecast strong sales and posted a profit that was double analysts’ estimates. Amazon shares closed up 0.5 percent.


The Nasdaq exceeded Thursday’s losses to register once again its biggest daily percentage drop in a month. For the week, the Nasdaq lost just over 1 percent, but the S&P rose 0.6 percent. The Dow added 1.5 percent. Russelll 2000 down 1.9 percent. FAANG down 4 percent on the week. A lot of air has leaked out of them in the past 48 hours. Breaking down the FAANG: Facebook dropped 17 percent on the week, Netflix down 1.5 percent, Apple down 0.5 percent, Amazon gained 0.3 percent, and Alphabet up 4.6 percent. Apple reports earnings on Tuesday.


Second-quarter economic growth came in at an annual rate of 4.1%, the government said Friday. That was the best showing since the third quarter of 2014. The strong second-quarter growth reflected large increases in orders of durable goods, investment in non-residential construction, exports, intellectual property, and government defense spending. Weak home construction and increased imports, which subtract from economic growth, took it down a notch. Growth in the first quarter was revised up slightly, from 2% to 2.2%, while the fourth quarter of 2017 dropped from 2.9% to 2.3%. The personal consumption expenditures price index, a key metric that the Federal Reserve uses to decide whether to raise interest rates, came in at 1.8% for the second quarter, down from 2.5% in the first quarter.


Trump took to the Rose Garden this morning for a victory lap, claiming: “We are on track to hit the highest annual average growth rate in over 13 years.” Well, maybe. The U.S. did grow 2.9% in 2015 — that looks beatable, but it’s by no means certain. The fastest GDP growth before that was 3.5%, achieved in 2005. Take the 2.2% growth in the first quarter and the 4.1% rate of the second, and it averages out to 3.15%. Third quarter GDP growth is estimated around 3.1%, and it is certainly possible we could see full year GDP above 3%. Adding a trillion dollars to an already expanding economy will juice growth.


There’s a reason for the second quarter surge in GDP, and it isn’t simply the miracle of Trumponomics. Household consumption, after a shabby showing in the first quarter of 2018; household consumption is like the engine driving the economy. A flurry of action by businesses moving to get ahead of the tariffs flying between the United States and its trading partners accounts for a significant portion of the uptick. For example, soybean farmers are seeing an unseasonal surge in demand. That’s because countries that typically rely on exports from Brazil need new suppliers, since China — the world’s leading importer of the crop — is buying up Brazilian soybeans in retaliation for U.S. tariffs. The result has been a roughly $20 billion spike in orders, good for a half-point of GDP alone last quarter. Elsewhere, economists see evidence that businesses are stockpiling goods as they brace for higher import prices if more tariffs bite. Estimates vary for how much of the total second-quarter growth number will owe to the phenomenon, though several peg it at around 1.5 percent. Eventually, tariffs will almost certainly slow economic growth, but for right now they are creating a small surge to brace against what might be coming.


Despite all the asterisks surrounding today’s report, the economy is fundamentally strong; the unemployment rate is low at 4%, even if that might not be “full” employment and even if most workers are struggling with stagnant wages, the labor market is better than it has been in years. Household wealth is rising, consumers are spending, and businesses are investing. Even if you take out the flukiness, you’re looking at an economy with solid underlying momentum. Stocks fell despite the good economic news. Who knows why stocks do what they do, but there are many possible explanations for this wet-firecracker reaction. First, the market is not the economy. Second, strong numbers make the Federal Reserve more likely to raise interest rates.


The Fed FOMC meets next week. We do not expect a rate hike at this meeting, instead look for the Fed to lay the groundwork for a September rate hike. All they need to do is to point to current growth and inflation numbers. The Fed has penciled in two more moves this year, expected at the meetings with press conferences in September and December. The Fed will soon be including press conferences following all FOMC meetings, and they have said they could raise rates at a meeting without a press conference, so it’s possible they could surprise us, but the Fed is loath to dish out surprises. The FOMC raised rates by a quarter-point in March and June to a range between 1.75 and 2%. Every rate hike is like tapping the brakes on economic growth


More Americans became homeowners in the spring, and the number of renters decreased. The national homeownership rate rose to 64.3% in the second quarter, up from 64.2% in the first three months of the year. That marked the sixth-straight quarter of yearly increases. Over the past 12 months, 1.77 million more Americans became owners, while the number of renters declined by about 100,000. Still, homeownership today is a full percentage point below the 50-year average, and this lag reflects the long-lasting scars from the Great Recession and the lopsided nature of this recovery.


Shareholders at Walt Disney and Twenty-First Century Fox have approved Disney’s $71.3 billion acquisition of the Fox movie and TV studios and other assets including Fox’s 30 percent stake in streaming Hulu. As a result of the shareholder votes, held simultaneously Friday in New York, Disney will evolve into a more dominant streaming video competitor and an even a bigger box office behemoth: Disney and Fox have collectively accounted for more than 46 percent of the total box office so far this year. Disney, which owns the Pixar, Lucasfilm and Marvel brands as well as its own live-action and animation studios, will now add to its portfolio the historic 20th Century Fox studio, which has produced such classics as “The Sound of Music,” “Miracle on 34th Street,” “Patton,” “Alien,” “Titanic,” “Avatar” and the original “Star Wars” film.


ExxonMobil is pumping less oil — even as more nimble rivals capitalize on the shale revolution. And Exxon’s share price remains in the doldrums despite soaring oil prices. Exxon’s struggles reflect poorly placed bets that sapped resources and left the largest US oil company watching the oil boom from the sidelines. While the United States is pumping more oil than ever before, Exxon’s production has dropped seven of the past eight quarters. Exxon Mobil reported quarterly profits that fell short of analysts’ expectations, marking the fourth time in the last five periods the company has disappointed. The miss was largely due to weaker earnings in Exxon’s refining and marketing segment due to heavier-than-anticipated maintenance and operational problems. Exxon shares dropped 2.75% today.


Chevron reported second-quarter results that fell short of expectations on both the top and bottom line, even as profits more than doubled from a year ago; but the company’s stock still rose after announcing it would begin buying back $3 billion of its stock from shareholders each year.


Some stories deserve to be told on the silver screen and live forever in the hallowed halls of cinema. MoviePass parent, Helios & Matheson Analytics Group has one of those stories. MoviePass made a name for itself by practically handing out money. The popular service, owned by parent company Helios and Matheson, charges $9.95 a month to see up to one regular 2D movie in theaters a day—including in markets like New York, where a single ticket can easily top $10. MoviePass pays the theaters full price for each ticket. How fast has the money gone? In May, MoviePass reported spending $40 million more in cash than it brought in. For June, it expected that gap to increase to $45 million. In July, the cash finally ran out. And investors responded appropriately. Shares fell 56% today.  This news comes days after the company announced a 250-1 reverse stock-split in an attempt to raise share prices. Maybe they can make a movie out of this story, it seems impossible to make a viable business out of this mess.


The longest total lunar eclipse of the 21st century occurs tonight, including a blood red moon,  for most of the world, but not in North America.

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