Financial Review

Get Out Now

….Harvey update. North Korea fires missiles, Wall Street rolls on. Case-Shiller home sales solid. Consumer confidence strong. Freeport-McMoran signs over Grasberg. UTX closing in on Rockwell. Buffett banks on BofA.

Financial Review by Sinclair Noe for 08-29-2017

DOW + 56 = 21,865
SPX + 2 = 2446
NAS + 18 = 6301
RUT + 2 = 1384
10 Y – .02 = 2.14%
OIL – .11 = 46.33
GOLD – .90 = 1309.60
A pair of 70-year-old reservoir dams that protect downtown Houston and a levee in a suburban subdivision began overflowing Tuesday, adding to the rising floodwaters from Harvey. The dams did not break, but they are overflowing, meaning the flooding is just getting worse. Brazoria County authorities posted a message on Twitter – “GET OUT NOW!!!”  (all caps – 3 exclamation points). A weather station southeast of Houston reported 49.32 inches of rain as of Tuesday morning. Already 14 sites in Houston have recorded more than 40 inches of rain and 36 different locations have recorded more than 3 feet. Harvey now officially holds the US record for most total rainfall from a tropical system, and it hasn’t left the area yet. Rivers around Houston crested last night and today, several areas are reporting water 25 feet above flood level. At least 14 people are reportedly dead in the Houston area, including a family of six who are thought to have drowned in a van and a police officer who drowned in his patrol car. Many folks have lost touch. Undoubtedly, the death count will rise.

 

The phase of immediate recovery, still unfolding in Houston, includes search-and-rescue and providing temporary shelters. The latest estimates are that more than 30,000 will need temporary shelter. Immediately after a large-scale disaster, infrastructure known to engineers as “lifeline systems” – power, transit and communications – must be restored. In Houston, as many as 100,000 are without power, and all service was suspended on the local public transit system. Major roadways are underwater and will remain impassable for several weeks to several months. Also among the near-term challenges are securing critical facilities and bringing them back online, including fire and police stations, hospitals, nursing homes and schools. Water and sewer systems and debris clearance are next on the list. Something as simple as trash collection has stopped for the past 5 days. Early estimates suggest the financial damage has already run into tens of billions of dollars, and one forecaster has predicted the final bill could be as high as $100 billion. Trump is visiting Texas today and he said the cost of recovery from Harvey – the first natural disaster during his presidency – would be “very expensive” but pledged that “the federal government stands ready, willing and able to support that effort”. Trump also made some impromptu remarks, saying “We love you, you are special, we are here to take care of you. It’s going well…What a crowd, what a turn out.”

 

So, the ripples from Harvey will hit the economy in a number of ways, including higher gas prices at the pump, higher commodity prices for building supplies – also look for construction labor to focus on the Houston area, meaning localized shortages, and higher insurance rates, and then consider the mortgage backed securities for residential and commercial, and the overall economic slowdown means the Federal Reserve will likely take a more dovish position on removing accommodation.

 

The markets started today’s trading in negative territory on news that North Korea had fired a missile that crossed over Japan. South Korea responds by having four F-15K jet fighters conduct bomb-dropping drills. Japan asks the United Nations Security Council to hold an emergency meeting. Kim Jong Un doesn’t seem to be backing down. This morning, Trump repeated the Washington cliché that “all options are on the table”, a warning that’s been issued time and again for more than a decade. Kim, “smart cookie” that he is, has probably acquired enough evidence at this point to realize that the U.S. is unlikely to take military action to stop him as long as he has literal guns to the heads of 25 million people in Seoul. But as long as nothing explodes, Wall Street rolls merrily along.

 

Today the Dow Industrials opened down 134 points, then slowly and surely turned positive, marking a 200 point intraday swing from low to high. Many investors sought safe haven plays, pushing gold higher and pushing yields on ten year Treasury notes to the lowest levels of the year. The bond market is certainly sending a clear signal that it expects the pace of Fed rate increases to slow dramatically. Just two months ago, derivatives were showing that traders expected the target federal funds rate to rise to 2 percent over the next three years. Now, they see a rate of 1.6 percent, implying a little more than one boost from the current range of 1 percent to 1.25 percent. It’s also notable that even though yields on benchmark 10-year Treasuries dropped to their lowest level of the year, touching 2.08 percent, about 75 percent of the respondents to JPMorgan’s widely followed weekly client survey say they are neutral on the bond market. That implies they anticipate no big changes in current conditions for the foreseeable future, which is a remarkable referendum on an economy that many expect to gather strength. As the dollar declined to two-and-a-half-year lows, companies that do a lot of business outside the U.S. climbed. A weaker dollar boosts their sales and helps their profits when they are converted back into dollars. The dollar has weakened in part because a lot of economies in other regions are getting stronger, which boosts their currencies. The dollar is down almost 10 percent in 2017, at its lowest point in more than a year and the euro is at two-year highs.

 

Apple hit another record high today. The new iPhone launch is about 2 weeks away, maybe. While Apple has not confirmed a new iPhone will launch this year nor invited media to an event, it is expected to do something on September 12. Whatever happens, the tech rally isn’t dead yet. Meanwhile, Apple  and professional services company Accenture said they will team up to help businesses build better applications for iOS, the operating system that powers Apple’s iPhone and iPad.

 

The S&P/Case-Shiller 20-city index rose a seasonally adjusted 5.7% in the three-month period ending in June, compared with a year ago, the same rate of change as in May. The national index rose 5.8%, compared with a year ago, up from a 5.7% annual increase in May. Demand remains strong and inventories are tight. The Phoenix market for existing home sales is right in line with the national numbers. Phoenix prices were up 0.8% in the June period, and up 5.8% over the past 12 months.

 

The Conference Board’s consumer confidence index rose to 122.9 in August, up from a revised 120 in the prior month. The index hit a 16-year high of 124.9 in March. Consumers are feeling better given rising home prices, a healthy job market and stocks close to record highs. This bodes well for consumer spending in the third quarter. The present situation index, a measure of current conditions, jumped to a cycle high of 151.2 in August from 145.4. The future expectations index rose marginally to 104 from 103. We feel good about things right now but we are not optimistic about the future. The gap between current conditions and future expectations is the widest since 2008. The growing divergence likely reflects the perception that the best days of the recovery are behind us, and that there is not much of a chance of further substantial improvement on the horizon. Still, both measures are elevated enough that consumers don’t appear concerned about an economic downturn.

 

Freeport–McMoRan announced that it was signing over 51% ownership interest in the Grasberg mine to the Indonesian government. Grasberg is one of the most valuable chunks of land in the world, the world’s largest gold mine and second-largest copper mine. The deal essentially rewrites an arrangement that began in 1972, when a Freeport predecessor began mining operations there under an agreement with a military dictatorship. In exchange, the Indonesian government agreed to extend Freeport’s permit to export copper from the mine. That gives Freeport a measure of certainty as it makes plans to invest $20 billion to expand the mine and shift much of the work underground.

 

The Department of Justice is looking into whether Uber violated laws involving the bribery of foreign officials. The DOJ is examining allegations that Uber may have violated the Foreign Corrupt Practices Act. The law makes it illegal for individuals and organizations to pay foreign government officials in order to obtain or retain business. It’s not clear exactly what incidents or countries the DOJ is looking at, or when the alleged violations may have occurred.

 

Airplane-equipment giant United Technologies is closing in on a more than $20 billion buyout of competitor Rockwell Collins.  Discussions are reportedly ongoing, but negotiations have focused on a deal price of less than $140 per share for Rockwell. The company was trading up about 2% to $130 per share late today morning, giving it a market cap of $21.7 billion.

 

Warren Buffett’s Berkshire Hathaway has become Bank of America’s largest shareholder by exercising its right to acquire 700 million shares at a steep discount, more than tripling an investment it made six years ago. Berkshire is now the largest shareholder in the second- and third-largest U.S. banks, with stakes of roughly 6.6 percent in Bank of America and 10 percent in Wells Fargo. Berkshire exercised warrants to acquire its shares for roughly $7.14 each, well below their closing price of $23.58. To pay for the shares, Berkshire swapped $5 billion of Bank of America preferred stock it had bought in August 2011. Its new common shares are worth roughly $16.5 billion, giving Berkshire a roughly $11.5 billion profit.

 

 

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