…Stock drop then flatten out. Fed tightening makes dollar king for now. China trade talks, meh. Trump, Cohen, Guiliani and a changing story. Elon Musk’s earnings call. AZ teacher strike ends.
Financial Review by Sinclair Noe for 05-03-2018
DOW + 5 = 23,930
SPX – 5 = 2629
NAS – 12 = 7088
RUT – 8 = 1546
10 Y – .02 = 2.95%
OIL + .57 = 68.50
GOLD + 7.00 = 1312.60
Stocks started the session with a sharp drop. There was a preponderance of negative news: the trade delegation with China entered negotiations without much optimism, Rudy Giuliani confirmed that Trump had made payments to a porn actress through his attorney Michael Cohen, Cohen’s phone was tapped by the FBI, several companies reported not so good earnings results, and Tesla’s conference call was different, in a weird sort of way. Earlier, when the Dow was off almost 400 points it broke below its 200-day moving average, for the first time since early April, while also notching a six-week low. That seemed to be the trigger for computerized trading to buy. The primary thing missing from the market right now is something to spur us higher. There’s no great catalyst, and if strong earnings reports aren’t enough to do it, what would be? That’s why everyone is closer to the sell button than the buy button.
Jobless claims rose by 2,000 in the latest week, though they remained near multidecade lows. Separately, the productivity of American businesses rose 0.7% in the first quarter, but there’s little sign of long-term improvement in what’s been a weak link for the U.S. economy.
The Institute for Supply Management’s nonmanufacturing index fell more than expected in April, dropping to 56.8, down 2 percentage points from March. The Markit services purchasing managers index for April came in at 54.6, compared with 54 in March.
Yesterday the Federal Reserve FOMC policymakers announced they would leave interest rates unchanged for now, though they still anticipate a couple of more rate hikes this year by a total of 75 basis points. This means U.S. rates are likely to pull still further ahead of all others in the developed world. The Fed’s overnight lending rate is already in a target range of 1.50-1.75 percent compared with the European Central Bank’s closely watched deposit rate benchmark at minus 0.4 percent while the Bank of Japan pledges to guide short-term interest rates at minus 0.1 percent. The Fed showed no sign of swerving from its tightening path after its policy meeting, calling recent US inflation rises sustainable. Meanwhile data released today shows inflation in the Eurozone slowing further last month. In just two weeks the dollar has surged nearly four percent against a basket of the most traded currencies, erasing all the losses it had suffered since the start of 2018. The revival of the dollar after more than a year on the wane is already causing mayhem in emerging markets, while tightening global financial conditions in a way that could eventually make even the Fed consider a pause for thought. China’s central bank meanwhile has also contributed to dollar strength via liquidity injections into money markets and by cutting reserve requirement ratios for banks. Even though the dollar has moved into overbought territory and part of the dollar rally may be because of a short squeeze, the Fed is still the only tightening game in town. The policy divergence is shown in bond markets where spreads between German yields and equivalent U.S. debt has blown out to its widest in three decades at 240 basis points. If you look around the globe for government debt, the US treasuries are bound to grab attention; and that might help explain why bond prices moved higher today, pushing yields slightly lower, even after the Fed maintained its commitment to higher rates.
China and the US have both played down the possibility that this week’s negotiations could resolve trade tensions between the two countries. Shortly before the talks were set to take place in Beijing, the mood between the world’s two largest economies worsened with reports the US administration is considering taking executive action to restrict some Chinese firms’ ability to sell telecoms equipment.
Meanwhile, Iran Foreign Affairs Minister Mohammad Javad Zarif said the country will not renegotiate the nuclear deal it struck with the U.S. in 2015. Zarif said in a YouTube video: “Iran will not renegotiate what was agreed years ago and has been implemented … also we will reject any ratification of it.” Gas prices have a hit a level not seen in three years and are expected to continue their upward trajectory. The national average for a gallon of gas reached $2.82 this week, a level not seen since summer 2015.
After months of denials, Rudy Giuliani confirmed Trump’s personal lawyer, Michael Cohen, paid $130,000 to an adult film actress as part of a nondisclosure agreement in October 2016. The question is whether that was a campaign finance violation. Federal election law covers transactions “for the purpose of influencing” federal elections. Trump tweeted Thursday morning, “Money from the campaign, or campaign contributions, played no roll in this transaction.” But also Thursday morning, Rudy Giuliani appeared on Fox & Friends and said, “Imagine if that came out on Oct. 15, 2016, in the middle of the last debate with Hillary Clinton.” And with that, we may be looking at campaign finance violations.
Meanwhile, Federal investigators wiretapped the phone lines of Trump’s longtime lawyer Michael Cohen before the FBI seized records and documents in a raid last month on his offices, hotel room and home. NBC news said it was unclear how long the wiretap had been authorized, but it was in place in the weeks before the April 9 raids in New York targeting the lawyer. At least one call between a phone line associated with Cohen and the White House was spotted, though not necessarily recorded. Like a search warrant, a wiretap can be authorized when a judge determines there is probable cause to believe a person has committed a crime. But there is an added burden of showing the criminal behavior is ongoing and that there is no other way to reasonably obtain the information. Authorities must re-apply for the wiretap every 30 days. Because Cohen is a lawyer, prosecutors likely took multiple steps to address concerns that a wiretap would violate attorney-client privilege.
Tesla reported earnings after the closing bell Wednesday – actually they reported a big loss and that Model 3 production was less than half what they have promised. Nothing new there. Then CEO Elon Musk presided over a contentious conference call with analysts. Musk cut off an analyst asking about the company’s need to raise additional money from investors. Musk dismissed one analyst’s question about gross margin by calling the question “boring” and “not cool”. At one point, Musk even told one analyst: “We have no interest in satisfying the desires of day traders. I couldn’t care less. Please sell our stock and don’t buy it.” Tesla’s stock dropped more than 8% this morning and closed the session down 5.5%. And while the share price took a hit, Musk was not really off base about the idea that investors should not be acting like day traders, and that many analysts can’t see the forest of the future through the trees of negativity. Musk is an innovator; Wall Street analysts are not. Like oil and water – they do not mix. I don’t know what this means in the longer term for Tesla and Musk, but Tesla is making really interesting cars and Musk is one of the most intriguing and innovative people in business these days, for better or worse. Wall Street tends to siphon value rather than create it. Most conference calls are drier than the Sahara. And most Wall Street analysts are little more than nattering nabobs of negativity, deeply conflicted at that.
Federal prosecutors in Detroit have unsealed charges against former Volkswagen AG Chief Executive Martin Winterkorn, accusing him of conspiring to mislead regulators about the VW’s diesel emissions cheating. In 2017, Volkswagen pleaded guilty to fraud, obstruction of justice and falsifying statements in Detroit as part of a $4.3 billion settlement reached with the U.S. Justice Department in January over the automaker’s diesel emissions scandal and agreed to three years of oversight by a former U.S. deputy attorney general. In total, VW has agreed to spend more than $25 billion in the United States to address claims from owners, environmental regulators, states and dealers and offered to buy back about 500,000 polluting U.S. vehicles. Volkswagen had initially suggested that only lower-level executives knew of the cheating. The indictment reopens the question of whether other senior executives knew about the scandal.
Cardinal Health shares plunged 21% after the company reported a third-quarter profit miss and lowered its 2018 adjusted earnings-per-share guidance.
American International Group shares slumped 5.3%, after the insurer missed profit estimates for the first quarter. It was the stock’s biggest percentage loss since Feb. 15, 2017.
Kraft Heinz shares rose 1.4% after topping Wall Street estimates.
FireEye closed up by 9.7% after the security-software maker lifted its full-year guidance as sales beat forecasts.
Square Inc. dropped 1% after the payments company posted earnings and shed light on its spending plans and bitcoin business.
New York Times fell 1.3% after it reported first-quarter earnings that beat expectations.
Activision Blizzard shares fell 5% after its earnings results were inadvertently released early, and the stock was halted as the first-quarter numbers were officially released during the regular session. The numbers actually beat estimates.
Tomorrow morning the Labor Department releases the monthly Jobs Report. Most estimates call for 185,000 to 190,000 new jobs last month, after a surprisingly small 103,000 increase in March. If the numbers come in strong, we could see the unemployment rate dip to 4.0% from 4.1%, where it has been stuck for 6 months.
The Arizona Legislature passed a state budget early Thursday that included nearly $273 million aimed at giving teachers pay raises. Gov. Doug Ducey signed the bill early this morning. Teachers did not get everything they wanted, but they won substantial gains from reluctant lawmakers.So, it is back to class tomorrow.