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…Earnings season strong but may have hit peak earnings. Google shines. Trade wars loom. Iran gets tweet threat. Commodity prices slammed by tariff talk. Existing home sales slip

Financial Review by Sinclair Noe for 07-23-2018

DOW – 13 = 25,044
SPX + 5 = 2806
NAS + 21 = 7841
RUT + 1 = 1698
10 Y + .07 = 2.96%
OIL – .46 = 67.80
GOLD – 7.50 = 1225.00

For the S&P 500, the 2800 level is turning into a significant level of support; and the Dow has support at the 25,000 level. Today, those levels held. This is the busiest week of earnings reporting season. There are 174 S&P 500 index companies scheduled to report earnings this week. Eleven of the 30 Dow Jones Industrial Average components are on the docket as well.

The earnings reporting season is off to a great start, with 87 percent of the S&P 500 companies that have reported, posting reporting better-than-expected profits as compared with the same period in 2017. Though it’s still a relatively small sample — 17 percent of the index — the early results are encouraging. What is somewhat concerning, though, is that the strong second quarter is not inspiring hopes for a more powerful third quarter. Expectations for the July-to-September period have changed little even as earnings momentum otherwise has grown. Analysts surveyed by FactSet still expect the quarter to grow 21.5 percent, a notch below the 21.6 percent estimate as of June 30 but still among the best quarters of the past decade. Revenue growth also has come down a bit, to 7.5 percent from the 7.6 percent projected at the end of June.

The lack of more upward enthusiasm is feeding a popular narrative in the market this year, namely that US companies are reaching peak earnings and may not have much left in the tank. The first quarter saw earnings growth of about 25 percent, with the second quarter probably coming in above 20%, but the S&P 500 index is up about 4.7% over that time, and most of the gains have come in momentum stocks. The S&P 500 is currently trading around 16.5 times forward earnings, making it about in line with the five-year average of 16.2 and ahead of the 10-year market of 14.4. With 2019 profit growth set to slow to about 10 percent, companies will have work to do to justify valuations.

After the closing bell, a strong earnings report from Alphabet, the parent company for Google. Earnings per share: $11.75 beating estimates for $9.59 per share. Revenue grew to $32.6 billion, beating estimates of $32.17 billion. Google’s dominance in online advertising has been challenged this year by the antitrust battle over its Android mobile software and other regulatory actions. But the issues have yet to halt Google, which has grown quarterly revenue at least 20 percent year-over-year for two straight years.The stock soared more than 5 percent after-hours and is now up about 4 percent. The European Union just slapped the company with a $5 billion fine for competition abuses related to its Android phone software, which showed up as a separate operating expense line on its income statement, affecting its non-adjusted earnings per share. Including the fines, Alphabet’s EPS was $4.54. As usual, Google’s advertising business accounted for most of its revenue, hitting $28 billion in the second quarter. Meanwhile, its “other revenues,” which include its cloud business and hardware sales, was $4.4 billion. Growth in the company’s traffic acquisition costs, a key expense, decreased for the first time in three years compared with the year-ago period. Operating margin rose to 24 percent excluding a $5 billion antitrust fine, up from 22.5 percent last quarter.

 

On Sunday, Treasury Secretary Steven Mnuchin tried to assuage fellow G-20 finance chiefs at a summit in Buenos Aires that there’s no chance of a currency war erupting. He was responding to fears sparked by a pair of Trump tweets Friday morning complaining about “illegal currency manipulation” he alleged by China and the European Union to gain a trading advantage over the United States. The second of those tweets also doubled down on criticism Trump first leveled Thursday at Federal Reserve Chair Jay Powell for raising interest rates. A final communique from the meeting said that although the global economy remains strong, growth is becoming ‘less synchronized’ and risks over the short and medium terms have increased.”

Secretary of State Mike Pompeo said the United States would step up broadcasts into Iran critical of the country’s theocratic rulers. Iranian President Rouhani said the United States should avoid inciting Iranians against the government. Late last night, Trump tweeted in all CAPS, NEVER EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER THE CONSEQUENCES.  And one of the consequences is that oil prices moved higher today.

Oil gained more than 20 percent in the first half of 2018, and odds have been rising that higher crude oil prices will spark the next economic downturn. This should not come as a surprise for any investor who is a student of market history: The last five U.S. recessions were also preceded by a rise in oil prices. Today, oil prices moved higher early but the focus turned to oversupply worries, moving away from escalating tensions between the US and Iran. The market gave up gains as attention returned to oversupply risk. Saudi Arabia and other large producers are ramping up production to offset losses from Iran that are likely to come with the approach of the November deadline for other countries to comply with US sanctions on crude sales from Iran

Not all commodity prices have been moving higher; in the past four months, soybeans have been hit more than 20%, pushing prices to the lowest levels in more than a decade. That might sound like a cheap way to feed livestock, but meat prices have also plummeted. More than 2.5 billion pounds of meat are being stockpiled in warehouses across the US as trade disputes slow sales overseas. Despite an increased appetite from Americans for meat in recent years, production of beef, pork, poultry and turkey have hit record highs, leaving the US meat industry increasingly reliant on exports, which has suffered in recent months over tariff disputes. However, the good news is that extra meat may bring down prices for US consumers and retailers. Mexico and China – two of the largest foreign buyers of US meat – have imposed tariffs on US pork products in response to Trump’s tariffs on US steel, aluminum and other goods.

Open interest on the Comex Copper contract has risen 17% since the start of July, as prices have tumbled 16% in the past 5 six weeks,  indicating a fresh amount of short positions being added to profit from the downside. copper is being targeted vs the dollar because of the risks trade wars pose to global growth and with it demand -even though, 49% of demand comes from China which actually makes it a more globally diversified metal than others. But, it’s copper’s high base in manufacturing which sees it more closely correlated with trade than those more construction-related metals. If the trade war becomes more global and starts to impact other significant copper consumers such as Japan, Germany and Korea, then copper could well be more vulnerable.

 

The deteriorating health of Sergio Marchionne forced Fiat Chrysler to replace him as CEO this weekend. Fiat Chrysler named Mike Manley to succeed Mr. Marchionne as chief executive.

Tesla has asked some suppliers to refund a portion of what the electric-car company has spent previously, an appeal that reflects the auto maker’s urgency to sustain operations during a critical production period. Tesla said it is asking its suppliers for cash back to help it become profitable, according to a memo reviewed by The Wall Street Journal that was sent to a supplier last week.

Shares of Illinois Tool Works fell 7.2 percent. The machinery parts maker cut its full-year earnings forecast, blaming the strong dollar for the cut.

Nike announced it would raise wages for about 7,500 employees following a global pay review. The compensation changes come after a number of executives left the company earlier this year, some due to alleged improper behavior. The raises will be given to both men and women, and they aren’t limited by factor like geography or which department they work in at Nike. The salary adjustments will go into effect August 1.

Shares of Papa John’s fell 8 percent after the pizza chain said it would implement a “poison pill” stock dilution that would act against any move by founder John Schnatter to take a bigger stake.

US government bond yields surged Monday, coinciding with a similar selloff in comparable Japanese bonds that was sparked after reports that the Bank of Japan was considering tweaks to make its stimulus program more sustainable. The Japanese 10-year bond yield jumped to 0.83% from 0.32%. That represented its largest one-day yield move in about two years. Meanwhile, the 10-year Treasury note yield jumped by 6.8 basis points to 2.96%, a six-week high, to mark its largest one-day rate jump since June 1. Japanese bond yields jumped on reports the Bank of Japan would debate changes to its stimulus program to combat stubbornly low inflation in the region. The BOJ adopts a “yield curve control” policy that aims to hold its 10-year yield at around 0% through the use of bond purchases. Expectations for less accommodative monetary policy from the BOJ also helped to spark selling in Treasuries.

The National Association of Realtors said sales of existing homes fell 0.6 percent in June, the third straight monthly decline, as higher prices and a limited supply of listings have sidelined many would-be buyers. Home prices are climbing at roughly double the pace of wages. Sales of entry-level homes worth less than $250,000 have fallen because inventories are very tight — and the decline accounts for nearly all of the annual drop in home sales. Still, the number of homes for sale in June rose on an annualized basis for the first time since the middle of 2015. The median price of a home sold in June was $276,900, a fresh all-time high, and 5.2% higher than in June 2017.

And if the busy earnings season is not enough to capture your attention this week, consider that Friday brings the longest lunar eclipse of this century, a magical deep red blood moon. Earthlings around the world will be treated to a special event, a lunar eclipse lasting 1 hour and 43 minutes long, close to the theoretical longest lunar eclipse possible and the longest of the 21st century.

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