…Stocks drift higher. Beige Book shows steady growth and tariff worries. Berkshire buyback. Trump on Russia: they didn’t do it, they did it, they aren’t continuing to do it. Pizza and burgers. EU fines Google. Amazon Prime smash hit. Morgan Stanley beats.
Financial Review by Sinclair Noe for 07-18-2018
DOW + 79 = 25,199
SPX + 6 = 2815
NAS – 0.67 = 7845
RUT + 4 = 1691
10 Y + .01 = 2.88%
OIL + .90 = 68.98
GOLD – .10 = 1228.10
The S&P 500 hit a five-month high. Financials and industrials were leading gains, both by at least 1%, while consumer-staples names led losses. The Dow Industrials closed higher, marking its longest winning period since an eight-day streak ended May 14.
A couple of weeks before a FOMC policy meeting, the Federal Reserve publishes the Beige Book; it isn’t hard economic data, just anecdotal assessments of the economy gathered from the 12 Fed districts. The Fed found that 11 of 12 regions of the country were growing at a “modest” pace or even faster. Only the states around St. Louis reported “slight” growth. Many companies say they can’t find enough skilled workers and in some cases they are turning aside new business. The ultra-tight labor market has given more bargaining power to workers and many companies have boosted pay and benefits to attract or retain employees. However, the report found “wage increases were modest to moderate.” Which is odd: one would think employers are familiar with the concept of pushing up their wages to attract talent. “Manufacturers in all districts expressed concern about tariffs and in many districts reported higher prices and supply disruptions that they attributed to the new trade policies,” according to the report. It doesn’t look like companies are passing higher costs from tariffs on to consumers, not yet. The word “tariff” appeared 31 times in the July Beige Book, compared to 22 times in May, and zero mentions in March.
Beyond, the economic narrative, Fed Chairman Powell reiterated many of his statements made on Tuesday in his last testimony in front of congressional lawmakers. Powell’s testimony didn’t influence markets, as he basically mirrored Tuesday’s remarks. Testifying this time in front of the House Financial Services Committee, Powell emphasized the U.S. central bank’s desire to raise rates further this year and said he sees few signs of an economic recession. Powell doesn’t think the tariffs and trade policy tensions, as uncertain as they are, have shifted the risk pendulum away from being “roughly balanced.” Asked about the reduction in the balance sheet, Powell said he thinks the program will last 3-4 years but said everything is “fairly uncertain.” He said there was no target range for the final size of the balance sheet. But, here’s the rub – as the Fed gradually sells off about $40 to $50 billion from its balance sheet each month, the US Treasury will issue $1.2 trillion in new debt in 2018 and 2019 to cover the forecasted budget deficit. Meanwhile, Russia has been selling US Treasuries. China might not buy more Treasuries, considering the trade tensions and the fact that the Chinese Yuan dropped to a 12-month low. The big fear is that with all this debt hitting the markets from the Treasury and the Fed, there won’t be much room left for other debt, and without loan growth, the system will grind to a halt as borrowing has become such an inherent part of the global economy that markets and growth cannot withstand higher borrowing costs.
Builders broke ground on far fewer homes in June. Housing starts ran at a seasonally adjusted annual 1.17 million rate in June, less than expected. Builders are struggling with higher input costs, builders are also struggling to give buyers what they want – and many buyers, in turn, may be put off by long wait times for new construction. Tariffs, including levies on Canadian lumber, have increased the typical cost of a new home by about $9,000.
Berkshire Hathaway led the financial sector higher, rising 5.1 percent; it’s best day in 7 years. Berkshire Hathaway announced that the company loosened an old company rule and can now buy back stock whenever Buffett and Berkshire Vice Chairman Charlie Munger “believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.” Companies bought back $436.6 billion of their own stock in just the second quarter — a new record. One reason Berkshire has stayed on the sidelines of buybacks is because of the company’s old rule, which stated that Berkshire could not pay more than 20% above Berkshire’s book value per share — a key measure of a company’s financial health. As of the end of the first quarter, the book value for one class A Berkshire share (BRKA) was $211,184. But the price of one Berkshire A share currently trades for nearly $300,000. That’s 40% higher than book value, which means Berkshire was prohibited from buying the stock under the old rule.
S&P 500 industrials were up 1.1 percent, and following strong earnings from railroad CSX Corp and United Continental, the Dow Jones Transport Average jumped 2.2 percent, for its biggest daily advance in three months.
Yesterday, Trump tried to walk back comments that he believed Russian President Vladimir Putin over American intelligence chiefs on Russian interference in the 2016 election, saying that he had misspoken a day earlier after a summit meeting with Putin in Helsinki. Earlier today, reporters asked if Russia was still targeting the United States, Trump shook his head and said, “No.” So, two days ago, they didn’t do it, yesterday they did, and today they aren’t continuing to do it… Got it! No, wait. Sarah Sanders is now saying Trump did not say “no” to a question about Russia, he was saying no, he didn’t want to answer the question, even though he went on to answer questions. So, Monday he misspoke and today we mis-heard… Got it!
Hinting at an end to NAFTA, Trump told his cabinet the US is having “really good discussions” with Mexico and is “getting closer” in trade negotiations and may do a separate trade agreement with Mexico. He also said the US could do a separate agreement with Canada “at a later time. He then said that autos will be the focus of trade talks with the EU on July 25… Got it!
John Schnatter resigned last week as chairman of Papa John’s after it emerged that he had used a racial slur during media training to prepare him for a return as brand spokesman following his withdrawal from ads in the wake of a dust-up with the National Football League. Now he regrets the resignation. He remains on the board which does not have the authority to remove him as a director and it will be up to shareholders whether to re-elect him at the next annual meeting in May. Shares of Papa John’s were up about 4% today. So, where is the good news in this story? The Wall Street Journal is reporting that before the resignation, Schnatter was in preliminary merger talks with Wendy’s, the hamburger chain. Preliminary talks – nothing definitive, but just the thought of all that healthy food under one roof.
The European Commission today fined Google $5 billion for violating EU antitrust rules, saying that “Google has imposed illegal restrictions on Android device manufacturers and mobile network operators to cement its dominant position in general Internet search.” The Commission said that Google broke the law by requiring manufacturers to install its Google Search and Chrome apps as a condition for licensing Google’s app store. It said that Google paid some large smartphone makers and network operators to install apps on phones before they were sold. It also prevented manufacturers from selling devices running on alternative versions of its Android operating system.Last year, the EC issued a $2.8 billion fine to Google for “abusing its market dominance as a search engine by giving an illegal advantage to… its comparison shopping service.”
Amazon Prime Day was a massive success. Despite an initial glitch, Amazon’s sales exceeded Cyber Monday, Black Friday and last year’s Prime Day. Prime members bought more than 100 million products. Amazon didn’t say how much people spent in all. Before Prime Day, the retail think tank Coresight Research predicted sales would reach $3.4 billion, about $1 billion more than last year. The most popular purchases in the United States were Instant Pots, personal water filters and the 23andMe DNA test. Laundry detergent, smartphones, pans, light bulbs, and video games and consoles were big sellers internationally. Amazon briefly became the second company after Apple to reach $900 billion in market value, a major milestone in its 21-year history as a publicly listed company. Amazon shares closed slightly lower, and short of $900 billion.
Morgan Stanley crushed profit expectations on better than expected trading and investment banking results. Morgan Stanley said second-quarter profit rose 38% from a year earlier as the Wall Street firm posted the fastest growth in trading revenue among the largest U.S. banks, while tax cuts fattened the bottom line. In the second quarter, the five biggest U.S. Wall Street firms posted an average 10% growth in total trading revenue from a year earlier. Morgan Stanley’s 18% leap outpaced Goldman’s 17% increase and JPMorgan Chase at a 12% clip. The growth rate was 6.4% at Bank of America, while Citigroup recorded a decline of 0.5%.
EBay shares fell more than 1% loss in after hours trade. EBay reported an earnings beat but lower-than-expected guidance.
International Business Machines shares ticked higher in the extended session after topping Wall Street estimates for the quarter. In the quarter revenue rose 4 percent. For the third consecutive quarter of revenue growth, following five years of year-over-year revenue declines. IBM shares were last up 1.1% after hours