Financial Review

Gravity

…Stocks fall after 8 gains. Bond fall hard, yields jump to highest levels in 7 years. Mortgage rates jump. Retail sales strong but Home Depot disappoints. Primaries in 4 states. North Korea cancels talks with South Korea. The biggest pot deal ever.

Financial Review by Sinclair Noe for 05-15-2018

DOW – 193 = 24,706

SPX – 18 = 2711

NAS – 59 = 7351

RUT  un =1600

10 Y + .08 = 3.08%

OIL + .04 = 71.00

GOLD – 22.70 = 1291.30

 

After 8 straight winning sessions for the Dow Industrials, gravity returned, and stocks fell. Home Depot reported quarterly sales that fell short of Wall Street’s expectations – the earnings were good, but sales missed thanks to what the company categorized as a “slow start” to spring sales. Spring is an especially important season for the home improvement retailer as shoppers traditionally stock up on gardening supplies and renovation materials. Customer transactions, however, fell 1.3 percent during the quarter. Home Depot fell 1.6 percent. And the weakness in Home Depot may be a warning sign for the housing market. Whatever, after 8 days of stocks being higher, it didn’t take much to trigger selling.

 

Stocks also slipped after the Commerce Department reported retail sales increased 0.3 percent in April, that follows an upwardly revised 0.8 percent gain in March. Clothing stores posted the biggest increase in sales in April. Home-furnishing stores, internet retailers and home and garden centers were other winners. Department stores also reported a small pickup in sales. Americans spent a lot more to fuel up in April, with sales at gas stations rising 0.8%. Americans shelled out an extra $4.4 billion for gasoline in April than they did a year earlier. Auto sales barely rose. Consumers spent a bit less last month on appliances, electronics, health-care items and sporting goods. Sales at bars and restaurants had the biggest drop in more than a year. The acceleration in spending in the spring also points to a stronger reading in gross domestic product in the second quarter. The stock market was in no mood for good news on retail sales. Instead, the solid read on consumer spending was overlooked as traders focused on an uptick in interest rates.

 

Bonds dropped, sending the yield on the 10-year Treasury note up over 3.08% – topping the high from July 2011, and raising fresh questions about how high America’s borrowing costs will climb. The short-dated 2-year note yield edged 3.9 basis points higher to 2.585%, the highest level since 2008. The dollar reached the strongest point since December. Breaking support means that bonds could tumble further, and faster because there is no more support until we get yields around 3.2%. Also, the Fed is flooding the bond market with new issues, as the government continues to rack up more and more debt. The leap in yields comes as bond traders continue to price in a quicker pace of Fed rate increases. Traders for the first time are now assigning a 51 percent chance of a fourth interest rate hike this year by the Fed, according to the CME. How high rates go is still open to debate. San Francisco Fed President John Williams delivered a speech today underscoring his view that the Fed has only a few more rates hikes ahead of it before rates reach neutral. Williams said the longer-run economic drivers “still point to a ‘new normal’ of a low (neutral rate) and relatively low interest rates.” At his confirmation hearing, also Tuesday, Fed Board nominee Richard Clarida flagged what could be another, and related, point of disagreement at the Fed: whether the central bank should resort to bond-buying to fight downturns.

 

A sharp sell-off in the bond market is sending mortgage rates to the highest level in seven years. The average contract rate on the 30-year fixed is at 4.875 percent for the highest creditworthy borrowers and 5 percent for the average borrower. Mortgage rates, which loosely follow the yield on the 10-year Treasury, started the year right around 4 percent but began rising almost immediately. They then leveled off in March and early April, only to begin rising yet again. The move follows positive economic data in retail sales, suggesting that newly imposed tariffs would not hit sales as hard as expected, or that the hit to sales hasn’t hit yet. The surge in rates could not have come at a worse time for the spring housing market. Buyers are struggling to find affordable homes for sale, as the supply of listings drops to record lows in most major markets. Home prices are now rising at the fastest rate in four years, according to CoreLogic, and show no sign of easing up. Higher mortgage rates would typically serve as a damper on prices, as sellers have to adjust to what buyers can afford, but with supply and demand so far out of whack, that is unlikely to happen in the near term. If rates move significantly higher, past 5 percent on the 30-year fixed, prices will have to adjust.

 

And if you think rising interest rates could create a little havoc in the housing market, you don’t want to think what might happen in the equity markets, where the typical portfolio manager has never experienced a rising interest rates environment. The last time rates were in a significant uptrend was from 2003 to 2006 before the financial crisis struck. But for now, let’s keep things in perspective – the Dow is down one day after 8 straight gains; the S&P and the Nasdaq have seen nice gains over the past couple of weeks. The S&P 500 managed to post a high above the April 18th high, and while it is still about 6% below the January record high, it isn’t breaking down, despite a bad day.

 

Primary voters in Idaho, Nebraska, and Oregon head to the polls today, but Pennsylvania will likely be the talk of the evening. A total of 23 Republican House members have announced retirements this session of Congress, the highest number of GOP retirements in one cycle going back to 1973. In Pennsylvania alone, five Republican congressmen are not running for re-election in 2018. One of the easiest ways for Democrats to take back the House would start with the party finding success in Pennsylvania in the fall. The decision by the Pennsylvania Supreme Court earlier this year to re-draw the state’s congressional districts has generated a number of competitive House races, and an influx of candidates from both parties have launched campaigns in the state’s six open-seat races.  As it stands, Pennsylvania’s delegation in the House features 10 Republicans and six Democrats, but the shifting congressional lines, which are more geographically compact under the new map, provide an opportunity for Democrats to flip a number of GOP seats. In its decision ordering the state’s congressional map redrawn, the Pennsylvania Supreme Court found the map agreed to in 2011 violated the state constitution’s guarantee that “elections shall be free and equal.” Redistricting continues to be a major priority for both parties this cycle because many of the governors and state legislators elected in 2018 will oversee the next round of congressional redistricting.

 

North Korea canceled high-level talks with South Korea and threatened to call off a planned U.S.-North Korean summit in June, citing its objections to military exercises being conducted by the U.S. and South Korea. North Korea’s Central News Agency cited the drills involving the South Korean and U.S. air forces as a major concern, calling the maneuvers a rehearsal for an invasion.

 

Among the worst performers on the S&P 500, Agilent Technologies shares dropped nearly 10% after the maker of medical instruments and other equipment posted quarterly earnings that matched forecasts late Monday.

 

Berkshire Hathaway said it has more than doubled its investment in generic drugmaker Teva Pharmaceutical and confirmed it has become Apple’s second-largest shareholder. The disclosures were made in a filing with the U.S. Securities and Exchange Commission. Berkshire said it owned about 40.5 million Teva American depositary receipts (ADRs) worth about $693 million as of March 31, up from 18.9 million ADRs three months earlier. Berkshire also said it boosted its Apple stake to about 239.6 million shares worth more than $40 billion.

 

Facebook has been under pressure for its failure to remove violence, nudity, hate speech and other inflammatory content from its site. Government officials, activists and academics have long pushed the social network to disclose more about how it deals with such posts. Now, Facebook has published numbers for the first time detailing how much and what type of content it takes down from the social network. In an 86-page report, Facebook revealed that it deleted 865.8 million posts in the first quarter of 2018, the vast majority of which were spam, with a minority of posts related to nudity, graphic violence, hate speech and terrorism. Facebook also said it removed 583 million fake accounts in the same period. Of the accounts that remained, the company said 3 percent to 4 percent were fake.

 

And in what might be the biggest pot deal ever, Aurora Cannabis will buy rival MedReleaf for $2.5 billion in the biggest deal yet to unify major Canadian pot growers, as the country moves toward legalizing marijuana for recreational use. The deal is the latest in a wave of mergers in the industry as marijuana producers seek to cut costs and gain scale. Canadian regulators have granted over 70 firms licenses to produce and sell medical marijuana, with more than half granted in 2017 or 2018. Aurora and MedReleaf together expect to produce over 570,000 kilograms per year of cannabis through nine facilities in Canada and two in Denmark. Canada is one of the few countries that exports marijuana, allowing growers to take immediate advantage of recent medical pot legalizations in more than 20 countries. The worldwide legal marijuana market is expected to generate revenue worth $146 billion by end of 2025.

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