Financial Review

Heat of the Day

…Earnings season heats up. Companies affected by trade war. Farmers get $12 billion bailout. It’s hot outside.

Financial Review by Sinclair Noe for 07-24-2018

DOW + 197 = 25,241
SPX + 13 = 2820
NAS – 1 = 7840
RUT – 18 = 1680
10 Y – .02 = 2.95%
OIL + .87 = 68.76
GOLD + .10 = 1225.10

 

 

The S&P 500 index rose to its highest since early February, and to within 2 percent of its late-January record. The Nasdaq hit a new record high. Alphabet jumped over 3.8% following a very strong earnings report that beat both top and bottom line estimates. After accounting for record EU antitrust fine, Alphabet earnings beat expectations by more than $2 a share.

A big beat for Biogen; earnings were up in the second quarter and sales climbed 9%. That’s in part thanks to strong demand for spinal atrophy treatment Spinraza, one of the world’s most expensive drugs. A single dose costs upwards of $125,000. Biogen says 20% more patients in the US are now using the drug.

AT&T added a net 46,000 postpaid mobile phone subscribers in the second quarter, beating Wall Street estimates. On an adjusted basis, the company earned 91 cents per share. Analysts had expected adjusted earnings per share of 85 cents. Total operating revenue fell about 2 percent, missing estimates. Shares gained 2%. But the big news for AT&T is that they won court approval last month to close its $85 billion acquisition of media company Time Warner Inc and began bundling the content it gains from the deal with new wireless plans in an effort to drive subscriber growth. The Department of Justice is still challenging that case, but the deal is expected to go through.

Verizon Communications reported quarterly profit and revenue that topped estimates but added fewer-than-expected monthly subscribers. Shares were up 0.7%.

Texas Instruments forecast better-than-expected revenue and profit for the third quarter as it benefits from higher sales of semiconductors used in cars and industrial machinery. The earnings report comes a week after CEO Brian Crutcher stepped down just six weeks into the role, following a report that he had violated the chipmaker’s code on personal behavior.

Roomba-maker iRobot jumped 20% in after-hours trade after the company posted second-quarter earnings that easily topped expectations.

The Office of the US Trade Representative kicked off public hearings on pending tariffs against China. The 25% tariffs, which would target $16 billion worth of goods, would be in addition to US duties on $34 billion worth of Chinese products enacted earlier this month. Here’s how a few companies are dealing with tariffs and potential tariffs:

General Electric estimated that new tariffs on its imports from China could raise its costs by $300 million to $400 million overall, before steps to lessen the impact.

Honeywell said on Friday it will increase the use of supply chain sources from non-China countries to counter growing costs related to a tariff war between the world’s two largest economies.

Home furnishings chain At Home Group said it would make adjustments to its supply chain to mitigate the impact of the proposed tariffs on goods imported from China.

Harley-Davidson just posted stronger-than-expected earnings for the second quarter and shares moved higher by 7.6%. But the trade fight is starting to take its toll. Harley says worldwide sales slid more than 3.5% and lowered guidance for the rest of the year. Harley-Davidson said it expects incremental costs of about $15 million to $20 million for the remainder of the year from the steel and aluminum tariffs. It also says it will take further hits from retaliatory moves from the European Union.

3M posted better than expected earnings and shares were up almost 1%, even as they issued a warning that it expects an impact of about $10 million or $0.01 a share on an annualized basis from the tariffs passed so far. The company also said it was prepared to make changes to supply, sourcing and pricing in response to any further tariffs.

Otis elevator maker United technologies reported better than expected earnings and the shares were up 3.7% despite a warning that tariffs which have been enacted so far will impacts earnings by $0.05 per share in 2018. The company expects to see a much bigger impact in 2019.

Upscale home furnishing chain RH expects to reduce significantly the amount of goods sourced from China in its 2019 fiscal year to mitigate the impact of proposed new tariffs by the United States.

Gentex, which makes aircraft windows and rear-view mirrors, said it expected cost increases of between $5 million and $8 million for the second half of 2018 related to its planned purchases of raw materials from China.

Toymaker Hasbro said it was moving more production out of China as a result of the tariffs, adding 30 percent of its manufacturing was now done elsewhere.

Danaher, which develops technology for the dental, life sciences, diagnostics and environmental industries, said it expected an earnings impact, and that it would look to modify manufacturing locations.

Home appliance manufacturer Whirlpool said U.S. tariffs on Chinese goods including steel contributed to an increase in raw materials costs in its U.S. business. Whirlpool tumbled 14 percent after reporting weak quarterly results and cutting full-year forecasts.

Qualcomm, the San Diego-based chipmaker might have to abandon its $44 billion acquisition of the Netherlands’ NXP Semiconductors if it fails to gain approval from regulators in Beijing. The deal, first announced more than 20 months ago, has been held up by the Chinese government for months amid the trade fight with the United States. China could pull through and greenlight the merger at the last minute. But the situation is uncertain at best.

In addition to specific companies, rural, agricultural states have been particularly hard hit by Trump’s trade policies. In retaliation for US imposed tariffs on steel and aluminum, China, the EU, Mexico and Canada have in turn targeted U.S. agricultural products, including soybeans, dairy, meat, produce and liquor. The Agriculture Department said it will offer $12 billion worth of aid to farmers, ranchers and others hurt by the escalating trade wars. The agriculture department said emergency aid would be provided to farmers through direct assistance, a government food purchase and distribution program, and a trade promotion program. It would be done in part through a division of the Agricultural Department that was created to provide financial support for farmers.

Proposing federal subsidies for farmers is likely to place congressional Republicans, who typically resist large-scale government assistance programs, in a difficult position. Some were quick to denounce the proposal. Nebraska Senator Ben Sasse said, “This trade war is cutting the legs out from under farmers and the White House’s ‘plan’ is to spend $12 billion on gold crutches,” and Kentucky Senator Rand Paul said, “Tariffs are taxes that punish American consumers and producers. If tariffs punish farmers, the answer is not welfare for farmers — the answer is remove the tariffs.” This morning Trump tweeted “Tariffs are the greatest!”…maybe, but it helps if you can dole out $12 billion to buy a few votes.

There’s no question that some American companies are feeling the bite of the trade war. But so far, only a few companies and a bunch of farmers are feeling the pinch. The direct effects on the US economy are small, because the economy is really big and it is mostly domestically driven. To assess how the trade war could affect growth, the job market and inflation at the macroeconomic level, you need data. The trouble is that much economic data operates with long time lags. One likely effect of a trade war is on prices — in most cases, increasing them for American consumers. This will eventually show up in overall inflation numbers, but that could take time, especially since most of the early rounds of tariffs are aimed not at finished consumer goods but at raw materials and industrial products. And prices for some commodities such as soybeans and corn and livestock, could actually fall, offsetting higher prices for steel and aluminum and other materials. Likewise, copper prices have been falling even as lumber prices have jumped. Prices in futures markets suggest the trade distortions will be temporary. If that changes, it will be a bigger deal for both overall price inflation facing consumers and for the incomes of farmers and other producers of commodities. It’s also worth keeping an eye on the producer price index, calculated by the Labor Department, which captures the prices of the raw materials that companies use to make finished products. If the trade war is going to feed into broader consumer inflation, it is likely to show up there first. Also watch the labor markets. If companies are seeing higher prices, one of the first places they will tighten purse strings is in the HR department.

Republican plans to build on last year’s U.S. tax legislation will include making individual and small business tax cuts permanent, expanding savings plans and giving breaks to start-up companies. The outline for “Tax Reform 2.0” is only a couple of pages long at this point, and light on details. There will be a push to finish it up by September, before the midterm elections.

After last week’s surprise crude build, expectations were for a draw once again and API delivered with a bigger than expected draw of 3.16mm barrels, which sent oil prices higher. The reality is this is high gasoline demand season. They’re going to keep refineries operating pretty strongly until after Labor Day. And in the background, continued tensions between the US and Iran.

Of course it is always hot during the summer, but the strange weather that we have been witnessing in recent months is unlike anything that we have seen since the Dust Bowl days of the 1930s.  At this moment, almost the entire Southwest is in some stage of drought.  Agricultural production has been absolutely devastated, major lakes, rivers and streams are rapidly becoming bone dry. We’re looking at temperatures of 117 right now. Try to stay cool.

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