…..Fed leaves rates unchanged; wait for December. S&P 500 down 7 straight. Facebook tops 1 billion daily. ADP says 147k jobs last month. Alibaba grows earnings. A new KFC every 5 hours. Wells Fargo again. Colorado River is drying up. I’ll watch the game on TV.
Financial Review by Sinclair Noe for 11-02-2016
DOW – 77 = 17,959
SPX – 13 = 2097
NAS – 48 = 5105
10 Y – .02 = 1.80%
OIL – 1.16 = 45.51
GOLD + 8.70 = 1297.50
The Federal Reserve wrapped up a two-day meeting of its policy-making committee, and delivered the expected news that it would not adjust rates during the final days of a presidential election. However, the Fed’s post-meeting statement reinforced expectations that Fed officials do not plan to wait much longer. The Federal Open Market Committee issued a statement that said: “The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” adding “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”
The Fed’s assessment of economic conditions was also just a little more upbeat than the September statement. The most significant change reflected evidence of stronger inflation. The November statement said inflation “has increased somewhat,” rising closer to the Fed’s preferred annual pace of 2 percent.
The health of the economy has continued to improve. The unemployment rate stood at 5 percent in September, close to a historically normal level. Inflation rose 1.2 percent over the 12 months ending in September, up from 0.8 percent during the 12 months ending in July. And the economy expanded at an annual pace of 2.9 percent in the third quarter.
Fed fund futures are now pricing in an 80% chance of a rate hike in December, but that is not a guarantee. The Fed has repeatedly backed away from planned increases when the economic data has taken a turn for the worse. And the biggest uncertainty right now is the election Tuesday.
The S&P 500 index has dropped for the past 7 trading sessions and yesterdays’ declines saw the benchmark index drop below key support levels. It is longest losing streak in five years, and it happens to be one of the strangest slumps in recent history as well. The last time the index fell for seven straight days was in late November 2011, when the market tanked 8.6%. Back then investors were gripped by fears over the Eurozone economy and the so-called fiscal cliff. But the current pullback is very shallow, with the index down only 2.5%, having fallen less than 1% at each of those days. What is even stranger is the fact that the S&P 500 has been positive at some point in each of the last seven sessions before ending in negative territory.
The big earnings report today came after the closing bell. Facebook reported a 55 percent rise in quarterly revenue, to $7 billion, beating analysts’ average estimate of $6.9 billion. Net income jumped to $2.37 billion, or 82 cents per share, in the quarter from $891 million, or 31 cents per share, in the third quarter of 2015. Excluding items, the company earned $1.09 per share. On that basis, analysts had expected 97 cents per share. Facebook said about 1.79 billion people were using its site monthly, up 16 percent from a year earlier. Facebook gained 80 million monthly users in the third quarter and for the first time now has more than 1 billion daily users on mobile.
Shares have been down for 8 straight sessions in Europe with major indices in Germany, France, the UK and Spain all dropping more than 1% today on weak corporate earnings. Germany’s Lufthansa announced its adjusted earnings before interest and taxes fell 6.5% in Q3, while Denmark’s Maersk reported quarterly profits that slumped 43% on lower freight prices.
Payroll provider ADP said that businesses added 147,000 jobs in October, down from 202,000 in September, a figure that was revised strongly higher. The hiring was led by hotels, restaurants and entertainment firms, which added 38,000 positions, followed by health care, which gained 34,000. Manufacturers shed 1,000 jobs and construction companies cut 15,000. The ADP data cover only private businesses and often diverge from the official figures, but is used as a guide to the government’s monthly jobs report.
Hackers linked to the Russian military have exploited a previously undisclosed Windows security flaw, according to Microsoft, as President Putin looks to strip the software out of government offices and firms. Senior intelligence officials say Putin is planning to replace all foreign software with domestic alternatives, and has already blocked LinkedIn, which is being bought by Microsoft.
A major gasoline pipeline that is a crucial supply source for the U.S. East Coast could reopen as early as Saturday after an explosion in Alabama killed one worker and injured five others. Gasoline futures shot up as much as 15%yesterday on the New York Mercantile Exchange, but gave back gains in the afternoon on news of the weekend reopening. The 5,500-mile Colonial Pipeline is owned by Koch Industries, Royal Dutch Shell and others.
A barrel of West Texas Intermediate dropped below $46 a barrel. The market remains weighed down by record output from the world’s largest exporters, and mounting uncertainty that OPEC and its rivals can do much to tackle a two-year global surplus. The drop in crude prices and the structure of Brent futures means that oil traders can once again take advantage of contango – where oil for delivery today is cheaper than oil in future months – by storing oil in tankers at sea.
Chinese online shopping giant Alibaba Group reported a 55 percent rise in second-quarter revenue, beating analyst estimates on the back of core e-commerce sales and strong media and entertainment growth.
Yum China (ticker symbol YUMC) officially began trading today after spinning off from Yum Brands (ticker symbol YUM)—the fast-food operator behind Taco Bell, Pizza Hut, and KFC restaurants. And the company—with over 20,000 KFC units, 16,000 Pizza Hut units, and 6,000 Taco Bell units—sees this split as a new chapter of growth, with goals to triple its store count globally; that works out to a new KFC store every 5 hours. The new Yum Brands will focus on US growth along with international growth outside of China. Meanwhile, the China business will have a specific country focus for Pizza Hut and KFC.
Broadcom Limited said today that it had entered into a definitive agreement to acquire Brocade Communications Systems for $5.9 billion. The price breaks down to $12.75 per share in an all-cash transaction.
Time Warner, which two weeks ago agreed to sell itself to AT&T, boosted its outlook for the year as improvement in its TV and film businesses pushed quarterly results above expectations. Revenue increased in all three of the company’s segments – up 8.8% for Turner, 4.3% for Home Box Office and 6.6% for Warner Bros.
If it’s not one thing it’s another. Wells Fargo has agreed to pay $50 million to settle a class-action lawsuit that accused the bank of overcharging hundreds of thousands of homeowners for appraisals ordered after the homeowners defaulted on their mortgage loans. The proposed settlement calls for Wells Fargo to automatically mail checks to more than 250,000 customers nationwide whose home loans were serviced by the bank between 2005 and 2010. The checks will typically be for $120. If a judge signs off on the settlement, as expected, the checks will be distributed next year. When a borrower falls behind on a loan, mortgage contracts typically let the lender order an appraisal of the home’s current value. The cost of that appraisal, known as a “broker price opinion,” can be passed on to the borrower, but Wells Fargo used one of its own subsidiaries to conduct appraisals and then routinely marked up the cost. A $50 million fine is a drop in the bucket for Wells Fargo, but it isn’t the first drop and likely not the last; drop by drop, soft water can wear away hard stone.
A US appeals court today agreed to revisit a challenge to an Arizona voting law which restricted the ability of advocates to collect absentee ballots by hand. A three judge 9th U.S. Circuit Court of Appeals had earlier upheld the Arizona law, but the full court on Wednesday voted to rehear the case before an 11-judge panel. Five conservative 9th Circuit judges dissented from the decision to rehear the case, saying it was made too close to Election Day.
A survey of policy- and decision-makers by the University of Colorado concludes there is a very real prospect of Colorado River water supply cuts to Arizona and Nevada in January 2018. The Colorado River Future Project focusing on critical issues for the river surveyed some 65 water managers, municipal and agricultural customers, conservationists plus government officials at the tribal, state, federal and congressional levels. The results acknowledge that more river water than is available is promised to interests in Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming – and Mexico. It points to a continuing 16-year drought diminishing the amount of promised water and says the most urgent need is to firm up contingency plans and extend water-use agreements. So far, the level has barely remained above the point that would trigger a shortage declaration and cuts of 11.4 percent to Arizona’s usual water allotment, and 4.3 percent of Nevada’s supply. Combined, that amount of water would serve more than 625,000 homes. Officials have warned of possible cuts in January 2018.
There is a price on baseball history. Right now, it’s about $19,500 each for two cozy seats behind the visiting Chicago Cubs dugout for a winner-takes-all faceoff with the Indians in Cleveland tonight. Fans snatched those prime seats off secondary-market ticket brokerage StubHub. Business has been brisk for the site and its rivals, as the Cubs try to end the longest championship drought in professional sports at 108 years. The Indians and their fans are equally hungry for a first World Series title since 1948.