If You Build It
…Stocks bounce. Infrastructure plan unveiled – how to pay remains a mystery. 2019 Budget unveiled – another mystery. GD buys CSRA. Wells credit cut. Unilever wants to clean up social media. Barnes & Noble cuts jobs, Amazon copies.
Financial Review by Sinclair Noe for 02-12-2018
DOW + 410 = 24601
SPX + 36 = 2656
NAS + 107 = 6981
RUT + 13 = 1490
10 Y + .03 = 2.86%
OIL + .12 = 59.32
GOLD + 6.80 = 1323.50
Last week stocks suffered the biggest losses in 2 years. All three indexes suffered weekly losses of at least 5%, the biggest since early 2016. The S&P 500 and the Dow entered correction territory on Thursday—defined as a decline of at least 10% or more from recent highs. Friday and today we had big back-to-back gains. The 30-stock Dow closed more than 1,000 points lower twice last week and rose more than 300 points in two other trading days. The S&P 500, meanwhile, posted moves greater than 1 percent in four-of-five trading days last week.
There was no major economic data on the calendar today. The data highlight of the week will be January consumer price inflation, due Wednesday. If it comes in slightly ahead of expectations, spooked investors could trigger yet another stock selloff. The consensus estimate calls for headline inflation to rise 0.3%, and core inflation, which strips out food and energy costs, to gain 0.2%. Investors have been on edge as of late over concerns surrounding higher interest rates, therefore moves in the bond market will continue to be of key importance going forward.
Trump unveiled his Infrastructure plan today. It was supposed to be a $1.5 trillion plan; in reality, it looks like a $200 billion plan. Here’s a breakdown on funding: $100 billion in matching funds to be made available to states and cities on new, less-generous terms. A $50 billion rural block grant program that will be doled out to states based on the miles of rural roads and the extent of the rural population that they have. Then there’s a $20 billion fund for “projects of national significance” meaning, according to a weekend background briefing with administration officials, “projects that can lift the American spirit, that are the next-century-type of infrastructure as opposed to just rebuilding what we have currently.” Another $20 billion would go to federal loan programs that underwrite private financing of profitable infrastructure projects. Last, there’s a $10 billion capital financing program that would fund the construction of federal office buildings and similar infrastructure for actual government use.
What about the other $1.3 trillion? Well, the idea is that the $100 billion grant program is supposed to generate a total level of infrastructure investment far in excess of what’s currently spent by state and local governments. Right now, federally funded highways (that’s interstates and other routes) are financed on the basis of an 80-20 federal-state split, and federally funded mass transit projects usually get a 50-50 split. Trump’s proposal is to flip the 80-20 formula on its head and require that states and cities kick in at least $4 for every $1 in federal money they receive. States and cities are generally more fiscally constrained than the federal government, not less so. The practical impact of making the matching formula stingier will be to generate fewer new gleaming roads, not more.
Then there is the question of where the $200 billion will come from. We’re not sure about that. One way to come up with the money is to increase the federal deficit, which has already been increased. The other way is spending cuts. Another way is privatization – selling off federally owned property, such as airports (like Dulles International and Reagan National), and roads, and power transmission assets (like the Tennessee Valley Authority or the Southwestern Power Administration) and selling off water utilities (like the Washington Aqueduct, which supplies drinking water in D.C. and Northern Virginia). The administration is also considering turning the International Space Station over to the private sector and ending its federal funding. Infrastructure policy would require 60 votes in the Senate – so this is probably dead on arrival.
America’s infrastructure is in dire need of repairs. According to the American Society of Civil Engineers’ 2017 Infrastructure Report Card, which is published every four years, US infrastructure gets a D+ grade. It got the same grade in 2013. The ASCE estimates the US needs to spend about $4.5 trillion over the next 7 years to improve the state of the country’s roads, bridges, dams, airports, schools, and more.
Also this morning, the administration’s Office of Management and Budget released their proposal for the fiscal year 2019 budget. Fiscal years are different from calendar years, so the proposal covers October 1, 2018, through September 30, 2019. The budget proposes nearly $700 billion in 10-year savings by “repealing and replacing” Obamacare, more than $200 billion in cuts to the Supplemental Nutrition Assistance Program (SNAP, or food stamps – cutting the cash payments and replacing them with boxes of food – certain to include government cheese), cutting expansion of Medicaid, and $266 billion in cuts to Medicare, among many other program cuts. When he ran for office, Trump told voters that he would not cut Medicare or Medicaid. The budget includes over 11% cuts to Veterans’ Affairs. Higher education faces massive changes. The budget proposal would sharply curtail income-based loan repayment plans, scratch the Public Service Loan Forgiveness Program and embolden the government to go after students who don’t pay their loans. Changes to loans would apply to borrowing after July 1, 2019, not including those loans provided to borrowers to finish their current education. The budget would eliminate subsidized loans.
The proposed $4.4 trillion budget would boost the federal deficit to nearly $1 trillion in the next fiscal year and result in accumulating shortfalls of more than $7 trillion over the coming decade. The administration likes to take a rosy view on the economy, and the budget blueprint is no different. The latest projections show that the gap between what the Office of Management and Budget and the Federal Reserve projects for gross-domestic-product growth is as wide as 50%. The OMB looks for gross domestic product to grow at 3% or better. The Fed says growth will likely be about 2% to 2.5%.
S&P 500 companies are posting revenue and earnings for the fourth quarter that are exceeding estimates, with profit growth of 16 percent topping forecasts of 12.7 percent. The strong growth coupled with the recent selloff means that S&P 500 companies are now trading at 16.5 times forecasted earnings, a level last recorded in early November 2016 and down from 18.5 times.
General Dynamics said it had agreed to buy CSRA Inc. for $6.8 billion as part of the defense contractor’s push into government information-technology services. GD will double its annual IT services sales to become one of the largest providers to the Pentagon and other agencies such as the CIA and the Department of Health and Human Services. Government departments are going through a major refresh of antiquated IT systems, including switching more services to the cloud and boosting cybersecurity. That has triggered a round of deal-making over the past three years among providers seeking greater scale to handle ever-larger projects as the government bundles contracts to secure savings.
Ford Motor is warning an additional 33,000 owners of older pickup trucks in North America to stop driving them until potentially defective Takata air bag inflators can be repaired. In January, Ford told 2,900 owners of model year 2006 Ford Ranger trucks to stop driving immediately after a second death was linked to inflators built on the same day. The expanded warning was prompted by additional testing.
S&P Global Ratings cut its rating on Wells Fargo to A- from A last week, noting that the regulatory risk ‘is more severe than we previously expected and the process for improving its governance and operational risk policies may take longer than we previously expected.’ And changing the bank’s culture might be a difficult task, given its long history of pushing sales volume and cross-selling.
Unilever is the world’s second biggest advertiser. And it will pull its advertising from tech giants like Facebook and Google if they fail to improve transparency about news, protect children from extremist and toxic online content, and move to build public cohesion rather than division. Trashing tech is gaining steam recently. Governments are fining the Silicon Valley titans, seemingly everyone—including tech executives themselves —want them to be regulated, and a steady stream of insiders are coming out against them, saying that their products are designed to hijack your attention, keeping you from accomplishing any of your own goals, whether that’s getting work done or building actual human relationships. Roger McNamee, an early Facebook investor, said last week that he was speaking out against Facebook because he had “contributed to creating something that created great harm.” But advertisers have the power of the purse, which means tech companies might actually be inclined to listen to them. Unilever spent about $8 billion last year on advertising, behind only Proctor & Gamble.
Barnes & Noble is cutting staff, laying off cashiers, digital leads and other experienced workers in a company-wide clearing. CNBC reported that many workers who showed up Monday morning at various Barnes & Noble locations were told that they no longer had a job. Meanwhile, Amazon is shedding hundreds of corporate jobs, most of which are in the company’s retail division — the part in charge of selling stuff to customers. An exact number has not been announced, but the report says it’s expected to be “several hundred”; some workers may be reassigned. Cuts of any kind are rare at Amazon, but apparently, anything Barnes & Noble can do, Amazon can also do.