Financial Review

In Other Words

…Stocks drop. Weak bond sale. Staring down 3%. Watching the Fed. Walmart online disappoints. Amazon lurks. Albertsons buys (a moat) Rite Aid. Qualcomm sweetens NXP bid.

Financial Review by Sinclair Noe for 02-20-2018


DOW – 254 = 24,964
SPX – 15 = 2716
NAS – 5 = 7234
RUT – 13 = 1529
10 Y + .02 = 2.89%
OIL + .09 = 61.77
GOLD – 17.30 = 1329.70


The Dow and S&P 500 snapped a six-session winning streak. The Dow dropped below 25,000; at the low point of the session, the Dow was down about 335 points. The Nasdaq tried to turn positive in the final half hour, but no. And the S&P 500 dropped near levels of support and bounced, but not enough bounce to turn positive.


The U.S. Treasury today sold $179 billion of bills at yields unseen since 2008 as it works to rebuild its cash balance with record-sized sales of short-term securities. The government auctioned $51 billion of three-month bills at a yield of 1.64 percent, 6 basis points more than similar-tenor notes sold on Feb. 12, while $45 billion of six-month debt yielded 1.82 percent. Its $55 billion sale of four-week notes was at a yield of 1.38 percent and the amount of bids that sale attracted relative to the offering size dropped to the lowest level since 2008. A $28 billion offering of two-year notes yielded 2.255 percent. The market is being hit with a deluge of T-bills following the recent U.S. debt ceiling suspension, and that’s helping to push up the rates that borrowers demand. Concerns about the U.S. borrowing cap had forced the Treasury to trim the total amount of bills it had outstanding, but that’s no longer a problem and the government is now busy ramping up issuance. Financing estimates from January show that the Treasury expects to issue $441 billion in net marketable debt in the current quarter and the bulk of that is likely to be in the short-term market. Meanwhile, don’t be surprised if the 10-year yield tests the 3% range, maybe this week. Earlier in today’s session the 10-year hit 2.93%. The 3 percent threshold — last reached on a closing basis back in December 2013 — is a significant level because of the material consequences for portfolios, from hiking corporate financing costs to eroding total returns on credit and curbing equity valuations.


Analysts at Morgan Stanley say the recent correction in stocks is only a taste of the potential damage from higher bond yields earlier this year, with the biggest test yet to come. “Appetizer, not the main course,” is how the bank’s strategists led by London-based Andrew Sheets described the correction of late January to early February. Although higher bond yields proved tough for equity investors to digest, the key metric of inflation-adjusted yields didn’t break out of their range for the past five years, they said in a note Monday. While many have warned that faster inflation could hurt stocks, in theory bigger price gains should be at worst neutral, if they boost earnings along the way. Higher real yields, on the other hand, mean a bigger discount rate to value future earnings. Should they break out of the range over the past five years as investors anticipate greater central bank policy normalization, that could hit stocks harder. Relatively low real yields were a big support for equity valuations, so a break higher would indicate that stocks will have to rely on earnings — not multiple expansion — to drive them higher. And the challenge there is that a slowdown may loom starting in the second quarter, according to the Morgan Stanley thinking. In other words, it’s when growth softens while inflation is still rising that returns suffer most.


On a technical basis, look for 2700 to 2680 as a key level of support for the S&P 500. If we break that, then we will likely see a re-test of the early February lows of 2580 to 2530.


The Federal Reserve will release minutes on Wednesday of its Jan. 30-31 meeting, Janet Yellen’s last as chair, where officials kept the rate unchanged. Fed policy makers speaking this week include New York Fed President William Dudley and Atlanta Fed President Raphael Bostic. Cleveland Fed President Loretta Mester is among speakers at the U.S. Monetary Policy Forum in New York City. At the end of last year, investors were still focused on the prospect of three rate increases in 2018. But additional fiscal stimulus and signs of wage growth has some market participants for four rate increases. If those expectations are affirmed by the Fed, some might suspect five to six hikes could be in store. And that probably won’t go down well. Rate increase expectations would lift yields for government paper, hitting the brakes on stocks and junk bonds. Shaken investors would tinker with their portfolios and start to question the Fed’s commitment to continued liquidity. In other words, a little taper tantrum.


For quite some time now, Walmart has been playing catch-up with Amazon. When you think about online shopping, you probably do not think Walmart – you probably think Amazon. This is a tough nut for Walmart to crack, and one that it can only break by more heavily marketing its services. Today, Walmart delivered a disappointing annual profit forecast, sparking fears that its bid to catch up with Inc. online is losing momentum. The world’s largest retailer expects earnings of $4.75 to $5 a share this fiscal year, excluding some items, compared with an average Wall Street estimate of $5.13. Though Walmart’s sales last quarter topped projections, the results reflected a slowdown in online orders. At Walmart’s e-commerce unit, sales rose 23 percent last quarter. That’s less than half the pace of previous periods. Today, Walmart dropped more than 10%, its worst one-day decline in almost 3 years.


Meanwhile, Amazon has quietly launched an exclusive line of over-the-counter health products in a possible challenge to pharmacy retail chains that could spark a price war and put pressure on store-brand profit margins. Technically, the company doesn’t own these products, which are produced by private-label manufacturer Perrigo, but it does put Amazon in a position to squeeze other retailers. The e-commerce giant launched the Basic Care line in August, including 60 products ranging from ibuprofen to hair regrowth treatment.


Privately-held Albertsons plans to buy the rest of Rite Aid that isn’t being sold to Walgreens Boots Alliance. The combined companies would be worth around $24 billion, with $83 billion in annual revenue. The deal is the latest in a wave of consolidation in the drug retailing sector, which is looking to cut costs amid weak reimbursement rates and lower generic drug prices. At the same time, Amazon’s foray is widely expected to disrupt the industry, prompting drug chains to beef up their businesses.


Qualcomm announced today it has reached a deal with NXP Semiconductors to raise its bid for the chipmaker to $127.50 a share, or $44 billion. The new deal puts pressure on Broadcom to decide if it will stick with a stipulation in its bid that Qualcomm does not raise its offer for NXP. It could strengthen Qualcomm’s defenses because it allows its shareholders to better assess the standalone value of Qualcomm as an alternative to a deal with Broadcom. Broadcom said on Tuesday it was evaluating its options in response to Qualcomm’s move and noted that the revised price for NXP was well beyond what Qualcomm has repeatedly characterized as “full and fair.” It called the new deal a transfer of value from Qualcomm shareholders to NXP shareholders. Despite a down day for the broader market, chip stocks performed well.


Elliott Management, a $34 billion hedge fund, told clients that cryptocurrencies will likely one day be described “as one of the most brilliant scams in history.” “FOMO (fear of missing out) has solidly trumped WTHIT (what the hell is this??),” Elliott wrote in a fourth-quarter letter to clients. Bitcoin has about doubled in price from its low of the year on Feb. 6, rising to as high as $11,730 today. Although it’s still far away from its peak of almost $20,000 in December.


According to Keefe, Bruyette and Woods big banks have been fined a total of $243 billion since the financial crisis. Bank of America leads the ignominious tally with $76 billion in fines. JPMorgan Chase has been fined nearly $44 billion, and a number of other big money-center banks have been fined over $10 billion, including (in order) Citi, Deutsche, and Wells Fargo. Thirteen banks make up 93% of the total. The banks don’t always pay in cash – sometimes it is credit for things like loan modification or providing financing for affordable housing. And even with $243 billion in fines over the last 10 years or so, the big banks are bigger than ever. That’s good news for shareholders hoping for a dividend – also, good news for the CEOs, who have now been awarded their 2017 pay packages. And given the strong overall performance last year, they’re quite generous. Why it’s almost as if the fines, and the transgressions that lead to the fines, were just part of the business model.



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