Financial Review

In the Fullness of Time

…Stocks wrap a good week. Waiting on a G7 kerfuffle, and the Fed. Preexisting conditions, thrown under the bus. Apple shortfall. Supercomputers. Give me a B.

Financial Review by Sinclair Noe for 06-08-2018

DOW + 75 = 25,316
SPX + 8 = 2779
NAS + 10 = 7645
RUT + 4 = 1672
10 Y un = 2.94%
OIL – .36 = 65.59
GOLD + 2.20 = 1300.00

Stocks started the session in negative territory but inched higher through the trading day. For the week, the S&P rose 1.6 percent while the Dow added 2.7 percent and the Nasdaq gained 1.2 percent.

 

Worries about the relationship between the United States and its biggest trading partners rattled the broader market ahead of the G7 meeting in Canada. But hopes of any progress at the summit were already at rock bottom, so where does this go? Well, if the Twitter-verse is any indication, the G7 summit is looking like a slow-motion train wreck. Trump, Macron, and Trudeau have been exchanging barbs. Trump kicked off a day of meetings with America’s closest allies by defending his tariffs and calling for Russia’s reinstatement in the economic Group.  The White House said that Trump will step out of the Quebec summit mid-morning Saturday, bound for Singapore to meet Kim. Also, Saturday afternoon’s schedule includes a discussion of climate change.

 

And as the G7 wraps up, another economic summit will begin, the Shanghai Cooperation Organization features, China, Russia, Pakistan, and four other central Asian countries. China alone is expected to contribute around 30% of the total increase in global GDP over the next decade, with India accounting for another 10%. Asia Pacific’s share of the global economy is expected to rise to 39% by 2023, while that of North America falls to 25%. Chinese President Xi Jinping and Indian Prime Minister Narendra Modi have stepped up to defend globalization in recent months. Both countries put their names to a statement issued earlier this week that criticized the “new wave of protectionism” and advocated for an “open and inclusive world economy.”

 

Next week brings the U.S.-North Korea summit – scheduled for June 12 in Singapore. Next week also features the Federal Reserve FOMC policy meeting. The US yield curve is flattening, driven by ongoing rate hikes from the US Federal Reserve. The current spread, or difference, between US 2 and 10-year bond yields is now around 40 basis points, more than 200 basis points below the level it sat in early 2014. The Fed is expected to raise interest rates for the second time this year and the focus will be on whether the U.S. central bank signals it is on course to deliver a total of four rate hikes this year. And the European Central Bank is expected to lay out its plan to cease buying bonds, while the Bank of Japan is expected to maintain its massive stimulus program. That’s 3 central banks over the span of about 36 hours. The Fed’s relative hawkishness presents investors with reasons to buy the dollar as central banks for almost half the global economy, and three-quarters of the official currency reserves, diverge in their monetary policies. It also threatens to intensify pressure on emerging markets, which are already unnerved by the withdrawal of U.S. stimulus and increasingly calling on the Fed to slow down. But a hawkish Fed is more speculation than reality. The minutes of the May 2018 Federal Open Market Committee meeting make clear, the Fed would view some overshooting of the inflation target as consistent with its policy goals. In other words, officials will not overreact to stronger inflation numbers in coming months. Consequently, the stage is set for the Fed to continue with its policy of gradual tightening as it marches rates up to neutral.

 

Preexisting conditions: Before Congress passed the Affordable Care Act in 2010, health insurers could deny you coverage, or charge you more, if you had a preexisting condition. So if you were a cancer survivor or diabetic or asthmatic, you paid dearly if you needed to change insurance or were getting it for the first time. Or you went without. Preexisting conditions was one of the most hated parts of healthcare before the ACA, and one of the most popular changes brought about by the ACA. The Trump administration told a federal court today that it would no longer defend crucial provisions of the Affordable Care Act that protect consumers with pre-existing medical conditions. Under those provisions of the law, insurance companies cannot deny coverage or charge higher rates to people with pre-existing conditions. The Justice Department said the provisions were part of an unconstitutional scheme that required most Americans to carry health insurance. The Justice Department brief said the individual mandate was unconstitutional. The Supreme Court upheld the individual mandate in 2012 as an exercise of the government’s power to tax. But since Congress repealed the tax last year, the Justice Department claims the mandate and the law’s consumer protections can no longer be justified. A court ruling on this particular challenge could be months away and appeals of any decision could take many more months, during which the law is likely to stay in effect.

 

U.S. authorities are transferring into federal prisons about 1,600 Immigration and Customs Enforcement (ICE) detainees, officials told Reuters on Thursday, in the first large-scale use of federal prisons to hold detainees.

 

Japanese financial daily the Nikkei reports Apple expects to ship 80 million new model iPhones this year, down 20 percent from what it had planned at the same time last year. Apple has asked suppliers to make about 20 percent fewer components for the three new iPhones it plans to launch in the second half of 2018, compared to last year’s plans for its iPhone X and iPhone 8 models. Consumer demand appears to be cooling after years of spectacular growth in sales. Quite simply, if you wanted an iPhone, you probably have one, and if you have one, you might be reticent to plop down $1,000 for a slightly newer version. Apple shares fell 1.5%.

 

And then the damage worked its way through the supply chain, hitting suppliers AMS (down 6%) and Dialog Semi (down 4.1 percent). U.S.-based supplier Advanced Micro Devices, Micron Technology, Intel, Broadcom and Qualcomm were all down between 1 percent and 4 percent.

 

Deutsche Bank fell 2.3%. Bloomberg reported that the German lender is exploring options to merge with rival Commerzbank. It’s like strapping two turkeys together to see if they can fly.

 

General Electric rose 1.1%. GE said its quarterly dividend would remain at 12 cents a share. Investors have recently been worried that the payout could be vulnerable to another cut, after having recently been halved.

 

Ant Financial Services Group, operator of China’s biggest online payment platform by market share, has raised around $14 billion from investors including Singapore’s sovereign fund and U.S. private equity firm Warburg Pincus. It is believed to be the biggest-ever single fundraising globally by a private company. The capital-raising comes ahead of a widely expected initial public offering (IPO), though Ant has neither publicly set a timetable nor chosen a likely stock exchange.

 

Oak Ridge National Lab in Tennessee has a new gadget which is, unofficially for now, the most powerful supercomputer on the planet. It was designed in part to scale up the artificial intelligence techniques that power some of the recent tricks in your smartphone. America hasn’t possessed the world’s most powerful supercomputer since June 2013, when a Chinese machine first claimed the title. Summit is expected to end that run when the official ranking of supercomputers, from an organization called Top500, is updated later this month.

 

Supercomputers have lost some of their allure in the era of cloud computing and humongous data centers. But many thorny computational problems require the giant machines. A US government report last year said the nation should invest more in supercomputing, to keep pace with China on defense projects such as nuclear weapons and hypersonic aircraft, and commercial innovations in aerospace, oil discovery, and pharmaceuticals. Summit, built by IBM, occupies floor space equivalent to two tennis courts, and slurps 4,000 gallons of water a minute around a circulatory system to cool its 37,000 processors. Oak Ridge says its new baby can deliver a peak performance of 200 quadrillion calculations per second (that’s 200 followed by 15 zeros) using a standard measure used to rate supercomputers, or 200 petaflops. That’s about a million times faster than a typical laptop, and nearly twice the peak performance of China’s top-ranking Sunway TaihuLight. What it really means is that you would need 6.3 billion years to do the calculations this computer can do in one second.

 

Many of the best known brands in the world have changed their names. Kentucky Fried Chicken changed its name to KFC. Backrub was a tech company that worked on the back links of the internet. Backrub changed its name to Google. Seriously, you can Google it. X.com became PayPal. Nike was originally founded as Blue Ribbon Sports. Netflix changed its name to Qwikster, but that only lasted about a month. Customers hated the new name. Reed Hasting made a public apology and changed the name back to Netflix.

 

IHOP stands for International House of Pancakes. The chain has been around for 60 years and has used the IHOP acronym since 1973. The chain is owned by Dine Brands. And it’s not as if Dine Brands needs to reinvent the company. The stock is up nearly 25% this year because sales are growing at IHOP. So, they are going to change the name…to IHOB. What does the B stand for? Breakfast? Broccoli? Bagels? Bananas? Biscuits? Boomerangs? They aren’t saying, not yet. The changeover is Monday. Will the new name stick? We will know in the fullness of time.

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