Financial Review

Inching Higher

…Earnings season super strong – individual names a bit volatile. Buffett sits on cash. Facebook wants your financial data. Iran under sanctions again. Gates testifies at Manafort trial.

Financial Review by Sinclair Noe for 08-06-2018

DOW + 39 = 25,502
SPX + 10 = 2850
NAS + 47 = 7859
RUT + 10 = 1684
10 Y – .02 = 2.94%
OIL + .41 = 68.90
GOLD – 6.10 = 1208.20


The 3 major stock indices closed higher, but not at the highs for the day. Investors focused on a strong earnings season with results from Berkshire Hathaway impressing and Facebook lifting Nasdaq after a report it was planning new services. The S&P edged closer to a record hit on Jan. 26, closing within a percentage point of the all-time high for the first time since the current correction began. Of the 413 S&P 500 companies that have reported second-quarter results so far, 79.2 percent have topped earnings estimates, according to Thomson Reuters data. That compares with the 72 percent average for the past four quarters.


Berkshire Hathaway rose 2.3 percent after the Warren Buffett-led conglomerate reported a 67 percent surge in quarterly operating profit to $6.9 billion. The filings show that Berkshire’s 5% stake in Apple is now worth nearly $50 billion. That’s by far the most valuable stake it has in any one company. Berkshire is now sitting on almost $130 billion in cash. Investors and executives should take note that ultimate contrarians Buffett and partner Charlie Munger are sitting on the sidelines when it comes to acquisitions. Buffett warned in his annual shareholder letter in February of this very thing: Not enough good companies were available to buy at reasonable prices. Yet research from Moody’s Analytics shows the value of global mergers and acquisitions shooting to $2.6 trillion in the first half of this year, just below a record set in 2007. Berkshire Hathaway’s cash pile grew in 1998-99, just ahead of the bursting of a tech-stock bubble, then again in 2005 to 2007, as markets again became frothy. But then Berkshire used the period from 2000 to 2003, and then 2007 and 2009, to buy assets at lower valuations as markets were melting down.


Facebook gained 4.4 percent after the Wall Street Journal reported it had asked large U.S. banks to share detailed financial information about customers as part of an effort to offer new services.Facebook wants users’ financial information, like credit card transactions and checking account balances. The data would be used for Messenger features including account balance updates and fraud alerts, but not for Facebook’s other platforms. Sure – what could go wrong?


SeaWorld Entertainment shares surged 18%, hitting a four-year high, after the theme park operator posted better-than-expected earnings for the second quarter and said attendance is rising again.


Shares of Rite Aid plunged 10%, their biggest one-day selloff in nearly a year, after the drugstore chain warned investors don’t be surprised if it reports a fiscal 2019 adjusted loss, as a result of greater-than-expected generic drug bid activity.


Zillow Group shares dropped 19% in the extended session after the company reported earnings. Zillow posted earnings of 13 cents a share on $325 million in revenue. Analysts had expected earnings of 10 cents on $326 million in revenue. The problem – they lowered third quarter guidance. Another problem – Zillow announced plans to acquire a national mortgage lender to assist with home purchases. The company recently launched a new strategy of buying and selling homes directly to users, expanding its offerings beyond real estate brokers. The acquisition is intended to supplement that effort.


Etsy stock shot up 8 percent post market after the e-commerce arts and crafts website reported better-than-expected revenue, even as earnings were just shy of estimates.


Mattress Firm, the largest U.S. mattress retailer, is considering a potential bankruptcy filing as it seeks ways to get out of costly store leases and shut some of its 3,000 locations that are losing money. Mattress Firm’s South African parent, Steinhoff International Holdings, has been working on a deal to restructure the debt of some subsidiaries with its creditors, following an accounting scandal. Creditors agreed last month to hold off on their debt claims for three years. Steinhoff acquired Mattress Firm for $3.8 billion in 2016.


The United States will reimpose sanctions against Iran at midnight tonight, restoring economic penalties that were lifted under the 2015 nuclear accord and ratcheting up pressure on Tehran while worsening divides with European allies and other world powers. Iranian President Hassan Rouhani dismissed a U.S. call for talks. The sanctions are a consequence of Trump’s decision in May to withdraw from an international deal that sought to limit Iran’s nuclear program in exchange for easing pressure on the country’s shaky economy. Trump blasted the deal long before becoming president; his administration hopes that backing out of it will force Iran to shut down its nuclear enrichment efforts, curb its weapons program and end its support of brutal governments or uprisings in the Middle East.


Britain, France, Germany, Russia, and China also signed off on the 2015 accord. European officials have said that the Iran nuclear agreement is crucial to their national security, and international inspectors have concluded that Tehran is complying with the accord. The new sanctions bar any transactions with Iran involving dollar bank notes, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal, and they end imports into the United States of Iranian carpets and foodstuffs. The European Union updated a blocking statute that seeks to protect European companies from any penalties imposed by the United States for doing business with, or in, Iran. The measure threatens companies with penalties if they comply with American sanctions, putting some in a bind. While top American officials said that they would continue talking to foreign counterparts to cooperate on sanctions, they vowed to undertake vigorous enforcement of the restored penalties against Iran — regardless of European concerns. They also said more than 100 major businesses had already announced an intent to leave Iran, ahead of the sanctions. The decision to withdraw from the 2015 accord paved the way for the reimposition of sanctions in two stages. The first round comes into force at midnight, and the second takes effect on 4 November. The transition period was intended to provide companies already doing business with Iran time to wind down their activities.


The two major stock indexes in China have lost one-quarter of their value from highs this year. Meanwhile, the S&P 500, is close to a record high. Soon after the S&P 500 hit an all-time high on Jan. 26, stocks plunged on fears that the Federal Reserve might raise interest rates more quickly than expected. Then, at the end of February, Trump announced plans to impose tariffs on steel and aluminum, the first clear shot in the trade war. So far in the trade war between the two largest economic powers in the world, the U.S. has slapped tariffs on $34 billion of Chinese products, which China met with retaliatory duties. A big test for investors comes next month, when the Trump administration might impose $200 billion of extra tariffs on China. China has already announced retaliation. Under the plan, China would impose tariffs – between 5 percent and 25 percent – on nearly all of the $130 billion in goods imported from the United States. China’s Ministry of Finance said Friday the new tariffs would target more than 5,200 types of U.S. goods. That might be enough to get investors’ attention. Or we might wait until the yuan devalues further, or the Chinese equity markets crash further. That’s when things could really get dangerous.


Trump portrays the tariffs as a tax on foreigners, but the reality is that tariffs are taxes on U.S. companies and consumers. When a big U.S. retail chain or an equipment manufacturer has to pay 10 or 25 percent more to get steel from Canada or a certain part from China, that U.S. company has to pay the tax when it imports that item. U.S. businesses either eat that extra cost or pass it along to consumers.


Rick Gates, the star witness in special counsel Robert Mueller’s fraud and conspiracy trial against former Trump campaign chairman Paul Manafort, took the stand today to testify that he committed crimes with his former business partner. In a blow to the case being laid out by Manafort’s defense team, Gates then told prosecutors that he had been directed by Manafort to report overseas income as loans as a way to lower his taxable income. Since their opening statement last week, Manafort’s lawyers have sought to blame Gates for breaking finance laws, framing him as a liar who abused Manafort’s trust and embezzled millions of dollars from him. Gates did admit in court that he stole hundreds of thousands of dollars from Manafort by filing false expense reports.  Gates also testified that Manafort had worked with him to commit financial crimes, including filing false tax returns. Manafort had directed him to commit other crimes, Gates said, such as not disclosing foreign bank accounts and omitting information from a court deposition. Gates pleaded guilty in February to lying to investigators and conspiracy against the United States, and struck a plea deal to fully cooperate with the special counsel.


Wells Fargo admitted in a regulatory filing that as many as 400 homeowners between April 2010 and Oct. 2015 may have needlessly lost their homes to foreclosures because of errors in the way the bank evaluated applications to participate in the Home Affordable Modification Program. Wells Fargo set aside $8 million to deal with the consequences.


Nine NASA astronauts — five of whom flew on the space shuttle — have been announced as the crew of new commercial spacecrafts built by Boeing and SpaceX. Beginning next year, these crafts will head toward the International Space Station in the first manned missions from the U.S. since the shuttle program ended seven years ago.


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