Financial Review

Irrational Spending

….Kicking off 3Q earnings season. IMF meets in DC. EPA to scrap Clean Power Plan. Waiting on Catlans. Google sold ads to Russian trolls. Weinstein out. Trump-Corker battle. California goes after drug prices. Vet ETF. Thaler’s crazy economics.

Financial Review by Sinclair Noe for 10-09-2017

 

DOW – 12 = 22,761
SPX – 4 = 2544
NAS – 10 = 6579
RUT  – 6 = 1503
10 Y bond market closed
OIL + .23 = 49.52
GOLD + 7.50 = 1284.60

 

Third quarter earnings season kicks into high gear this week with 8% of the S&P 500 slated to report results. And while companies are forecast to reveal a healthy pace of earnings growth, expectations are already very high. A solid earnings season may not be enough to move the market higher. Even though the S&P 500 Index climbs to new heights on an almost daily basis, analysts have been quietly reducing their third-quarter profit forecasts, seeing an earnings gain of just 4%, after two quarters of over 10% growth.  Analysts also see sales growth of 4% year-over-year, a slight deceleration for the second quarter’s 5% growth. Earnings estimates tend to start out muted as company executives guide analysts lower only to beat the forecasts in a phenomenon known as under-promise and over-deliver. The expected gain in earnings is less than the estimated 5 percent jump in revenue, implying negative earnings leverage. If companies can’t beat estimates, then there is no justification for near record prices. And more than just beating estimates, looking forward, Wall Street will expect strong fourth quarter and 2018 guidance.

 

As central bankers, finance ministers and money managers descend on Washington this week for the fall meetings of the International Monetary Fund, they will confront an unusual reality: global markets and economies rising in unison. Global economic growth came in at 2.6% in 2016. In its last update in July, the IMF kept its 2017 estimate of economic growth unchanged at 3.5 percent, which would be higher than the 3.2 percent recorded in 2016. The IMF tends to issue rosy projections and then trim their forecast. In Japan, a reform-minded government and aggressive action by the central bank have pushed growth to 1.5 percent — up from 0.3 percent three years ago. In Europe, strong domestic demand in Germany and robust recoveries in countries like Spain, Portugal and Italy are expected to spur 2.2 percent growth in the eurozone. That would be more than double its average annual growth in the previous five years. Aggressive infrastructure spending by China; bold economic reforms by countries including Brazil, Indonesia and India; and rising commodities prices (helping countries such as Russia) have spurred growth in emerging markets. And in the United States, despite doubts about President Trump’s ability to pass a major tax bill, the economy and financial markets chug along. But the big question is what happens when global central bankers stop their easy money policies?

 

Environmental Protection Agency Administrator Scott Pruitt said he will sign a new rule overriding the Clean Power Plan, an Obama-era effort to limit carbon emissions from coal-fired power plants. For Pruitt, getting rid of the Clean Power Plan will mark the culmination of a long fight he began as the attorney general of Oklahoma. Pruitt was among about two-dozen attorney generals who sued to stop President Barack Obama’s push to limit carbon emissions. Closely tied to the oil and gas industry in his home state, Pruitt rejects the consensus of scientists that man-man emissions from burning fossil fuels are the primary driver of global climate change. The Clean Power Plan was designed to cut U.S. carbon dioxide emissions to 32 percent below 2005 levels by 2030. The rule dictated specific emission targets for states based on power-plant emissions and gave officials broad latitude to decide how to achieve reductions.

 

Still no word on a split in Spain. Catalonia’s secessionist leader faced increased pressure to abandon plans to declare independence from Spain, with France and Germany expressing support for the country’s unity. The Madrid government said it would respond immediately to any such unilateral declaration. A week after a vote on independence which the government did its utmost to thwart, the tension also took its toll on the business climate of Spain’s wealthiest region. Three more Catalonia-based companies joined a business exodus from the region that has gathered steam since the Oct. 1.

 

Google has discovered Russian operatives spent tens of thousands of dollars on ads on its YouTube, Gmail and Google Search products in an effort to meddle in the 2016 U.S. presidential election. The ads do not appear to be from the same Kremlin-affiliated entity that bought ads on Facebook, but may indicate a broader Russian online disinformation effort. Both Twitter and Facebook recently detected and disclosed that suspected Russian operatives, working for a content farm known as the Internet Research Agency in St. Petersburg, Russia, used their platforms to purchase ads and post content that was politically divisive in a bid to influence Americans before and after the November 2016 presidential election. The Internet Research Agency employs hundreds of so-called “trolls” who post pro-Kremlin content, much of it fake or discredited. Congressional committees have launched multiple investigations into Russian interference, but concern about Silicon Valley’s role has surged over the past month.

 

Harvey Weinstein was fired by the Weinstein Company. The move follows a New York Times exposé  that revealed one of Hollywood’s most powerful film producers faces accusations of sexual harassment spanning decades. Now, the company Weinstein formed will change its name. Weinstein is expected to seek therapy.

 

The White House tied a new “Dreamer” deal to immigration reforms. It sent Congress a list of demands, including faster deportations and funding for the Mexican Border wall, “as part of any legislation addressing the status of Deferred Action for Childhood Arrivals recipients.” Trump scrapped the program last month; it expires Mar. 2018. Polls show voters side with Democrats on shielding the immigrants, known as Dreamers. By adopting a hard line, Trump is setting the stage for a prolonged fight in Congress.

 

Trump traded Twitter insults with a major Republican critic. Trump attacked Tennessee senator Bob Corker, claiming the lawmaker was retiring because Trump had refused to endorse him. Corker, who is chair of the foreign relations committee, retorted that the White House had become an “adult day care center,” and he described Trump as  irrational, ill-informed, impulsive, unfit for command, and increasingly a danger to the country and the world. The war of words could have implications for tax reform legislation, which is still in the early stages. Due to a process known as budget reconciliation, the Republicans can write and pass tax measures without any support from Democrats but firs they have to reach agreement within their own ranks. With Republicans holding 52 seats in the 100-member Senate, only a few defections could sink a bill – as happened to their failed efforts to repeal Obamacare. Some of the sticking points that could divide Republicans include whether or not the tax plan will add to the deficit, how the cuts will be paid for, and whether the benefit of cuts will go the wealthy or the middle class. And that is just the framework, not the finishing trim.

 

California Governor Jerry Brown has signed state legislation requiring drug companies to report certain price hikes for prescription medicines in a move that could set a model for other states to follow. The law aims to provide more transparency around pharmaceutical and biotech company pricing methods for their medicines, and requires drug manufacturers to give a 60-day notice if prices are raised more than 16 percent over a two-year period. The law also requires health plans and insurers to file annual reports outlining how drug costs affect healthcare premiums in California. At least 176 bills on pharmaceutical pricing and payment have been introduced this year in 36 states.

 

A new exchange-traded fund, slated to begin trading before the end of the year, is dedicated to only holding companies that are seen as supportive to veterans and their families. the InsightShares Military Veterans ETF will only hold companies “determined to be military friendly,” a term the filing uses as a registered trademark. The term “refers to a standard created by Victory Media that measures a company’s commitment, effort and success in creating sustainable and meaningful employment opportunities for our nation’s military veterans”.

 

Richard Thaler, a University of Chicago economist, was today announced as this year’s recipient of the Nobel Prize for Economics. Prof Thaler’s central insight is that we are not the rational beings beloved of more traditional economic theory. Given two options, we are likely to pick the wrong one even if that means making ourselves less well off. Lack of thinking time, habit and poor decision-making mean that even when presented with a factual analysis (for example on healthy eating) we are still likely to pick burger and chips. We’re hungry, we’re in a hurry and burger and chips is what we always buy. Nudge theory takes account of this, based as it is on the simple premise that people will often choose what is easiest over what is wisest. Thaler didn’t contend that humans were randomly irrational. More importantly, he observed that people are predictably irrational. If irrational human behavior can be predicted, then it can be incited, or nudged. Thaler coined the term “nudging” to describe cheap and easy interventions that change people’s decision-making. Tests have shown that putting healthier foods on a higher shelf increases sales. The food is more likely to be in someone’s eye line and therefore “nudge” that person towards the purchase – whether they had any idea about the health benefits or the obesity argument or not. Such theories, which sit in a big bucket of academic study called “behavioral economics”, are what Prof Thaler is famous for. When asked how he would like to spend the Nobel prize money, Thaler answered: “I will try to spend it as irrationally as possible.”

 

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