Keep Calm, Carry On
….Dow breaks 26k and fades. Gov shutdown? Inflation in your future? Earnings news: BP, Citi, UnitedHealth. Wells Fargo redline. States sue for net neutrality. Bitcoin breakdown. Detroit Auto. Alibaba AI can read better than you.
Financial Review by Sinclair Noe for 01-16-2018
DOW – 10 = 25,792
SPX – 9 = 2776
NAS – 37 = 7223
RUT – 19 = 1572
10 Y – .01 = 2.54%
OIL – .56 = 63.74
GOLD – 1.60 = 1339.00
The Dow first closed above 25,000 on January 4. Today, 7 trading days later, the Dow Industrial Average broke through 26,000 this morning, then faded, then it turned negative. And next thing you know, the Dow lost more than 380 points from the intraday high to the intraday low; a 294 point swing from intraday high to close. If you look at year-to-date performance, you have the broad popular indices up roughly 3 to almost 5 percent in two weeks’ trading. That’s fairly aggressive, and so today there was a pause – a fairly volatile pause. We are still very early in the earnings reporting season, but so far, more than three quarters of the 26 S&P 500 companies that have reported have topped profit estimates, according to Thomson Reuters. Over the last two weeks investors have bought the 2nd largest amount of S&P 500 futures since at least 2010, while at the same time net holdings of S&P 500 calls are the highest and the net holdings of S&P 500 puts are the lowest since at least 2010. Perhaps expectations are too high, and traders do not have enough protection. At these levels, even a 2% downward move could induce jitters.
And the government might shut down on Friday. Maybe, maybe not. A short-term government shutdown does not seem to have lasting impact on equity markets, but it can deliver a quick downward hit. Volatility tends to increase around these events, but they historically have had little lasting impact on markets. Politicians have just 3 more days to work out a deal. Democrats are demanding protection for DACA, an idea that Trump shot down last week. A continuing resolution, a stop gap measure might be in the works, or not. Meanwhile, the Department of Justice said it is appealing against a federal judge’s ruling that temporarily blocked the Trump administration from phasing out the Obama-era program granting protections to young, undocumented immigrants – and asking the supreme court to intervene. The department said it had filed an appeal in the ninth circuit court and intends to “take the rare step” later this week of seeking a fast track to the supreme court.
Inflation expectations rose in December to the highest level in months as younger and middle-age workers expected higher prices and earnings. According to a Federal Reserve Bank of New York survey of consumer expectations, which the Fed considers among other data as it continues to gradually raise interest rates, median one-year ahead expectations jumped to 2.82 percent last month, from 2.61 percent in November, the highest reading since February. The three-year inflation measure was 2.89 percent, up from 2.78 percent in the previous month, reaching its highest point since April. On both counts the New York Fed said the increase was largely driven by survey respondents younger than 40.
Energy shares weighed on the S&P 500 today. Oil prices dropped off three-year highs. Fundamentally, oil has been pushed higher by an effort led by OPEC and Russia to withhold production since January last year. The cuts are set to last through 2018. The restraint has coincided with healthy oil demand, pushing up crude by almost 15 percent since early December. As prices have moved higher, US shale producers have become more active. The U.S. rig count, an early indicator of future output, rose by 10 oil rigs last week to 752 and is much higher than a year ago when only 522 rigs were active.
BP is taking a $1.7 billion charge to its fourth quarter earnings due to its 2010 Gulf of Mexico oil spill. According to the British oil giant, it now estimates disaster relief has reached around $62 billion. Investors are already zeroing on this quarter’s bottom line after BP announced a $1.5 billion charge thanks to the new tax plan.
Citi is working to close the gender pay gap. The bank announced it will increase job compensation for women and minorities in the U.S., U.K. and Germany. The move comes after an internal assessment revealed those groups were paid less than men. Citigroup reported a loss in the fourth quarter, as its earnings were wiped out by a $22 billion charge related to the new tax law, but over the longer-term, Citi and the other big banks will benefit from tax changes. Adjusted earnings per share came in at $1.28, beating expectations of $1.19 a share.
A federal judge in Philadelphia rejected Wells Fargo’s bid to dismiss that city’s lawsuit accusing the largest US mortgage lender of predatory lending targeting black and Hispanic borrowers. The lawsuit is one of several against big lenders by major U.S. cities claiming that mortgage lending discrimination causes more defaults by minority borrowers, lower property tax revenue, and higher costs to combat crime and blight. It is separate from the scandal over the creation by San Francisco-based Wells Fargo of unauthorized customer accounts.
The attorneys general of 22 states filed a lawsuit to block the Federal Communications Commission’s repeal of regulations that ensure an equal and open internet. The attorneys general said the rollback of so-called net neutrality rules were “arbitrary and capricious” and a reversal of a longstanding policy to prevent internet service providers from blocking or charging websites for faster delivery of content to consumers.
CVS wants beauty manufacturers to get real. The drugstore chain says it’s banning photo manipulation in its store-brand makeup displays. It’s also requiring all other beauty brands that sell products in its stores to commit to the ban by 2020 or face having an alert label placed on in-store promotions and displays that featured touched up images of models.
Merck surged more than 7 percent after early results from a key study showed its blockbuster drug Keytruda and two chemotherapy medicines helped lung cancer patients live longer and stopped the disease from advancing.
UnitedHealth rose 2.3 percent after the largest U.S. health insurer reported results that beat estimates and raised its 2018 earnings outlook.
General Electric fell 3.4 percent after raising the prospect of breaking itself up and announced nearly $11 billion in charges from its long-term care insurance portfolio and new U.S. tax laws.
Netflix is looking to expand its reach. The streaming giant says it’s “still exploring” ways to launch on the Nintendo Switch. That’s despite a tweet from Netflix support saying otherwise. Last November, Nintendo launched a deal with Hulu and said it was in talks with other companies such as Netflix and Amazon.
Nestle has agreed to sell its U.S. confectionery business to Italy’s Ferrero for $2.8 billion. For Nestle, which first sold milk chocolate in the 1880s, a consumer shift away from junk and sugary foods has led the Swiss company to focus on “nutrition, health and wellness”, although it says it is committed to its non-U.S. confectionery business.
Bitcoin fell below $12,000 for the first time since December, as investors monitored warnings from regulators and reports of an escalated crackdown on the cryptocurrency market in China. You have to think that $10,000 is an important psychological barrier, and any break below could lead to an even bigger rout. Ethereum was trading at $1,090, down more than 18 percent.
The Detroit Auto Show officially opened Saturday, giving industry experts and the media a chance to preview new cars before they hit the streets. The show will open to the public on Jan. 20. Ford will significantly increase its planned investments in EVs to $11 billion by 2022 and have 40 hybrid and fully electric vehicles in its model lineup. Chairman Bill Ford said, “We’re taking our mainstream vehicles, our most iconic vehicles, and we’re electrifying them.” Ford also showed off its 2019 Ranger, after pulling the midsize pickup off the market in North America eight years ago. Transportation Secretary Elaine Chao attended the Detroit Auto Show and said the Transportation Department will “carefully and responsibly” review General Motors’ request to test an autonomous car without a steering wheel.
20 years ago, IBM’s Deep Blue beat Garry Kasparov in a game of chess and the practice of pitting human against computer continues to this day. Google’s AI was the first to beat a Go champion a couple of years back. Now the computers beating humans at reading and doing it better than humans. Alibaba’s deep neural network and an AI software developed by Microsoft have outscored humans on a reading comprehension test, which demanded answers to more than 100,000 questions. The test, which was devised by Stanford University, specifically to see how human reading compares to that of AI, gives passages for both to read and then asks questions about what has been read. So, a passage from Oliver Twist might ask, “What did the boys at the workhouse eat?” The correct answer is gruel. It’s important to understand that “comprehension” doesn’t mean “interpretation”, only that it has extrapolated the correct data from what is available. It still takes a human to say, in the case of our Oliver Twist example, “Ewww – gruel!” or to ask our robot overlords for “more, please.” Reading comprehension is one of the holy grails for customer service roles, which is why companies like Alibaba and Salesforce are so keen.
The entire continental U.S. is experiencing widespread flu right now, the first time in the 13 years of the current tracking system that this has happened, according to the CDC. The rate of flu hospitalizations nearly doubled last week to 22.7 per 100,000 people compared with the previous seven days. Federal authorities also disclosed that 20 children have died from the virus and 7% of senior deaths last month were to blame on this year’s virulent strain.