Let Them Eat Cake
….Bannon blows out. Stocks drift lower. Continued WH fallout. China trade war in the offing. Corinthian student debt relief. Foot Locker falls. Chicken Soup-y IPO. Waiting on the Eclipse.
Financial Review by Sinclair Noe for 08-18-2017
DOW – 76 = 21,674
SPX – 4 = 2425
NAS – 5 = 6216
RUT – 1 = 1357
10 Y – .01 = 2.19%
OIL + 1.64 = 48.73
GOLD – 3.30 = 1285.20
Stocks drifted lower into the close, wrapping up a rough week. While the day’s losses were small, Friday marked the first time stocks haven’t risen the day after a more than 1 percent drop since Nov. 8. For the week, the Dow was down 0.8 percent, the S&P 500 was down 0.7 percent and the Nasdaq fell 0.6 percent. With a decline of more than 2 percent for the last two weeks, the S&P marked its weakest two-week period since before Trump was elected on November 8. The S&P 500 closed roughly 1 percent below its 50-day moving average, the furthest below that key technical measure since mid-April. Today also marked the eighth straight day in which the NYSE and Nasdaq had more stocks making new 52-week lows than highs.
Stocks started the trading session in negative territory then struggled into the green, with a sharp spike on word that Trump had fired chief strategist Steve Bannon; that news sent up a cheer on the trading floor of the New York Stock Exchange but stocks drifted lower into the close. Even after Bannon’s exit, it’s far from clear Trump will tone down his rhetoric. His first instinct is to fight anyone who challenges him and lash out on Twitter, an approach that has pushed his approval ratings to historic lows for a president in his first year. Consider Trump’s disastrous response to the violent protests at the University of Virginia last weekend. In firing Bannon, Trump has lost his chief ideologue, the man who channeled his base and advocated for the populist-nationalist policies that helped propel Trump to victory. But he has gained an unpredictable and potentially troublesome outside ally who has long experience running a media organization, and an even longer list of enemies. Sources close to Bannon say he is likely to go back to Breitbart News, the right-wing website he ran before joining the campaign last year. Whether this is good or bad or just chatter, it is another bit of chaos in a very bad week for the White House. From the Wall Street perspective, it looks like Gary Cohn and General Kelly won the latest round of palace politics; it remains to be seen if they can translate that into getting the legislative agenda back on track.
Also today, Carl Icahn ended his role as a special adviser to Trump after facing criticism that his recommendations on policy could help his own investments, creating a potential conflict of interest.
Meanwhile, the fallout from the president’s comments on Charlottesville continues. Following the statements against hate and bigotry from the Joint Chiefs and all the top military leaders, secretary of state Tillerson also distanced himself from the president’s position. Members of the president’s Arts and Humanities Commission have resigned. “I can’t even believe I have to write this: standing up to Nazis is essential; there are no good Nazis. Or Klansmen, or terrorists.” That comment, along with a million dollar donation to the ADL, came from Fox CEO James Murdoch. (Oddly, there was no mention of Murdoch’s comments on Fox News’ site.) Mitt Romney called on president Trump to apologize (can you imagine that and a full eclipse happening in the same week?)
The US has initiated an investigation into China’s theft of US intellectual property (IP) using Section 301 of the Trade Act of 1974. What that boils down to is that the US just fired the first shot in a trade war with China. China sees the use of Section 301 as an act of aggression because it allows the president of the United States to act against the Chinese economy without consulting the World Trade Organization. China has been warning the Trump administration against bypassing the WTO since January. And even though initiating a 301 investigation is not a violation of the WTO in and of itself, earlier this week, Chinese state media was alive with condemnation of the Trump administration for even considering it. That isn’t to say that the US doesn’t have a legitimate grievance — experts around the world pretty much agree that China has a problem with stealing company’s trade secrets. But again, it’s how the US is going about doing this that is offensive not only to China, but to US allies watching too. Even without anti-globalist Steve Bannon in the White House, many in the Trump administration will carry on his ideology through policy.
All of this makes even our allies nervous about their dealings with this administration, and according to reports they are prepared to fight fire with fire. China is ready too, of course — and it has quite a lot of fire. From 2001 to 2016, US imports from China increased by a factor of 3.5, while US exports to China increased by nearly a factor of six. China consumes a ton of products made by Trump’s base. It is the largest market for US soybeans (62% in 2016) and airplanes (25% of Boeing passenger planes in 2016). It the second-largest market for US cotton (14% in 2016), auto (17% in 2016), and semiconductors (15% in 2016). But never mind them, and never mind any of that. You have to also think about what a trade war would do to the cost of things Americans buy. A trade war between US and China will hurt not only Chinese manufacturers, but also upstream suppliers and downstream distributors such as US retailers. If China retaliates, the price of American goods will go up, and markets that were once open to us may start to close.
Tens of thousands of students who attended Corinthian Colleges, a now-defunct for-profit college chain, could be eligible for student loan relief. The Consumer Financial Protection Bureau as well as several states attorneys general announced a proposed settlement Thursday, which if approved, would require private equity firm, Aequitas Capital Management, to forgive $183.3 million worth of student loans that the firm helped fund for former students of Corinthian Colleges. About 41,000 students could be eligible for debt relief under the agreement, which is subject to approval by a U.S. District Court judge in Oregon. Corinthian Colleges filed for bankruptcy in 2015, amid accusations the school used inflated job placement and graduation rates to lure students. In a complaint accompanying the settlement, the CFPB also outlined an alleged loan scheme of which Aequitas was a part. Through that scheme Aequitas funded and purchased private loans with high interest and default rates offered to Corinthian students as a way for the school to stay in line with federal regulations governing for-profit colleges. For-profit colleges are subject to a regulation known as the 90/10 rule, which requires that they can’t get more than 90% of their revenue from federal financial aid. In an effort to comply with the regulation, Corinthian raised its tuition beyond the maximum students could take out through the federal financial aid program.
Oh, this was ugly. Foot Locker were crushed today – down 28%, after the company reported a 6% second-quarter same-store sales decline, and a 4.4% year-over-year decrease in sales, to $1.78 billion. The FactSet consensus was $1.80 billion. In an earnings statement, Foot Locker Chief Executive Richard Johnson reaffirmed the company’s “strong” position in the premium sneaker market and said the company was hurt by “limited availability of innovative new products in the market.” Johnson went on to say he wasn’t worried about Amazon.com. Umm, you might want to be a little worried.
If you owned Foot Locker, you likely need something to sooth your frazzled nerves and lighter wallet, maybe a nice cup of chicken soup. Chicken Soup for the Soul Entertainment had its IPO today. And it was ugly, down about 9%, but let’s focus on the good stuff. It was a unique IPO. Much like the Chicken Soup books, the initial public offering was crowdsourced. CSS Entertainment was the largest-ever exchange-listed IPO completed under Regulation A+ (an alternative to a traditional IPO that is favored by smaller companies), as well as the first to list on the Nasdaq Global Market. This process opened up the offering to the general public. Whether the price drop can be attributed to the crowdsourcing or because the crowdsourcing pushed the offering to the maximum allowed – time will tell. Consider this a learning experience. But finally something new and egalitarian in a Chicken Soup-y kind of way.
Bing is bigger than you think. Bing claims that fully one-third of searches in the US are powered by Bing, either directly or through Yahoo or AOL (both of which provide results generated by Microsoft (It’s true, I googled it.)
Monday is eclipse day and it will be expensive. The eclipse will happen during the workday, and many workers will likely try to watch it. According to an analysis from Challenger, Gray & Christmas, it will cost employers some $694 million collectively. The company did not even factor in the employees that might be taking time off to actually travel to watch the eclipse, if they don’t live in its direct path. That also does not include the cost of those glasses you need if you want to look directly at the sun. And you do not want to look directly at the sun without ISO approved glasses. It is called solar retinopathy and it can result in blindness, even in just a few seconds so be careful.