Financial Review

Little Record

…Russell 2000 record high. Bonds continue to fall. Zuck goes to Europe. Senate releases records on Trump investigation. Also, financial disclosures. CEO-average worker pay gap grows. Senate votes for net neutrality. Macy’s surprises Macy’s.

Financial Review by Sinclair Noe for 05-16-2018

DOW + 62 = 24,768
SPX + 11 = 2722
NAS + 46 = 7398
RUT + 16 = 1616
10 Y + .02 = 3.10%
OIL + .23 = 71.54
GOLD – .10 = 1291.20


Stocks recovered, bond did not. Smaller companies continued to outperform their larger rivals with the Russell 2000 reaching a record high. The Russell 2000 is up about 5% year-to-date. The S&P 500 Index rose above its average price for the past 100 days. The S&P 500 is up about 1% year-to-date, but still down 5.5% from its January 26th high. Bonds have cratered over the past couple of days, pushing the yield on the 10-year note up 10 basis points, to the highest level in 7 years. The two-year Treasury note yield also notched a new multiyear high of 2.593 percent, its highest since August 11, 2008. Yields have been on the move higher this month ever since the Fed said on May 2nd that inflation was moving closer to its 2 percent target. Earlier inflation expectations led to a rise in interest rates in February, sparking a widespread equity sell-off as stock traders grew nervous over whether the economy was ready for increased borrowing costs. For now, the equity markets seem fairly sanguine about the recent spike in rates.


Weeks of diplomatic progress were thrown into doubt when North Korea postponed high-level talks with Seoul and threatened to pull out of its historic meeting with the United States. The uncertainty compounded investor jitters ahead of United States-China trade negotiations.


Mexican negotiators don’t expect North American trade talks to wrap up this week after all. The likelihood that an early rewrite of the North American Free Trade Agreement won’t be done this week extends the uncertainty for companies with complex cross-border supply chains. The countries are divided over issues such as a U.S. demand for a minimum level of North American content to be sold without tariffs in the U.S. Mexican officials also are frustrated by U.S. demands for the pact to sunset in five years, which Mexico’s Economy minister says would add uncertainty for auto makers.


Facebook shares were the biggest drag on the S&P 500, down 0.6 percent, on news that Chief Executive Mark Zuckerberg would appear before members of the European Parliament to answer questions about the improper use of users’ data. Zuckerberg’s appearance will not be open to the public. Zuckerberg has faced strong criticism from British MPs for his three refusals to appear before a British parliamentary committee investigating fake news. Potentially adding to their frustration, the Facebook boss will meet the French president, Emmanuel Macron, next Wednesday. Zuckerberg’s trip to Europe comes ahead of the EU’s data protection regulation, which comes into play on 25 May, a landmark law allowing any individual in Europe to ask a company for data held about them.


The Senate Judiciary Committee has released more than 2,500 pages of testimony and documents. The committee has been conducting one of the investigations into the Trump campaign’s contacts with Russians, and the documents revealed new details about the run-up and the aftermath of what is thought to be one of the key episodes of the Trump campaign’s interactions with Russia. The data dump also includes new details on Donald Trump Jr.’s meeting with Russians in Trump TowerThe release came on the same day that another Senate panel, the Intelligence Committee, gave bipartisan validation to a more than year-old assessment by American intelligence agencies about the Russian effort, announcing that after careful review, it agreed that Russian President Putin ordered an influence campaign designed to sow discord and boost Trump’s candidacy.


Also today, Trump released his financial disclosure filing with the Office of Government Ethics, which requires top officials to disclose their assets, income and liabilities. The filing says that Trump “fully reimbursed” his lawyer Michael Cohen. Cohen is known for paying porn star Stormy Daniels $130,000 in hush money to silence her about an alleged affair with Trump. The filing gives conflicting accounts about the reason for the payment.  At issue is whether the payment represented a personal expense or an unreported loan to Trump’s campaign – which could run afoul of federal election law.


Factory production regained its footing in April to push capacity utilization to the highest since 2015, indicating the industry will support economic growth this quarter. Factory output rose 0.5% m/m (matching est.) after being unchanged in March.


Housing starts dropped 3.7 percent to a seasonally adjusted annual rate of 1.287 million units in April. Data for March was revised slightly higher. Single-family homebuilding, which accounts for the largest share of the housing market, edged up 0.1 percent. Groundbreaking activity on multi-family housing units dropped 11.3 percent. Residential construction has been hamstrung by rising prices for building materials and shortages of land and skilled workers. While a survey on Tuesday showed confidence among single-family homebuilders perked up in May, builders complained that “the record-high cost of lumber is hurting builders’ bottom lines and making it more difficult to produce competitively priced houses for newcomers to the market.” The Trump administration in April last year imposed anti-subsidy duties on imports of Canadian softwood lumber. Investment in homebuilding was flat in the first quarter after growing at a 12.8 percent annualized rate in the October-December quarter.


The first comprehensive study of the massive pay gap between the US executive suite and average workers has found that the average CEO-to-worker pay ratio has now reached 339 to 1, with the highest gap approaching 5,000 to 1. The study includes data on almost 14 million workers at 225 US companies with total annual revenues of $6.3 trillion. In 188 of the 225 companies in the report’s database, a single chief executive’s pay could be used to pay more than 100 workers; the average worker at 219 of the 225 companies studied would need to work at least 45 years to earn what their CEO makes in one. According to a recent Bloomberg analysis of 22 major world economies, the average CEO-worker pay gap in the US far outpaces that of other industrialized nations. The average US CEO makes more than four times his or her counterpart in the other countries analyzed.


The Senate voted 52 to 47 with three Republicans joining all the Democrats and independents, in favor of a resolution to eliminate the Republican-led Federal Communications Commission’s December gutting of earlier rules to establish net neutrality. Critics of the FCC rollback say they’re worried about consumers being forced to pay more for less consistent or slower service.  The win could be short-lived. The Senate measure needs to win a vote in the House where Republicans have a larger majority, and to get a signature from Trump, who supports the FCC’s action to kill net neutrality. “Net neutrality” doesn’t make for catchy campaign slogans, but there are indicators that voters are clocking this issue. According to data provided by Google, net neutrality regularly ranks among top political searches in each state.


The retailing index was boosted by a 10 percent surge in Macy’s shares after the department store operator reported strong quarterly results and lifted its full-year profit forecast. Shares of rivals Kohl’s and Nordstrom were up about 2 percent each. Macy’s is off to a better start to 2018 than anyone saw coming, including Macy’s itself. On a call with investors to discuss the company’s first quarter, CEO Jeff Gennette said the momentum picked up at the end of last year during the 2017 holiday season carried into the start of the new year, “in fact, exceeding our own expectations on most measures,” he noted. Sales, earnings, and cash flow all came in ahead of what the company predicted, prompting the retailer to raise its outlook for the rest of the year.


Cisco Systems beat earnings and revenue estimates and gave an upbeat forecast for fiscal fourth-quarter sales, a signal of healthy demand for equipment and software that runs the internet and corporate networks. The stock dropped 4% in after-hours trade.


Twitter is turning to greater automation in its battle against abuse on its platform, saying its software will start automatically demoting response posts that it determines are likely to disrupt or disturb users’ conversations. The change, which will roll out over the coming week, isn’t designed to deal with accounts or messages that violate Twitter’s content policies, which the company says it already takes action against. Instead, the new approach targets accounts that Twitter says exhibit signs of ‘troll-like behavior’ and that ‘distort and detract from the public conversation on Twitter.’


Ford is resuming production of its F-Series pickup trucks, ending assembly line shut downs at two of its most important plants that have lasted more than a week. Returning to full production is likely to take some time as Ford scrambles to re-establish manufacturing of critical components from a supplier. Ford suspended production of the F-Series last week due to a lack of critical components from its supplier Meridian Lightweight Technologies. Meridian’s plant in Eaton Rapids, Michigan, suffered extensive damage after an explosion and fire in early May.  Ford, along with BMW, Mercedes-Benz and General Motors were forced to suspend or curb production at several U.S. plants while looking for an alternate source for components. It is estimated Ford lost the production of 70,000 to 80,000 F-150 pickups since shutting down assembly lines. Ford has said its financial results for the second quarter will take a hit, though the exact cost remains to be seen.

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