Financial Review

Make or Break

…Stocks rally to near record highs. Trade wars on back burner for Wall Street. China threatens Apple. Watch tomorrow’s bond auction. JOLTS – jobs all over Consumer borrowing slows. Disney beats. Tesla going private? Wildfires running wild.

Financial Review by Sinclair Noe for 08-07-2018

DOW + 126 = 25,628
SPX + 8 = 2858
NAS + 23 = 7883
RUT + 3 = 1688
10 Y + .04 = 2.97%
OIL + .05 = 69.06
GOLD + 3.30 = 1211.50

The S&P 500 is up for 4 straight sessions and is about 14 points shy of a record high. Obviously, a break out to a new high would be very bullish. Also, don’t be surprised if the old high acts as resistance. The Nasdaq is on a 6-day winning streak. Also, the Nasdaq Composite is about 50 points from its record high. And the Russell 2000 is about 20 points from a record. So, it is safe to say the market is at a make or break level. Second-quarter results so far have been stellar, with S&P 500 companies reporting earnings growth of 24% and sales gains of 9.8%, according to FactSet. Of the 428 companies in the S&P 500 that have released second-quarter earnings so far, 79 percent reported above analyst expectations; that’s the highest beat rate in at least 24 years. Tax cuts have helped corporate profitability but that is not the full story. Earnings per share without the tax change would be 15.5 percent higher, leading to upward revisions for the rest of the year.


Amid the fanfare of Apple reaching $1 trillion in market valuation, investors may be missing another more important milestone of the same dollar level. Namely, U.S. companies appear poised to eclipse the $1 trillion mark in share buybacks this year, a pivotal record that will keep the stock market going even as many retail investors are beginning to fear equities. August is traditionally the biggest month for share buybacks.


Trade worries have been put on the back burner for now even as China shot off another verbal volley against the U.S. via one of its newspapers. A late Monday editorial in China’s People’s Daily declared the country won’t give in to “trade blackmail.” China threatened to place tariffs on $60 billion of American goods last week if the White House goes ahead with its plans to impose new levies on Chinese products.


An article today in the state-backed People’s Daily warned that Apple could be a target  of “anger and nationalist sentiment” in the ongoing trade war. Apple made $9.6 billion in revenues in China in the June quarter, which helped Apple hit a $1 trillion valuation. But the continuing trade war between the U.S. and China could leave Apple and other U.S. firms vulnerable as “bargaining chips” for Beijing. So far, Apple has been broadly insulated from the trade war. Trump reportedly told Apple CEO Tim Cook in June that iPhones assembled in China would be spared from levies. People’s Daily wrote. “It seems U.S. companies doing business in China are the biggest winners from China-U.S. trade. The Chinese market is vital for many top U.S. brands, giving Beijing more leeway to play hardball in the trade conflict.”


Meanwhile, the U.S. Trade Representative’s office has just published a final tariff list targeting 279 import product lines. The United States will begin collecting tariffs on another $16 billion in Chinese goods on Aug. 23. The latest list brings to about $50 billion in goods that now face a 25 percent tariff.


World shares edged toward a six-month high. Chinese stocks posted their best single day gain in over two years. China’s central bank raised the cost of shorting the yuan, which stabilized the currency and helped boost the euro against the dollar. Also, a sharp rally in Europe’s oil and mining firms. Turkey’s lira recovered as much as two percent from Monday’s losses of more than five percent after Washington had moved to end duty-free access to U.S. markets for some Turkish exports.


The U.S. government auctions $26 billion in new 10-year Treasury notes tomorrow, usually a routine affair, but more interesting this month because the offering is a record size and it could bring a 3 percent yield at auction for the first time in 7 years. Investors sold the 10-year note Tuesday, ahead of the auction, driving the yields up to 2.97%. May, 2011 was the last time we had a coupon at 3 percent or higher, just before the U.S. was downgraded. The debate in the bond market focuses on whether the 10-year yield, which briefly traded above 3 percent in the cash market last week, will continue to drift below that psychological level or return there and hold above it. For one, bond yields, which move opposite price, typically drift lower in August. Another concern is that perhaps heavier-than-usual pension buying, which has been driving longer-end rates lower lately, may be about to slow down. Many US corporations get to deduct pension contributions at old tax rates which are high. They get a hefty deduction, but that goes away in September and many corporations have been front-loading their bond purchases.


On the economic-data front, the latest report from the Labor Department showed there were 6.66 million job openings at the end of June, up fractionally from May’s levels and the third highest in history. Job openings increased in educational services but decreased in transportation, warehousing, and utilities. The quits rate, seen as a proxy for employee willingness to search for a better-paying position, stayed at 2.3% for the fourth month in a row.


Americans increased their borrowing in June at the slowest annual pace in three months as the level of credit card debt fell slightly. The Federal Reserve said consumer debt rose a seasonally adjusted $10.2 billion in June from the prior month to a total of $3.91 trillion. Consumer borrowing increased at an annual rate of 3.1 percent in June, the slowest annual gain since March. The category that includes credit cards slipped by $185 million in June after having surged by nearly $9.6 billion in May.


Walt Disney reported a 7 percent rise in quarterly revenue, driven by the success of superhero movie “Avengers: Infinity War” and more visitors to its theme parks and resorts. Net income attributable to Disney rose to $2.9 billion, or $1.95 per share, in the third quarter ended June 30, from $2.3 billion, or $1.51 per share, a year ago. Disney, which is buying some of Twenty-First Century Fox’s TV and film units, said total revenue rose to $15.2 billion from $14.2 billion.


Tesla CEO Elon Musk tweeted today: “Am considering taking Tesla private at $420. Funding secured.” That tweet sent the stock soaring from $342 to around $370, an 8% jump. Then the Nasdaq exchange temporarily halted trading in the shares, pending clarification of material news by the company. Later, Musk said: “A final decision has not yet been made,” he said. Trading on the NASDAQ resumed after Tesla posted the message. If Musk’s aim was to temporarily boost Tesla’s stock in order to force losses on short sellers, it could be considered stock manipulation, which is illegal. Musk has a running feud with the short sellers – and there are plenty of Tesla shorts – some 20% of shares outstanding are shorted. If, on the other hand, Musk can demonstrate that he has actually arranged financing for a private buyout, or made serious efforts to do so, he might be off the hook. Shortly before Musk posted his tweet, the Financial Times reported that Saudi Arabia’s sovereign wealth fund has bought about $2 billion worth of Tesla shares, representing a 4.5% stake in the company. So Saudi money could be part of a buyout offer. Musk will now be under pressure to promptly disclose whether a buyout offer is serious and where the money would come from, or we can watch the lawsuits fly.


Snap shares were up over 11% in after-hours trading after the social-media company beat earnings estimates but disappointed on user growth.


Papa John’s shares dropped nearly 10 percent in after-hours trading after the company’s second quarter results disappointed on both the top and bottom lines. Same-store sales in North America fell 10.5% in July and 6.1% in the most recent quarter. The company, still dealing with the fallout from former chairman and CEO John Schnatter using a racial slur on a conference call, also lowered its annual earnings forecast. So, the problem with Papa John’s appears to be Papa John.


3D Systems shares soared more than 19 percent during after-hours trading. The 3D printer manufacturer beat second quarter earnings and revenue estimates.


According to a new report from analysts at HSBC, the world spent its entire natural resource budget for the year by August 1. That means that the world’s citizens used up all the planet’s resources for the year in just seven months. The HSBC analysts said in the note: “In our opinion, these findings and events show that many businesses and governments are not adequately prepared for climate impacts, nor are they using natural resources efficiently.” Many banks and asset managers have started factoring climate risks into their decision-making but it’s far less common to see multinational banks sound the alarm about climate change so explicitly in their equity research.


The Mendocino Complex blaze, a wildfire burning through Northern California, has now officially become the state’s largest wildfire on record, scorching more than 290,000 acres. The fire has destroyed dozens of homes and other buildings, and more than 11,000 structures remained threatened. The Mendocino Complex blaze reached 443 square miles, almost twice the size of Tucson, Arizona – and the blaze is only 30 percent contained. Firefighters expect the fire will be fully contained by Aug. 15. Nearly 4,000 fire personnel, including 441 firefighters, were battling the wildfire. More than 14,000 firefighters are now battling over a dozen major blazes throughout California.

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