Financial Review

Making the List

…Stocks waver on trade concerns. What makes the list. Home-builders slip. Still, the economy is fairly strong. Ford buys a train station.

Financial Review by Sinclair Noe for 06-18-2018

DOW – 103 = 24,987
SPX – 5 = 2773
NAS + 0.64 = 7747
RUT + 8 = 1692
10 Y un = 2.93%
OIL + .72 = 65.78
GOLD – 1.00 = 1278.90

 

Stocks closed lower but not at session lows. The Dow had been down 265 points in early trade and even though it recovered more than half, it could not avoid a fifth consecutive losing session. The S&P 500 index clawed out of a 22-point loss. The Nasdaq went from negative to positive. The Dow is up 0.8% for the year, while the S&P has gained 3.6%; both remain a few percentage points below record levels. The Nasdaq is up 12% for the year and is just below an all-time closing high hit Thursday. Today, gains in energy shares helped curb declines stemming from concerns about a trade war with China. Trump said last week he was pushing ahead with tariffs on $50 billion of Chinese imports. China announced similar tariffs almost immediately and accused the United States of launching a trade war.

 

Boeing, which has acted as a proxy for trade war tensions with China as it is the single largest U.S. exporter to the country, fell 0.8 percent as the biggest drag on the Dow. Construction equipment maker Caterpillar declined 0.7 percent. Chipmakers, which rely on China for a large portion of their revenue, also lost ground. The PHLX semiconductor index lost 0.99 percent and was on track for its worst daily performance in a month. Intel, off 3.6 percent, was the biggest drag on the S&P 500 and the Nasdaq.

 

The tariffs mean that US businesses and consumers will likely be shelling out more money for certain items. But Americans have dodged at least a few bullets. Back in April, the list included 1,333 items. That has been winnowed down to 818 products (worth about $34 billion) with a 25% tariff, which goes into effect July 6. Another 284 products could be added to the list in the weeks ahead. So, which items made the list and which items were cut from the list? TVs and cell phones were cut from the list – no tariffs. Also, snowplows and snowblowers, golf carts, jukeboxes, chainsaws and parts will not face a tariff. Scores of items taken off the list hint at just how much the US depends upon China for health-related products—vaccines, defibrillators, chemical contraceptives, diagnostic tests, dental fillings, hearing aids, and hormones. Meanwhile, the changes to the list seem designed to ensure that Americans still have easy access to weapons. Telescopic sights for machines and appliances will now face a 25% tariff—those used for rifles and “other arms” are no longer included. In fact, the whole sweeping range of weaponry included in the April list has now been cut. Americans will still be able to enjoy duty-free prices on Chinese rocket launchers, flame-throwers, shotguns, ammunition, pistols, grenade launchers and imports classified as “bombs, grenades, torpedoes, mines, missiles and similar munitions of war.” And, yes, the US does import a few million dollars worth of those goods each year. To be on the safe side, Americans might want to stock up on floating docks and “direction-finding compasses” before the trade war’s next front opens up.

 

The National Association of Home Builders’ monthly confidence index fell two points to 68 in June. In June, each of the components of the overall NAHB index slipped one point. The gauge of present sales conditions was at 75, an eight-month low. The gauge of future sales conditions fell to 76, the lowest since November. And the tracker of buyer traffic hit 50. The trade spat with Canada is costing builders. A lumber pricing index known as the Random Lengths Composite Framing Price index is up 59% since the start of 2017, mostly due to the administration’s 20% lumber tariffs. Homebuilders say there is strong demand for their products, yet input costs are pushing higher and higher. Share prices of big publicly-traded builders have been clobbered this year, as interest rates and materials costs churn higher and the labor shortage remains acute. D.R. Horton, down 2% today and the stock has lost 16% in the year to date, while shares of KB Home dropped 1.5% today and are down more than 18% year to date.

 

China’s trade restrictions could leave the growing volumes of US crude from shale without a buyer. While the volumes would ultimately get shipped elsewhere, absent China the price could be depressed. Also, OPEC is meeting in Vienna on Friday. It is widely expected that OPEC and Russian will increase output to 1 million bpd by year-end and another 0.5 million bpd in the first half of 2019 to replace lost production from Venezuela and Iran. Yet any output increase agreement could be muted because other OPEC members including Iraq said last week that production cuts should be maintained because prices still need support. Trade worries come as oil prices are rising, adding to fears that inflation may pick up and cut into consumer spending. Tariffs push up the cost of the stuff we buy and, because of retaliation, reduce the demand for the stuff we sell.

 

Raphael Bostic, the president of the Atlanta Fed, said concerns about trade may have thwarted the benefits of tax reform in terms of getting businesses to invest. Bostic said the trade concerns aren’t so high as to get businesses to scrap the projects they’re currently working on, but they are enough to get them to be hesitant about the future. On rate policy, Bostic said the central bank still hasn’t reached the so-called neutral rate — where policy is neither accommodative nor restrictive. He said he is comfortable continuing to move policy toward a more neutral stance. Which is Fedspeak for saying: the economy is pretty good right now.

 

Valeant Pharmaceuticals sank 10.5% after the Food and Drug Administration failed to approve a lotion product intended to treat plaque psoriasis.

 

Shares of Chinese e-commerce retailer JD.com rose 0.3% after Google invested $550 million in the company. The partnership would open a channel for JD.com to sell to consumers outside China. For its part, JD.com said it planned to make a selection of items available for sale in places like the U.S. and Europe through Google Shopping — a service that lets users search for products on e-commerce websites and compare prices between different sellers.

 

Facebook has beefed up its audit committee to help monitor its social impact, privacy safeguards, and cybersecurity risk. The changes follow pressure from investors on Facebook to establish an independent risk committee. In fact, this very proposal was tabled at Facebook’s investor meeting last month and attracted support from 45% of the company’s independent shareholders.

 

Solid Biosciences  said the Food and Drug Administration had lifted its clinical hold on the company’s treatment for Duchenne muscular dystrophy, allowing a Phase trial to resume. Shares gained 10%.

 

Spinal muscular atrophy is a rare genetic condition that prevents the body from developing a muscle protein called SMN. Without the protein, muscles atrophy and movement is impaired. The disease is often fatal for infants. Over the weekend, PTC Therapeutics presented promising research at a conference in Dallas. Over a stretch of 182 days, 90 percent of babies with Type 1 SMA that received the therapy demonstrated improvement in their conditions, including the ability to control their heads, roll or sit. PTC is co-developing the drug with Roche. PTC shares hit a record high today. Biogen has also been working on this disease, but they are now lagging in the race. Biogen shares down 6%.

 

Ziopharm Oncology dropped 19% after the Food and Drug Administration placed a clinical hold on a Phase 1 trial of a treatment for cancer.

Rent-A-Center surged 22% after it agreed to be taken private by Vintage Capital, a private and public equity firm, in a deal valued at about $1.3 billion.

 

Fujifilm accused Xerox of breach of contract and engaging in “intentional and egregious conduct” in abandoning the $6.1 billion merger announced in January. The merger was scrapped on May 13 when Xerox, in a settlement with activist investors Carl Icahn and Darwin Deason, agreed to install several new directors and a new CEO. A merger would have combined Xerox with the 56-year-old joint venture Fujifilm Xerox, in which Fujifilm and Xerox had respective 75 percent and 25 percent stakes.

 

The head of Volkswagen’s luxury arm Audi was arrested today in Germany, the most senior company official so far to be taken into custody over Audi’s emissions-test-cheating scandal. VW admitted in September 2015 to using illegal software to cheat US emissions tests on diesel engines. The US filed criminal charges against former VW CEO Martin Winterkorn in May, but he is unlikely to face US authorities because Germany does not extradite its nationals to countries outside the European Union.

 

The Michigan Central Station, built in 1913, was once a symbol of Detroit’s importance as a center of American industry. Like many buildings in Detroit, the Michigan Central Station fell into serious disrepair. For a long time there were no windows, leaving wind, rain, wildlife, not to mention vandals, free to go through the building. The windows, at least, were replaced a few years ago. Now Ford Motor has announced the building will be fully restored and its first floor re-opened. There will be restaurants, shops, bars and cafes, with offices on the floors above. Ford is buying other buildings and land, too, and will ultimately occupy 1.2 million square feet in the neighborhood. Ford Motor intends to turn the area into the company’s hi-tech transportation campus focusing on autonomous vehicles and electric cars.

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