Manufacturing Breaks Bad
ISM manufacturing contraction. Productivity drops, labor costs rise. Auto sales dip. Oil under $44. This summer was cheap for drivers. What Brexit effect? Hanjin Shipping BK. Samsung charred. SpaceX explodes, and takes Facebook satellite with it.
Financial Review by Sinclair Noe for 09-01-2016
DOW + 18 = 18,419
SPX – 0.09 = 2170
NAS + 13 = 5227
10 Y un = 1.57%
OIL – 1.18 = 43.52
GOLD + 5.10 = 1314.60
The Institute for Supply Management said its manufacturing index in August fell to 49.4% from 52.6% last month, below expectations for a 52% reading. Any reading below 50% indicates contraction, and the index was below that level for the first time since February. Today’s ISM report is one of the most important data releases. The ISM index is a leading indicator, which tells us what is going to happen. In other words, it is leading both economic news and stock prices. New orders are down 7.8 points, production is down and employment is contracting faster. Overall, manufacturing is contracting again. Only six out of 18 industries were able to report growth. Eleven reported contraction. Cyclical industries like machinery and transportation equipment continue to underperform.
The poor ISM report comes on the heels of another weak report. Earlier, the government announced a steeper-than-initially expected decline in worker productivity, in what has been the longest dip in productivity since the 1970s. Nonfarm business productivity fell at a 0.6 percent seasonally adjusted annual rate in the second quarter, from an earlier estimate of a drop of 0.5 percent.
But the Labor Department also reported a surprise jump in labor costs, with the annual rate of unit labor costs rising to 4.3 percent at nonfarm businesses. The initial estimate was a 2 percent pace. Hourly compensation in the second quarter grew at a rate of 1.1 percent on an inflation-adjusted basis, from an earlier estimate that it had declined at a 1.1 percent rate.
The crummy data comes a day before the important August employment report, expected to be a major indicator for whether the Fed could raise rates in September. While some traders speculated the manufacturing report was a one-time blip, the data definitely subdued some talk that the economy was strong enough for the central bank to hike.
The number of Americans who applied for unemployment benefits last week rose 2,000 to 263,000. The average of new jobless claims over the past month, meanwhile, fell by 1,000 and also totaled 263,000. The less volatile four-week average is seen as a more accurate measure of labor-market trends. New claims fell below the key 300,000 threshold in early 2015 and have remained there for 78 straight weeks, the longest stretch since 1970.
The number of announced layoffs by U.S.-based companies fell in August to the lowest level since May. Global outplacement consultant Challenger, Gray, and Christmas reports US employers announced they planned to hand out 32,188 pink slips last month, a 29 percent decline from July. The August total was also 22 percent below the number of job cuts at this time last year. The computer sector was the biggest job-cutter, with Cisco Systems accounting for most of its 6,103 payroll reductions. The industrial goods sector – which includes the oil patch – was also hard hit, losing 3,073 jobs.
Wal-Mart said it will cut about 7,000 back-office jobs, mostly in accounting and invoicing positions at its U.S. stores, continuing a program it announced in June of cutting such jobs on the West Coast. Wal-Mart will now cut back-office workers in all its approximately 4,600 stores over the next several months. The retailer employs about 1.5 million people in the United States.
US auto sales fell 4.2% in August as some major automakers said a long-expected decline due to softer consumer demand had begun. The top three sellers, GM, Ford, and Toyota reported declines of at least 5%. Of the seven top manufacturers by sales, only Fiat Chrysler Automobiles reported a gain versus a year ago. Auto sales account for about one-fifth of all retail sales. Look for car companies to offer incentives to entice buyers.
A barrel of West Texas Intermediate for October delivery has been trading under the $44 a barrel level, with the commodity dropping about 7.5% this week. Russia’s Energy Ministry said it sees no need for talks on capping production with oil prices around $50 in a statement ahead of OPEC talks in Algiers later this month. Russia, the world’s biggest energy exporter, was a key negotiator in talks on an oil-output freeze with Saudi Arabia and other OPEC producers in April. That proposal failed after Iran declined to attend the meeting in Doha and Saudi Arabia refused to proceed with the deal without the participation of its Persian Gulf rival.
With gasoline prices rising at the pump as the summer driving season draws to an end, drivers can take solace in the fact that they shelled out less for the fuel this summer than they have in over a decade and that prices will fall back soon as fuel demand drops. The U.S. national average for a gallon of gasoline is likely to end the summer driving season at about $2.24, and that means drivers enjoyed the cheapest summer at the pump since 2004; and it’s a big drop from Labor Day 2012 when the average price was $3.86 a gallon. Now, with the usual drop in gasoline consumption following the Labor Day holiday, drivers can expect to prices decline as demand softens.
What Brexit effect? British manufacturing staged one of its sharpest rebounds on record in August as factories recovered from the initial shock of June’s vote to leave the European Union. The Markit/CIPS purchasing managers’ index for the sector soared to 53.3 from July’s figure of 48.3. Data over the past couple of weeks has further shown consumer demand holding up in the face of the referendum result.
More than $7 billion was wiped off the market value of Samsung Electronics today after it delayed shipments of its Galaxy Note 7 phone. Samsung announced the delays after several people posted images and videos of charred Galaxy Note 7s online and said their phones had caught on fire. Several South Korean media reports, without citing direct sources, said Samsung will soon announce a plan to recall affected Note 7 phones and replace their batteries as opposed to giving the users a new device.
The collapse of South Korea’s Hanjin Shipping is sending ripples through world supply chains, as manufacturers scramble for freight alternatives to the world’s seventh-biggest shipping line. Hanjin’s bankruptcy is the biggest ever in container shipping history. Hanjin filed for court receivership after its banks decided to end financial support, and ports across the globe have refused entry to its vessels in what is traditionally the industry’s busiest season ahead of the year-end holidays. Another theory is that Hanjin’s ships are staying out of port to avoid being confiscated.
The Securities and Exchange Commission fined RBC Capital Markets for $2.5 million for allegedly making materially false and misleading disclosures in its fairness opinion valuation analysis for a proxy statement for Rural/Metro Corporation’s sale in 2011 to a private equity firm. An SEC investigation found that RBC’s presentation as the lead financial adviser to Rural/Metro, a medical transportation services provider, contained allegedly materially false and misleading statements which made the bid look more attractive.
The investment bank that advised SolarCity on its $2.6 billion sale to Tesla made a “computational error” in its analysis that discounted the value of the solar company by $400 million. Despite the mistake by Lazard, the companies agreed it would not change their view of the deal. SolarCity has until September 14 to actively seek other acquisition proposals, at which time its “go-shop period” ends. The filing also revealed that in recent weeks, 15 institutional investors passed on either acquiring SolarCity or injecting equity into it. The company is having difficulty tapping the public markets amid the proposed merger and is facing a liquidity squeeze.
SpaceX’s Falcon 9 rocket has exploded as part of a test on a launch pad in Cape Canaveral, Florida. The company was scheduled to do a static test-fire of the rocket, which it previously landed safely on a ship in April after it delivered supplies to the International Space Station. So, this would have been the first recycled rocket.
The first step in Facebook’s grand vision to connect the entire world to the internet, or at least connect to Facebook, has gone up in flames. That SpaceX rocket that exploded was carrying a satellite that Facebook planned to use in its internet.org initiative. Facebook had planned to lease some of the bandwidth on the satellite, Amos 6, from its operator, the Israeli company SpaceCom, to beam internet to sub-Saharan Africa. The satellite was intended to fill in until Facebook’s more ambitious plans for internet access are ready, including developing and launching massive solar-powered drones that use lasers to beam internet to the ground. This the first time Facebook had planned to use a satellite. It’s been a rough week for Facebook. Last Friday, it fired the entire editorial staff on its Trending news team, and replaced them with an algorithm, which has since promoted fake news and could potentially be gamed into promoting hate speech. At the same time, CEO Mark Zuckerberg is insisting the company is not a media company, even though many of its 1.7 billion users rely on it to get their news. He also made a voice-activated thermostat for his house that doesn’t respond to his wife’s voice.
The last hurricane to strike Florida was Wilma in 2005; that’s about to change. Hermine will soon hit the northern Gulf coast packing winds around 75 miles per hour, and dumping too much rain, possibly up to 20 inches in some parts of the state. Isolated tornadoes and storm surges as high as 8 feet were also forecast. Towns, cities and counties along the Gulf Coast have been hastily preparing shelters for people and pets, setting up centers where residents could fill sandbags for personal use and placing electric line repair crews on standby ahead of the storm. Water spilling from rough seas already was inundating roads in some waterfront communities in the Tampa Bay region.