Financial Review

Marines Sue for Trademark Infringement

…NAFTA renamed. Net neutrality fight continues. GE’s new sacrificial lamb. Elon Musk makes deal with SEC. Nobel for immunotherapy.

Financial Review by Sinclair Noe for 10-01-2018

DOW + 192 = 26,651
SPX + 10 = 2924
NAS – 9 = 8037
RUT – 23 = 1672
10 Y + .02 = 3.08%
OIL + 2.29 = 75.65
GOLD – 3.60 = 1189.60

 

Wall Street has been hoping for some sort of victory in the trade wars. And we have a new version of NAFTA, with a few changes – including the name. U.S. equity futures jumped alongside the currencies of Canada and Mexico. Stocks lost some ground through the trading session. Industrial stocks, and more specifically auto and rail-related shares rose. Ford Motor gained 0.8 percent, while General Motors advanced 1.6 percent. Among railroads, Kansas City Southern rose 2.9 percent. Energy stocks got a boost as crude oil prices hit their highest level since 2014 on a combination of the new trade agreement and U.S. sanctions on Iran.

 

Hours before the midnight deadline, the US and Canada struck a deal for a renewed trilateral agreement between the United States, Mexico, and Canada. Newly dubbed the “USMCA” — the US-Mexico-Canada Agreement — it’s basically an updated version of the original North American Free Trade Agreement.

 

A few notable issues stalled the negotiations between Canada and the US over the past month — and at the outset, these appear to have been mostly resolved, giving each side a chance to declare victory. The US wanted greater access to Canada’s dairy market, and according to senior Trump administration officials, they won “a good deal for American farmers” on that front. Canada reportedly agreed to give U.S. dairy farmers access to about 3.5 percent of its roughly $16 billion annual domestic dairy market. Under the deal, the Canadian government will be allowed to compensate dairy farmers hurt by the deal. Canada had agreed to open up wider access to dairy markets under the proposed Trans-Pacific Partnership, which Trump withdrew from in January 2017. Trump administration officials say the new USMCA widens U.S. access to Canada’s dairy market beyond TPP levels.

 

Canada wanted to preserve NAFTA’s Chapter 19, an independent panel set up to resolve special trade disputes. Though it’s renumbered in the final USMCA agreement, the provision stays mostly intact. Canada relies on the settlement process to protect its lumber producers from anti-dumping tariffs imposed by the U.S.

 

Ottawa also wanted some protections from Section 232 tariffs — the mechanism the Trump administration used to impose steel and aluminum tariffs on countries, including Canada, which requires a national security justification. Senior Trump administration officials said accommodations would be made to protect Canada from tariffs on automobiles. Canada did not get guarantees regarding steel and aluminum tariffs, and they’ll be dealt with separately.

 

This new agreement incorporates the components of the bilateral agreement between the US and Mexico, including rules of origin for automobiles (meaning a certain percentage of parts have to be manufactured in each country to avoid tariffs) as well as new digital trade rules, intellectual property protections, and strengthened labor rules. NAFTA required automakers to produce 62.5 percent of a vehicle’s content in North America to qualify for zero tariffs. The new agreement raises that threshold, over time, to 75 percent. That’s meant to force automakers to source fewer parts for an “Assembled in America” (or Canada) car from Germany, Japan, South Korea or China.

 

For the first time, the new agreement also mandates that an escalating percentage of parts for any tariff-free vehicle — topping out at 40 percent in 2023 — must come from a so-called “high wage” factory. The agreement says those factories must pay a minimum of $16 an hour in average salaries for production workers. That’s about triple the average wage in a Mexican factory right now, and administration officials hope the provision will force automakers to shift suppliers from Mexico to Canada or the United States. Also, the new pact says Mexican workers must have the right to unionize.

 

There are risks to that change. Automotive analysts have warned that the provision could have a damaging effect for Americans, by raising costs for American car buyers and incentivizing automakers to move production to low-cost countries outside the United States.

 

While the USMCA is being called a victory, it came at a steep price. For the first time ever, a majority of Canadians hold an unfavorable view of the U.S., which is not only a NATO ally, but also the country’s No. 1 trading partner. Indeed, the Canadian Chamber of Commerce, in a statement following the announcement of the trade agreement late Sunday, said it was “delighted,” but added, “Canada must remember the lesson this turbulent period has provided: We must never again allow ourselves to be overly-dependent upon one trading partner.”

 

 

The new trade agreement will have a sunset clause—16 years, up from the five years the U.S. had demanded. There were certainly changes, but in the end the biggest change might be the name. All in all, much ado without much being done.

 

There are still a few hurdles before USMCA becomes a reality. The revised pact needs to be approved by all three governments, including the US Congress, which won’t consider the agreement until 2019, as well as ratification by Mexico’s new Congress and in Canada during a federal election year.

 

Meanwhile, the trade war with China continues. With little prospect of a restart for U.S.-China trade talks, we can look for an escalation in tensions that will see higher American tariffs on all Chinese imports. US tariffs on Chinese goods are currently in the 10% range, but scheduled to pop to 25% at the end of the year.

 

Also, over the weekend, the Trump administration filed suit seeking a preliminary injunction to block California’s state net neutrality law from taking effect in January. The FCC voted 3-2 in December along party lines to reverse rules that barred internet service providers from blocking or throttling traffic or offering paid fast lanes, also known as paid prioritization. The vote also sought to preempt states from setting their own rules governing internet access. The new rules handed ISPs sweeping new powers to recast how Americans use the internet, as long as they disclose changes. The new rules took effect in June but providers have made no changes. In August, 22 states, including California, and a coalition of trade groups representing major tech companies urged a federal appeals court to reinstate the rules and said it could not tie states’ hands.

 

General Electric Chief Executive John Flannery has been fired. When Flannery took the reins at GE from Jeffrey Immelt in August 2017, GE’s stock was down 19% on a year-to-date basis while the Dow Jones Industrial Average had rallied 11%. The stock was by far the worst Dow performer during Immelt’s 16-year tenure. Flannery was tasked with righting a ship slowly sinking under the weight of a deteriorating balance sheet, too many unrelated businesses, questionable accounting and acquisitions gone wrong. Flannery tried cutting the dividend to preserve cash; he tried to narrow the companies focus; he tried to sell parts of the company; he pledged new revenue recognition standards; he pledged greater transparency. And with almost every move by Flannery, GE’s share price dropped, then dropped some more – down 55% in just over a year. GE said it named board member Lawrence Culp as its chairman and chief executive, effective immediately, succeeding John Flannery. Culp previously served as CEO of Danaher Corp. from 2000 to 2014.

 

Last week, Tesla CEO Elon Musk looked to be on the ropes, and possibly down for the count. Tesla shares dropped 14% on news of a SEC lawsuit, which alleged Musk misled investors over his tweet that said he was considering taking the company private and had “funding secured” for the deal. Then today, a surprise announcement of a deal with securities regulators. Under the agreement, Musk is barred from serving as chairman for at least three years, Musk and Tesla each will pay a $20 million fine, and Tesla must name two new independent directors, one of which can be the new chair. Tesla shares jumped 17%. Tesla’s sole junk bond issue also rallied on the news. The $1.8 billion of 5.200% notes that mature in August of 2025 jumped more than 4 points in early trade to 88 cents on the dollar, sending the yield down to 7.571%.

 

The Institute for Supply Management’s manufacturing index fell to a reading of 59.8% in September from 61.3%. Any reading above 50% indicates improving conditions.

 

Separately, IHS Markit reported that its manufacturing purchasing managers index reached a four-month high of 55.6 in September.

 

The Commerce Department reports construction spending rose just 0.1% higher in August than in July, led once again by public-sector spending. The public sector carried all the weight in August: Spending in the sector was 2% higher than in July, while private-sector spending fell 0.5%. Housing was also weak: Residential construction fell 0.7% on the month, though it was 4.1% higher compared with August 2017.

 

Even as home prices have climbed steadily thanks largely to a lack of supply of homes for sale, housing affordability has remained relatively stable thanks to historically low borrowing costs. But that is changing. Mortgage rates have surged to 4.97 percent from 4.23 percent in January, according to the Mortgage Bankers Association. Including fees, most 30-year mortgage costs have reached 5 percent or higher. The rise in mortgage rates so far this year means a potential homebuyer would pay about $35,000 more interest on a $220,000 loan over 30 years.

 

Two immunologists — one from Texas, one from Japan — have been awarded the Nobel Prize in physiology or medicine for their pioneering research in cancer therapeutics. Working in labs on different continents, James Allison in Houston and Tasuku Honjo in Japan, both have made key discoveries over the past half-century that advanced the field of immunotherapy for cancer. Immunotherapy drugs stimulate the immune system to help the body attack the disease from within; essentially harnessing T-cells, a type of white blood cell known as the soldiers of the immune system, to attack cancer.

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