Financial Review

Milk and Cookies

…Dow and S&P hit record highs. Stocks look strong compared to the rest of the world. Household net worth grows. Gov shutdown still possible, maybe. Stocks soar even in the face of trade wars. Florence roundup; chicken and hog problems, and coal ash. One year after Maria in Puerto Rico and don’t forget USVI.

Financial Review by Sinclair Noe for 09-20-2018

DOW + 251 = 26,656
SPX + 22 = 2930
NAS + 78 = 8028
RUT + 17 = 1720
10 Y un 3.08%
OIL – .35 = 70.77
GOLD + 3.20 = 1207.90

The Dow and the S&P 500 closed at record highs today. The Nasdaq is about 1% shy of a record high. It has been a while since we’ve celebrated with milk and cookies. The bull market in stocks is the longest on record – as you know. Today’s price action just confirms the bull market. The move in the Dow looks particularly strong, coming about 8 months after the last record high in January. The last S&P 500 record was in August.


Recent market gains have come on signs of steadily improving fundamentals. In the latest economic data, first-time jobless claims fell by 3,000 last week, dropping to their lowest level since November 1969. Separately, the Philadelphia Fed manufacturing index jumped more than expected in September, rising to 22.9 from 11.9 in the previous month. The National Association of Realtors reports existing-home sales ran at a seasonally adjusted annual 5.34 million rate in August, virtually unchanged compared with July. While price gains moderated to a 4.6% yearly increase. It was the fourth month of sub-5% yearly price growth, and left the national median price at $264,800. At the current pace of sales, it would take 4.3 months to exhaust available supply.


Bank of America writes today that the S&P 500 continued its nine-year long trend of outperformance versus the rest of the world in August. Fueled by the strongest macro backdrop in the US since the financial crisis, the MSCI All Country World Index ex-US fell 2.3% in August, with EPS declining 2.4% and the P/E slipping to 15.2x, in complete contrast to the S&P 500 hitting an all-time high with positive revisions and multiple expansion. To show just how overvalued the US is relative to the rest of the world, on earnings, the S&P 500 now trades at a 12% premium to MSCI ACWI ex. US, a high since 2009, and trades at a premium vs. each of the major global regions (Europe, Japan, and EM) concurrently for the first time since 2009. The S&P might look a bit pricey, at least until you compare it to the rest of the world or to bonds.


Today, the Federal Reserve released if Flow of Funds report. Through the second quarter of the year, the net worth of US households rose to an all-time high $106.9 trillion, increasing for 11 consecutive quarters and up $2.2 trillion as a result of increases in real estate and financial assets. If you are not feeling richer, you are not alone.  In reality, most of that $100 trillion belongs to just 10% of the US population, and most of the increase went to the top 1%. That means that just 10% of the US population owns roughly $93 trillion of all US assets, while half of the US population has virtually no wealth, and if anything it is deeply in debt.


Tomorrow is that quarterly event known as “quadruple witching” – when futures and options on indexes and individual stocks expire – generally resulting in one of the biggest trading days of the year. Tomorrow also features a reconstitution day for the S&P 500. So, it is possible that the price action this week was exacerbated by the quad witching. Look for confirmation of the move – which is very likely, and then look for a continuation of the trend. There really isn’t much on the horizon that looks like a threat.


It has been shares of Boeing and Apple, which have helped to drive the Dow to new heights since hitting its year-to-date low on March 23. Apple has contributed 364 points to the price-weighted Dow’s return to record form, while shares of UnitedHealth Group added 361 points and Boeing’s stock added more than 300 points over the period. It is important to note that the Dow is price-weighted rather than market-weighted like the S&P 500 and the Nasdaq. That means the Dow is more influenced by the stock-price move of its constituents than market value. A $1 move in any one of the Dow’s 30 components equates to a swing in the index of about 7 points (rounded).


Of the 11 major sectors of the S&P 500, all but energy ended the session in positive territory. Among the FAANG group of stocks, Netflix closed lower. The remaining FAANGs gained ground.


Amazon is showing new hardware at an event in Seattle. A lot of new hardware. The company announced 15 Alexa-enabled products, as well as ways to integrate Alexa with third-party devices. The new suite of items ranges from microwaves and clocks to security devices and car gadgets. Plus upgrades to its Alexa assistant and Echo speakers.


Micron Technology reported earnings per share of $3.53, higher than analysts’ estimates of $3.34 per share. Revenue also beat expectations. Shares dropped 4.5% in after-hours trade.


Nike rose 1.1 percent after an analysis of the company’s online sales data revealed it had sold out of 61 percent more merchandise since the appearance the ad campaign featuring NFL player Colin Kaepernick.



Shares of Under Armour jumped 6.6 percent as the sportswear company announced it was cutting 3 percent of its workforce as part of its turnaround scheme.


Canadian cannabis company Tilray’s stock surged as much as 8% before reversing those gains to trade down 18%. Yesterday, shares jumped more than 70%. So, if you were long yesterday and short today, enjoy your vacation.


Wells Fargo, the third-biggest U.S. bank, plans to lower its employee headcount by 5 percent to 10 percent in the next three years as part of its ongoing turnaround plan, the company announced Thursday. The bank has 265,000 employees, meaning the reduction would result in a loss of between 13,250 and 26,500 jobs.


The Senate on Tuesday approved a bill that funds the military and some civilian agencies for the next year and provides a short-term fix to keep the government open through Dec. 7. Today, Trump called that spending plan “ridiculous” because it does not include money for a wall. Whether this is saber rattling or a serious threat of a government shutdown, we’ll know within the next 10 days or less.


It seems a bit crazy that stocks could move higher in the face of a trade war with China, but apparently the thinking is that if stocks fall, Trump would retreat from the trade war, so that makes it safe to buy more stocks. The next round of tariffs on $200 billion of Chinese exports to the US will go into effect on Monday. China will retaliate with $60 billion in tariffs on US exports to China. A resolution to the trade war between the United States and China is getting harder to find as the world’s two biggest economies pile ever more taxes on each other’s products. It’s more likely than not that these tariffs will be put in place for a long time.  The US and China haven’t held high-level talks since June, raising doubts about whether a resolution can be reached anytime soon.


So, China will make friendly with some of its other trading partners, cutting the average tariff rates on imports from the majority of its trading partners as soon as next month. This is designed to provide some relief for Chinese consumers. The move comes as China is trying to stimulate domestic consumption to support a slowing economy, and follows similar cuts to tariffs in July on a wide range of consumer goods. The WTO, the World Trade Organization, says the trade dispute between the United States and China could well expand into other areas given the significant ammunition the two countries have.  US Chamber of Commerce President Tom Donohue said on Wednesday that the Trump administration could still avoid a full-blown global trade war that erodes business confidence if it seals a trilateral NAFTA trade deal and makes progress on European trade issues in the coming weeks.



Florence and the flooding in its aftermath has closed more than 100 roads and cut off power to almost 500,000 homes and businesses. At last count, 35 people in the Carolinas have died as a result of the storm. The overall cost to the state’s agriculture is still unknown.


At least 1.7 million chickens have died in flooding from Hurricane Florence. According to Sanderson Farms, a major poultry producer, the chickens died at 60 farm buildings located at independent farms in North Carolina. The number of chickens killed by flooding might continue to rise. Approximately six million more chickens were isolated by flood waters at 30 farms, the company said. If feed trucks remain unable to reach the affected farms, more chickens could die as a result of the flooding. The chickens were being raised for market at farms that supply the company’s poultry processing plants. North Carolina is a major poultry producer, ranking fourth in the nation for broiler chicken production.


Hog production is another large industry in the state, but the N.C. Pork Council says mortality figures are not yet available. The state is home to almost 10 million pigs — second-most in the nation, after Iowa.  As if North Carolina hadn’t suffered enough from the storm called Florence, the state now faces a nasty side effect. According to the North Carolina Department of Environmental Quality (DEQ), 21 pig-manure lagoons “overtopped,” releasing animal waste into the environment. The lagoons, dug into the earth next to pig housing, are where the state’s more than 2,000 industrial-sized hog farms pump animal waste, which is then treated with waste-eating bacteria. The bacteria give lagoons a distinctive pink color. At least 89 lagoons in the state are at imminent risk of also releasing animal waste. You basically have a toxic soup for people who live in close proximity to those lagoons. All of these contaminants that are in the hog lagoons, like salmonella, giardia, and E. coli, can get into the waterways and infect people.


But wait, there’s more. Coal ash, a byproduct from burning the fuel in power plants, can carry arsenic, mercury, lead and selenium. Duke Energy has closed the breach of its coal-ash landfill in North Carolina, but not before the spill leaked into a popular fishing lake that hosts regular tournaments for anglers. The landfill at the company’s Sutton power plant near Wilmington broke open after Hurricane Florence inundated the region with flooding rains. Duke informed state officials that some of the coal-ash reached Lake Sutton. While Duke has said the spill poses no imminent threat, environmentalists countered that the potential risks remain unclear. Duke has yet to say how much coal ash entered the rain water and washed off the site. Meanwhile, Duke Energy has restored power to almost 80 percent of customers who went dark in the storm, and has freshly staffed and supplied its Brunswick nuclear station after it was cut off by flooding last weekend. The nuclear plant was not in imminent danger but the staff could not get out, and replacement workers could not get in. The target for getting almost all electricity restored is Sept. 26


Drones will be allowed to fly long distances and over populated areas across four states to assess damage from Hurricane Florence, after aviation regulators granted the first such approvals to an insurance company. Small, foam fixed-wing aircraft operated by State Farm Mutual Automobile Association, the largest U.S. property-casualty insurer, were deemed safe by the Federal Aviation Administration. State Farm has been working with researchers at Virginia Tech’s Mid-Atlantic Aviation Partnership, one of 10 locations selected earlier this year as test beds for drone research. The FAA approved routine commercial drone operations two years ago, but has restricted flights to low altitudes, away from people, and to short distances within sight of an operator on the ground. While the agency has granted a handful of waivers to the rules, including for a drone-delivery test by Alphabet’s Wing in August, this is the first one for an insurance company. The damage from Hurricane Florence has seen utilities, plus state and local emergency agencies deploy drones, but just for shorter flights.


One year ago today, Hurricane Maria hit Puerto Rico. Last month, researchers from George Washington University published a report detailing 2975 deaths directly related to the hurricane and its aftermath, making it one of the deadliest hurricanes in US history. Hurricane Maria’s 175 mph winds uprooted much of Puerto Rico’s energy infrastructure. More than 80 percent of the island’s power lines were knocked down by the storm, leaving 3.4 million Americans in the dark. It was the largest blackout in US history, and the second largest in the world. The island’s power grid suffered for years under poor funding, neglect, and outdated hardware. But the blackout lingered for months because of a failure to properly prepare and adequately respond at all levels of government. More than an inconvenience, the outage triggered a health care crisis. Vital medical equipment like dialysis machines couldn’t run. Medicines like insulin went bad. Perhaps most critically, water pumps shut off. That forced some residents to drink from contaminated sources. Sanitation networks failed, helping feed a leptospirosis outbreak. Power has been restored, but it is subject to brief outages.

Hurricane Maria provoked a mass exodus from Puerto Rico that has only recently begun to slow down. New data from the Puerto Rico Institute of Statistics shows that a net total of 150,000 people left the island in fiscal year 2018. That’s about twice the average migration from the previous two years, when roughly 90,000 Puerto Ricans left, mostly to escape Puerto Rico’s economic crisis. As US citizens, Puerto Ricans can vote in national elections if they live on the US mainland. Whether hurricane survivors will register to vote and turn out to the polls in November remains unclear, but there’s no denying that Hurricane Maria is playing a major role in the Florida’s competitive midterm elections. The Puerto Rican population is expected to soon surpass the Cuban diaspora as the largest Latino group in the state. Since Puerto Rico is a US territory, Americans living there have no real congressional representation. All of this has ended up reviving Puerto Rico’s push to become the 51st US state.

It is easy to forget that the U.S. Virgin Islands were struck by two Category 5 hurricanes last year. The islands have received $12.8 billion in aid from FEMA, but they are still struggling. Much of that money has either not reached residents or, in many cases, was not enough to fix homes ravaged by the storm. Problems still plague St. John: The only clinic operates out of a mobile trailer, the main public school hasn’t been rebuilt, and the island’s two biggest employers – The Westin St. John Resort and Caneel Bay Resort – remain closed. Again a reminder that St. Thomas, St. John, St. Croix, and Puerto Rico are all part of the United States.

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