Financial Review

Monday, Monday

…Record highs for the S&P, Nasdaq, and Russell 2000. Earnings soon. Gov shutdown? Offshore oil and gas. 2017 and bad weather. Driving Fed policy. OK Google, what is CES? Kohl’s good Xmas. Credit card debt nears milestone.

Financial Review by Sinclair Noe for 01-08-2018


DOW – 12 = 25,283
SPX + 4 = 2747
NAS + 20 = 7157
RUT + 1 = 1561
10 Y un = 2.48%
OIL + .46 = 61.90
GOLD + 1.10 = 1320.90


Record highs for the S&P, Nasdaq, and Russell 2000. Stocks started in negative territory this morning. The S&P and Nasdaq soon turned positive, but the Dow Industrials floundered around break-even. The Dow was up 2.3% last week; that’s the strongest kickoff to a year through four trading days since 2003, and it broke through 25,000. The Nasdaq continues to enjoy the tech rally from stocks like Nvidia and Micron – and the FAANG stocks are still acting FAANGy. The Nasdaq was 3.4% higher last week. That’s the Nasdaq’s best start to a new year since 2006. It’s normal — and even healthy — for the stock market to take a breather by retreating. Yet the S&P 500 hasn’t suffered a 3% dip since just before the November 2016 election. That’s the longest such streak on record. We’ve also seen the Vix, the volatility index trading under 10, indicating a sense of complacency. That doesn’t mean the market hasn’t been moving, but it does mean there is low correlation. When one stock or sector drops, another rises, and vice versa. Volatility is elevated in periods of high correlations because stocks move in the same direction at the same time. When sectors move more independently, actual volatility will drop (everything else equal) as winners offset losers.


Of course, it is easy to poke holes in the stock market rally, but the simple fact is that it has been a very solid rally. And that rally will come face to face with earnings in about a week. Wall Street stock analysts have jacked up their profit forecasts in recent weeks, and now expect companies in the S&P 500 will earn $148.3 a share in 2018, compared with $128.6 in 2017. The implied 15 percent rate of growth compares with a projection of 14 percent at this time last year and would represent the fastest increase since 2010.


The best-performing Dow component this year may surprise you. It’s not last year’s high-flyer Boeing, or tech giant Apple.  It’s serial laggard General Electric. GE is up around 6.3% year-to-date, outperforming the rest of the market in a big way in the early days of 2018. GE’s turn to outperformance may be a little surprising considering this stock’s recent price performance, but it makes sense. After lagging the rest of the Dow in a big way for the last year, this is a mean reversion trade.


Some 200,000 Salvadoran immigrants allowed to live and work in the United States since 2001 will lose their right to remain in the country in 2019. Separately, Trump warned in a weekend press conference that there would be no granting of legal status to young undocumented immigrants unless funding is granted for his proposed border wall with Mexico. Democratic lawmakers, who have already rejected the proposal, want the restoration of legal protection to young immigrants to be part of a spending bill that must pass by Jan. 19 in order to avoid a government shutdown. The Treasury Department will exhaust all of its borrowing options and run dry of cash to pay its bills by late March or early April if Congress does not raise its borrowing authority by Feb. 28.

The Trump administration has proposed opening up nearly all of America’s offshore waters to oil and gas drilling, but the industry says it is mainly interested in one part of it, now cordoned off by the Pentagon: the eastern Gulf of Mexico. The eastern Gulf has been formally off-limits to drilling since 2006 due mainly to the Defense Department’s concerns oil development would interfere with extensive military testing and training exercises in the area. Other regions offered in the proposed five-year drilling plan unveiled by the Interior Department last week are unlikely to see much interest. The Arctic is remote and expensive, Pacific states such as California have vowed to block drilling, and other areas also harbor deep opposition from politicians, environmental groups and business interests worried about spills.


Weather and climate-related disasters cost the United States a record $306 billion in 2017.  The U.S. National Oceanic and Atmospheric Administration said western wildfires and hurricanes Harvey, Maria, and Irma contributed to making 2017 the costliest year on record. The previous record was $215 billion in 2005, when hurricanes Katrina, Wilma, and Rita slammed the Gulf Coast. Average annual temperatures for the contiguous United States were 54.6 degrees Fahrenheit (12.6 degrees Celsius), 2.6 degrees Fahrenheit above the 20th century average and the third warmest since recordkeeping began in 1895, following 2012 and 2016.

The Trump administration
 is preparing to unveil an aggressive trade crackdown that’s likely to include new tariffs aimed at countering China’s and other economic competitors’ alleged unfair trade practices, according to Politico. Trump is tentatively scheduled to meet this week with Cabinet secretaries and senior advisers to begin finalizing the decisions, which may be unveiled later this month during his State of the Union address.


The Federal Reserve should raise interest rates three times this year given the already strong economy will get a boost from tax cuts, San Francisco Fed President John Williams told an American Economic Association conference. “If the data changes we can respond to that,” he declared, painting a benign picture of the world’s largest economy. Williams has a vote on monetary policy this year under a rotation. Meanwhile, Atlanta Fed President Raphael Bostic says he is comfortable “with a slow removal of policy accommodation,” and “that doesn’t necessarily mean as many as three or four moves per year.” We should get a better read on inflation later in the week, with the release of producer prices on Thursday and the Consumer Price index on Friday. The CPI report is projected to show core inflation, which excludes food and energy, rose 1.7 percent in December from a year earlier. Fed policymakers have come to view the tax overhaul plan as a short-term economic boost that will neither permanently supercharge the economy, or cause an immediate disruption that would require a central bank response. This is an important point, because it has been widely assumed that the Fed would respond to fiscal accommodation with a aggressive monetary tightening, or at the very least – that policymakers would stick to their previously announced regimen of tightening.


A Reuters survey of Fed policymakers shows they are expecting that the combination of corporate and household tax cuts will raise growth by up to half a percentage point annually for the next couple of years, and help keep unemployment at near record lows and thus perhaps raise wages. In addition, depending on how companies respond in terms of increased investment, the plan might raise long-run potential growth by a small amount. What they do not see is any great risk that the tax stimulus will fuel inflation or a run-up in asset prices that would prompt the Fed to raise interest rates any faster than it already plans. Though not an endorsement of the legislation, it is an important sign the Fed will not stand in its way.


More than 3,900 companies are on hand to show off their latest technologies at CES, the Consumer Electronics Show in Las Vegas this week. This is the first time in several years that Google has had a big, stand-alone booth at the show and its presence not only reflects the changing dynamic of the show, but also serves as a declaration of war on the battlefield of digital assistants, such as Siri and Alexa. Having an official booth at CES, especially when its chief rival Amazon doesn’t, lets Google show off to potential buyers and signal that it’s ready to work with the world’s top brands, developers and interesting start-ups. The competition to be the first assistant to get into people’s homes is fierce. It’s a market that’s expected to grow considerably within the next few years, with the analysis firm Gartner predicting that a quarter of all household requests will be made through voice assistants by 2019. Currently, Amazon’s Echo devices have 67 percent of the smart speaker market, to Google’s 25 percent. Google has some key advantages over Amazon when it comes to AI. Its deep knowledge of search gives it important background knowledge of what people want to know and, critically, how they make requests. Google’s services give it a built-in audience. Most importantly, because Google Assistant is built into the mobile Android operating system, it isn’t as housebound as Alexa.


Kohl’s posted far stronger same-store sales for the holidays than its bigger peers. Kohl’s reported a 6.9 percent rise in same-store sales for November and December, putting it on track for its best holiday quarter in three years. Share price popped 9% to just over $59, their highest since December 2016.


Before the holiday season even started, U.S. credit card debt stood at $808B on Sept. 30, or the end of Q3, according to figures from the Federal Reserve Bank of New York. That’s $280B more than the previous peak hit in 2008, at the height of the financial crisis that led to the Great Recession. If we see similar growth this year, it means we will soon credit card debt at $1 trillion. At some point, you have to wonder just how much debt consumers can shoulder before they buckle under. And what happens if consumers decide to tighten their belts, or are forced to tighten. The share of business investment has been quite low and just increasing corporate cash flow does not mean they will invest in business equipment or labor. That means the economy is being driven increasingly by the consumer. Anything that is dependent on household debt is going to end up running into problems sooner or later.

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