Financial Review

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….Record highs for Dow, S&P 500, Nasdaq, Russell. Producer prices fall in Dec. DACA deal dead. Walmart breaks the bank to $11 an hour plus bonus, closes 63 Sam’s Clubs. South Korea cracks down on cryptocurrency.

Financial Review by Sinclair Noe for 01-11-2018


DOW + 205 = 25,574
SPX + 19 = 2767
NAS + 58 = 7211
RUT + 26 = 1586
10 Y – .02 = 2.53%
OIL + .01 = 63.58
GOLD + 5.60 = 1322.90


Dow, S&P, Nasdaq, Russell close at record highs.


The S&P 500 hasn’t retreated 3%, either in a single day or over several days, since early November 2016 – the longest streak of calm in market history. There are reasons for the good times on Wall Street. The US and global economies are doing great. Even Europe is on the upswing. Corporate profits have never been stronger – and the tax law should give earnings a boost. The Federal Reserve hasn’t abandoned its plan to raise interest rates just gradually. Investors have also brushed aside a rapid increase in bond yields. China’s foreign-exchange regulator dismissed reports suggesting Beijing is looking to pare back on US bond buying. And as the Dow zips through milestone after milestone – it took just a month to go from 24,000 to 25,000 – concerns have grown that the market is on the verge of overheating. Some analysts have warned of a so-called melt-up an unsustainable race higher that isn’t based on fundamentals. We will find out more about the fundamentals in the coming weeks as fourth quarter earnings reporting season kicks in.


Producer prices fell for the first time in nearly 1-1/2 years in December, which could temper expectations that inflation will accelerate in 2018. The Labor Department said its producer price index for final demand slipped 0.1 percent last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4 percent. In the 12 months through December, the PPI rose 2.6 percent after accelerating 3.1 percent in November. The price of services fell 0.2 percent in December after nine straight monthly rises. A key gauge of underlying producer price pressures that excludes food, energy and trade services edged up 0.1 percent last month. The so-called core PPI increased 0.4 percent in November. It rose 2.3 percent in the 12 months through December after increasing 2.4 percent in November. Wholesale food prices recorded their biggest drop since May, while energy prices were unchanged. The cost of healthcare services increased 0.2 percent last month after being unchanged in November. Those costs feed into the core PCE price index. Tomorrow, the Labor Department will publish the consumer price index, or prices at the retail level.


New York Fed President William Dudley said the Federal Reserve may have to “press harder on the brakes” at some point over the next few years due to rising risk of a hard landing for the economy. Dudley said the risk of economic overheating “seems like an odd issue to focus on when inflation is low, but it strikes me that this is a real risk over the next few years.”


In a second report, the Labor Department said initial claims for state unemployment benefits increased 11,000 to a seasonally adjusted 261,000 for the week ended Jan. 6. Part of the increase may be attributed to weather.


The federal government ran a budget deficit of $23 billion in December, according to the Treasury Department, down $4 billion from the same month a year ago. Spending rose by $2 billion to $349 billion, while revenues climbed by $7 billion to $326 billion in the month.


A bipartisan working group of senators has reached an agreement on parameters for an overhaul of the nations’ immigration laws. In a written statement, six senators said they reached an agreement in principle that addresses border security, the diversity visa lottery, chain migration/family reunification and the DREAM Act, and they are working to build support for that deal in Congress. No other details were released. We should learn more soon, but it looks like the Trump has already rejected the proposal.


Walmart is the latest to credit the lower corporate-tax rate as a reason to reinvest the saved capital into its workforce. The world’s largest private employer announced on Thursday it will increase the starting wage for its U.S. employees to $11. Currently, Walmart’s minimum wage is $9 (but bumped up to $10 after completing a six-month training program). In addition to wage increases, eligible Walmart employees will receive a one-time bonus of up to $1,000. And, full-time employees will receive 10 weeks of paid maternity leave and six weeks of paid parental leave (up from eight weeks and two weeks, respectively). The pay hikes work out to about $300 million extra. Considering Walmart rings up about $57 million per hour in sales, it works out to about 5 hours of sales for Walmart, or about nine days of profit to recoup the extra spending. Looked at another way, the $300 million payout is just slightly more than the $244 million that Walmart US e-commerce chief Marc Lore made in 2016.


While Walmart has hiked wages over the past few years, the timing of this particular announcement signals the company’s attempt to curry favor with Trump. Consider this a high-profile “thank you” for the tax cuts. Walmart is a little late to the party, Target hiked hourly wages to $11 last year and commit to $15 per hour by the end of 2020. In 2015, McDonald’s announced an increase in its internal minimum wage. And TJ Maxx has also done the same in recent years. There’s debate whether these corporate maneuvers are merely publicity stunts or are the first steps to helping employees— or both; but the bottom line is that employees will earn a little bit more. With or without a tax cut, pressure to increase worker pay has been building in the economy and the retail sector. One way or another, Walmart was going to bow to this pressure and increase pay to retain workers.


Also, today Walmart abruptly closed 63 Sam’s Club stores and laid off thousands of workers. 10 of the closed megastores will become e-commerce distribution centers. Other companies have also been implementing this strategy of burying bad news in the rollout of positive announcements. Take, for instance, AT&T, which laid off 600 employees at the same time as it announced bonuses for 200,000 workers.


In the coming days, some of Wall Street’s major banks are expected to announce multi-billion dollar write-downs because of tax reform. JPMorgan Chase and Wells Fargo kick off earnings season for the big banks on Friday, while Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley report their results next week. For now, there will be some up-front charges on deferred tax asset (DTA) write-downs – instead of deferring, they will pay the new, lower tax rate. Also, repatriation of foreign profits, which have been sitting un-taxed, will be taxed but at the new, lower rate. The tax law will, of course, mainly be gravy for the banks in that their near-term after-tax net income should rise significantly. The net operating losses will still shield the same amount of income, and the cash taxes paid will be the same. It’s just that the shield would have been worth more if rates were higher.


South Korea’s government said it plans to ban cryptocurrency trading. The nation’s police and tax authorities raided local exchanges on alleged tax evasion. Not surprisingly, Bitcoin prices plunged more than 20%. After the market’s sharp reaction to the announcement, the nation’s Presidential office hours later said a ban on the country’s virtual coin exchanges had not yet been finalized, but the government was preparing a bill to ban trading of the virtual currency on domestic exchanges. Once a bill is drafted, legislation for an outright ban of virtual coin trading will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.


The “bomb cyclone” that left the eastern US shivering last week led to the biggest drop ever recorded for natural gas stockpiles. Inventories of the heating fuel tumbled. It’s been a banner time for gas demand. Total consumption of the heating and power-plant fuel climbed to a record on New Year’s Day in the lower 48 states. Even as demand is up, the US has been exporting more. The US has now become a net exporter of natural gas on an annual basis for the first time since at least 1957. Net exports averaged about 0.4 billion cubic feet per day last year, flipping from net inflows of 1.8 billion in 2016.


Xerox is in talks with Japanese camera maker Fujifilm for a potential major deal. A deal could result in a “change of control” at the company, though a full takeover of Xerox is not on the table,according to a report in the Wall Street Journal. Fujifilm and Xerox embarked on a joint venture in the 1960s, called Fuji Xerox, a consolidated subsidiary of parent company Fujifilm Holdings. Fuji Xerox spread to multiple countries in the Asia-Pacific area, developing office and printing equipment.


DST Systems rose 5% after the information processing and servicing company said it was being bought by SS&C Technologies Holdings  in a deal valued at $5.4 billion, including debt.


Delta Airlines gained nearly 5% after posting better than expected fourth quarter earnings and raisng its 2018 outlook.


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