Financial Review

Nas and R2K Record Highs

..Stocks rally. Waiting on G7. Trade wars have a price. But the trade deficit dips. Productivity slides. Tesla pops. Expect higher plane tickets. Amazon’d.

Financial Review by Sinclair Noe for 06-06-2018

DOW + 346 = 25,146
SPX + 23 = 2772
NAS + 51 = 7689
RUT + 11 = 1675
10 Y + .06 = 2.97%
OIL – .54 = 64.98

Stock markets started the session strong and just got better throughout the day. The Nasdaq Composite and the Russell 2000 indices closed at record highs. The Dow and the S&P 500 closed at their highest levels since March 12. The Dow posted its best session in about 2 months. The Nasdaq is up 11.4% in 2018 while the Russell is up 9.2%. To compare, the Dow is up 1.7% and the S&P has risen 3.7%. The financial sector rose 1.8%, easily the biggest percentage gainer of the day. The sector was boosted in part by a rise in the yield of the benchmark 10-year Treasury note. Among the most notable gainers in the sector, JPMorgan Chase gained 2.3% and Goldman Sachs added 1.7%.


A report late yesterday indicated that China offered to buy some $70 billion of U.S. goods to get the Trump administration to back off its tariff threats. Five days after Trump imposed a new set of heavy tariffs on foreign steel and aluminum imports, Mexico hit back, announcing its own set of sweeping tariffs on US pork, steel, cheese, bourbon, apples, and other goods. According to Mexican officials, they specifically chose to target goods from Republican strongholds. Overall, the new penalties will affect about $3 billion worth of US goods. The tax rates vary depending on the product, but most of them are high: There’s a 20 percent tariff on US pork shoulder and legs, and some bourbons and cheeses will be hit with 20 to 25 percent taxes. The Trump administration made things even more complicated, by suggesting that NAFTA talks between the US, Canada, and Mexico should be scrapped in favor of bilateral talks between the US and Canada, and between the US and Mexico.


Ahead of this Friday’s G-7 meetings, White House economic advisor Larry Kudlow downplayed the prospect of a “trade war” with allies — calling the tensions “disputes that need to be solved.” He said he hopes the summit, where Trump will have bilateral talks with Canadian Prime Minister Justin Trudeau and French President Emmanuel Macron, will lead to substantive discussions on trade. Still, Trump might find a frosty reception in Canada, where officials in Ottawa told Reuters today that divisions between the United States and other G7 members were so great that senior officials in charge of each nation’s preparations planned to hold an unusual additional meeting the night before the summit in a bid to find consensus.


Meanwhile, a group of senators, led by Republican Bob corker of Tennessee, are crafting a plan that would require congressional approval for Trump’s authority to enact sweeping tariffs and other trade policies, and there is even a claw back provision -which would retroactively apply to import adjustments from the past two years, including Trump’s recent tariffs on steel and aluminum. The proposal will be offered as an amendment to the annual National Defense Authorization Act, which is considered must-pass legislation.


All this trade talk has a price. An analyst with JP Morgan Chase puts that price at $1.25 trillion, based upon stock market losses, more or less attributed to tough rhetoric and threats of tariffs. The good news is that it might be temporary, according to the JPMorgan report: “The value destroyed by a trade war might be reversible if policies are reversed, while the positive impact of fiscal measures is likely to remain. This would likely catalyze a rough 4 percent market rally.” However, the bad news is that.. “if this uncertainty hangs over the market for a more extended period of time, the damage becomes more permanent and the probability of a disruptive tail event increases.”


Meanwhile, the nation’s trade gap narrowed sharply in April to a much lower-than-expected $46.2 billion, helped by a dip in cellphone imports. Cellphone imports fell $2.2 billion to pull down the consumer-goods deficit which narrowed by $2.8 billion in the month. Overall, exports rose 0.3 percent in the month to $221.2 billion with goods, led by a gain for industrial supplies and also food. April’s deficit is more than $1 billion narrower than March and far under the $53.1 billion monthly average of the first quarter. This points to a big net-export lift for second-quarter GDP. And a reminder, the data in this series wobbles and the 3 month rolling averages are the best way to look at this series. The 3 month averages are improving for exports and imports, but the data is worse if one considers inflation is grabbing hold in exports and imports – and the headline numbers are not inflation adjusted.


The productivity of American businesses rose at a revised 0.4% annual pace in the first quarter instead of 0.7% as originally reported , leaving the year over year increase at 1.3%. Output — or goods and services produced — climbed 2.7% instead of 2.8%. Hours worked were revised to show a 2.3% gain vs. a preliminary 2.1%. Productivity is determined by the difference between output (2.7%) and hours worked (2.3%). Productivity has been low for years to the detriment of the U.S. economy. When workers increase how much they produce per hour, companies make bigger profits and give larger pay raises. It’s the key to a higher standard of living. The long arc of rapid gains in productivity, came to an abrupt halt about a decade ago. The average annual increase has been cut in half to 1.2% compared to a 2.5% pace from 1948 to 2007. So, what happened? Did American workers get lazy? Or, were workers denied the tools needed to get better at their jobs?


Perhaps the biggest reason productivity has been weak is a prolonged period of low business investment stretching back to the end of the recession. What about all the new technology now available? Some economists point out that many recent innovations — social media apps, smartphones, HDTVs, and digital assistants — are geared toward improving the lifestyles of consumers. They don’t do much to help business like in the 1980s and 1990s when computers came of age. Back then a lot of innovation was geared toward business, whereas now it’s more geared toward consumers.


Tesla shares jumped 9.7% after CEO Elon Musk rebuffed a shareholder attempt to overhaul the electric car maker’s board and strip him of his role as chairman, despite worries about the company’s shaky finances and inability to meet its production goals for its first mass-market sedan. Musk told shareholders that the electric-car maker was “quite likely” to meet its production goal of 5,000 Model 3 cars a week. Not everyone is patient with Musk. Tesla began accepting $1,000 deposits two years ago, with the expectation that customers would likely receive their vehicles in 2018; hundreds of thousands of people have reserved one. But as of the end of April, some 23 percent of all Model 3 deposits in the U.S. had been refunded.


Facebook fell 0.8% after confirming it had shared user data with at least four Chinese tech companies. U.S. officials have warned that devices from one of those companies — Huawei Technologies — could be exploited for state-sponsored spying.


Plane tickets are about to get more expensive. It’s difficult to predict how much more expensive seats will become or the timing of fare increases, but the message is the unanimous from the major carriers. Airlines have a few ways to build in higher fuel expenses. Some might raise base fares by up to $10, especially on long distance flights or business class seats. Others might add fuel surcharges or sell fewer seats at the cheapest prices. Earlier this week, the International Air Transport Association, a global industry group, cut its 2018 profit forecast by 12% from the start of the year, blaming rising fuel and labor costs. In April, American Airlines CEO Doug Parker told analysts he expected higher fares. United also expects more expensive fares. Delta lowered its profit forecast. It said fuel prices were up around 50% from last year and 12% since the beginning of the quarter. The company hinted that higher fares were on the way.


Remember when Amazon bought Whole Foods, and it shook up the entire grocery sector? How about that time Amazon announced a new package-delivery service to compete with FedEx and UPS, sending shares of the two companies falling? Remember when the pharmaceutical supply chain stocks decline after Amazon’s purchase of Whole Foods spurred speculation it could eventually get into healthcare? Remember when JPMorgan, Berkshire Hathaway and Amazon announced they would all work together to form a new kind of health insurance marketplace of some sort? While the three companies weren’t specific about what kind of enterprise they aim to create, noting only that they wanted to improve employee satisfaction while reducing costs, the announcement reverberated through the stock market. Managed care and pharmacy providers absorbed the brunt of the selling, with companies including MetLife, Express Scripts, and UnitedHealth seeing large share drops that accounted for billions of dollars in lost value.


Amazon’s entry, or just the possibility of Amazon entering into any sector, is enough to send big, established companies running like mice from a python. Today, the rumor was that Amazon is looking at getting into the home-insurance business. Shares of Allstate, Chubb, Hartford Financial, Travelers, and Progressive traded sharply lower immediately after the Amazon report hit newswires. While these stocks pared losses shortly after the initial story, the immediate negative effect was undeniable. What’s unique about this situation is that Amazon itself hasn’t made this announcement. Rather, competing home-insurance stocks are falling on unconfirmed reports alone, showing that the mere prospect of getting Amazon’d is enough to wipe out market value.

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