Financial Review

Not a Drill

…Election Day, finally. JOLTS, a job for everybody. The cost of tariffs. Sanctions on Iran.

Financial Review by Sinclair Noe for 11-06-2018

DOW + 173 = 25,635
SPX + 17 = 2755
NAS + 47 = 7375
RUT + 8 = 1556
10 Y + .01 = 3.21%
OIL – 1.40 = 61.70
GOLD – 4.20 = 1227.40

Today is the day — this is not a drill. The first polls back East have just closed. As more polls close over the next couple of hours, we might start to see some trends develop. There’s still in people’s minds the idea that there could be a surprise. Most people are waiting to see what the results are before they make any major investment decisions. There is a strong possibility that the election will result in political gridlock. There could be another leg higher if we get gridlock because the existing economic agenda won’t be altered materially. Or we could get a rally, just because the elections are finally over, and there is some certainty. Nobody knows how the election will unfold. Nobody knows how it will impact the markets. We will only know in the fullness of time.


The trend in Congress is less. A Washington Post and ProPublica analysis found “a weakened legislative branch in which debate is strictly curtailed, party leaders dictate the agenda, most elected representatives rarely get a say and government shutdowns are a regular threat.” For just one empirical example: In 2005 and 2006, House committees met 449 times to consider legislation, and Senate committees met 252 times. By 2015 and 2016, they met only 254 and 69 times, respectively.


Beyond electing governors, members of the Senate and House, voters in 37 states will decide on 155 statewide ballot measures. Those measures range from displaying the ten commandments on state property in Alabama to legalizing casino gambling in Florida. Additionally, 15 states will vote on measures relating to election policy such as voting requirements and campaign finance.


Also, on the ballot in four states are initiatives to legalize marijuana usage. Voters in North Dakota and Michigan will be deciding on legalizing recreational marijuana, while in Missouri and Utah, voters will decide on the legalization of medical marijuana. Oklahoma recently legalized medical marijuana through a ballot initiatives earlier this year. Both Arkansas and Missouri will be voting on initiatives to raise the minimum wage. In Arkansas, which is currently ranked as the second lowest cost of living state, the minimum wage is currently $8.50. The ballot initiative, if passed, will raise the minimum wage in the state incrementally to reach $11 an hour by 2021.


In Missouri, which is currently ranked as the seventh lowest cost of living state, the minimum wage is currently $7.85 an hour. If voters approve of the initiative, by 2023 the minimum wage will be $12 an hour. Given that voters will be the ones to determine whether or not the minimum wage is increased in the two states as opposed to elected representatives. Since January 2014, 27 states and Washington, D.C., have increased their minimum wages.


State ballot measures aren’t getting the same attention as this year’s key congressional races, but they are leading to big spending by companies hoping to win over voters. In Montana, tobacco giant Altria Group has shelled out $17 million to fight against a ballot initiative that aims to fund an expansion of Medicaid through additional taxes on tobacco products. Montana’s ballot measure would lead to an additional $2 per pack tax on cigarettes, as well as new levies on e-cigarettes. In California, dialysis provider DaVita has spent $67 million to battle Proposition 8, which proposes limits on how much clinics can charge for dialysis, a vital treatment for people with kidney disease. Also, in the Golden State, investment firm Blackstone Group is funding a push back against Prop 10, which would give localities more authority to pursue rent control.


Problems with voting machines were preventing some Americans from casting ballots in a dozen states. A Homeland Security official said the agency had received reports of “sparse” voting technology failures, but said that so far they appeared to have had no significant impact in preventing people from voting.


The economy is strong, and we had a reminder this morning when the Labor Department released the Job Openings and Labor Turnover Survey, also known as JOLTS. The number of job openings in the U.S. fell in September just a month after setting an all-time high, but companies are still scrambling to find workers and offering higher pay and benefits to attract them. Job openings slipped to 7 million on the last day of September from a record 7.3 million in August. Even after the decline, job openings still exceed the 6.1 million Americans officially classified as unemployed. Job openings first surpassed the number of unemployed in the early spring. The share of people who left jobs on their own, known as the quits rate, was unchanged at 2.7% among private-sector employees. That’s the highest level during the current expansion and close to the record high of 2.9% set in 2001. Workers quit their jobs more often when they feel secure enough in finding another, a sign the economy is strong. Typically workers who move end up better paid. Job openings increased in transportation, health care and restaurants. Somewhat fewer jobs were available in most other industries such as construction and manufacturing.


The Food and Drug Administration has approved an opiate painkiller tablet, called Dsuvia, that is 1,000 times stronger than morphine and 10 times stronger than fentanyl. It’s meant to be used in hospitals as “a fast-acting alternative” to intravenous painkillers.


U.S. businesses paid out $4.4 billion in tariffs in September, a surge of more than 50 percent from the same month a year ago. The increase was largely driven by $1.4 billion in Trump administration tariffs on Chinese imports and foreign steel and aluminum. In March, Trump announced new duties on all steel and aluminum imports, citing national security concerns. The measures cost U.S. companies about $545 million in September. Even more costly were tariffs levied against China, which the administration has accused of stealing U.S. intellectual property. Those tariffs accounted for $800 million in September, even though the bulk didn’t take effect until the end of the month. U.S. exports also suffered as countries fought back with tariffs of their own on American products ranging from soybeans to bourbon to cheese. Shipments of products subject to retaliatory tariffs declined by $2.5 billion, or 26 percent, from the previous year. At the same time, products not subject to those tariffs remained steady.


Since withdrawing in May from the 2015 Iran nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), Trump has been looking for ways to turn up the pressure on the Iranian regime. On Nov. 4, U.S. sanctions on the country’s vital oil industry went into force. And the administration is ready to go even further, by imposing secondary sanctions on other countries with the goal of shutting Iran out of the dollar-based global economy entirely.


To that end, the U.S. wants to bar Iranian banks from the Society for World Interbank Financial Telecommunications (SWIFT) and the global payments system that it oversees. This would effectively send Iran back to a pre-globalization dark age. The problem for Trump and his advisers, though, is that SWIFT is not a U.S. institution. It is registered and based in Belgium, which, along with the European Union’s 27 other member states, supports the JCPOA.


In theory, targeted sanctions are a way to precisely focus the economic pain of sanctions. The new sanctions that went into effect yesterday, and the add-on secondary sanctions against companies that maintain relations with Iran, well, that’s more like a cluster bomb – and the damage is widespread. The US has been demanding compliance by threatening individuals on European corporate boards, including the directors of SWIFT, with targeted sanctions. Even more shocking, similar threats have reportedly been made against key European public officials. European leaders’ request to the European Investment Bank for its help in supporting the Iran nuclear deal doesn’t seem to have borne fruit, most likely owing to US threats against the EIB’s corporate interests and directors. Moreover, there are even rumors of veiled US threats against central bankers, including the directors of the European Central Bank.


You can’t rule out the possibility that top European officials are being pressured to shirk international law out of fear of being imprisoned on their next trip to the US. Not surprisingly, Europeans are debating the appropriate use of sanctions. Several Eurozone leaders are calling for the creation of an independent European payments system – an alternative to the dollar-denominated system of global payment. Changes to global finance typically move at a snail’s pace. In the near term, the question for Europeans is how to hold their own in a dollar-denominated world. Over time, the EU (and others) will make a case for a foreign exchange that is not ruled by the dollar. And that might be the most dangerous aspect of the Iran sanctions. Meanwhile, Iran said today it had so far been able to sell as much oil as it needs despite US sanctions.


Shares of fertilizer company Mosaic rose 10.6 percent and building materials producer Martin Marietta Materials gained 8.4 percent after strong results. Healthcare stocks got a boost from Mylan, which jumped 16 percent after the generic drugmaker reported a bigger-than-expected third-quarter profit as it sold more products in emerging markets. Pharmacy chain CVS Health rose 5.7 percent after its results.


Polls in Arizona are open until 7PM.

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