Financial Review

Not Exactly

….On again off again trade wars/disputes, whatever. Oil prices and everything else starting to pinch. Dodd Frank rollback because…, it works? Zuckerberg goes to the EU. SpaceX again.

Financial Review by Sinclair Noe for 05-22-2018

DOW – 178 = 24,834
SPX – 8 = 2724
NAS – 15 = 7378
RUT – 12 = 1625
10 Y un = 3.07%
OIL – .15 = 72.09
GOLD – 1.60 = 1291.60

Stocks gave back most of yesterday’s gains. Yesterday, the trade war with China was put “on hold”. Today, not exactly. Trump questioned a potential trade agreement with China that his administration announced days earlier, indicating he isn’t satisfied with the deal, whatever the deal might be. And by the way, he still wants a ban on Chinese telecom company ZTE, which is facing stiff penalties for violating sanctions against North Korea and Iran. Meanwhile the proposed June summit with North Korean dictator Kim Jong Un, may not happen according to Trump.


Tomorrow, we will look at the minutes from the Federal Reserve’s FOMC policy meeting in May. They did not hike rates, but the minutes might help to plot whether the Fed is hawkish or dovish – the difference being 2 or 3 more rate hikes for the remainder of the year.


Oil prices took a split path today, with the global benchmark, Brent crude, scoring a fresh 3½-year high while the U.S. benchmark, West Texas Intermediate, edged lower, with traders weighing the potential influence of developments tied to Iran and Venezuela against the prospects for domestic crude production. The West Texas Intermediate contract, which expired at the day’s settlement, ended at $72.24 a barrel on Monday to mark the highest finish for a front-month contract since Nov. 26, 2014. Global benchmark July Brent crude however, climbed 35 cents, or 0.4%, to $79.57 a barrel on ICE Futures Europe, for another finish at the highest for a front-month contract since late November 2014. It traded as high as $80.49.


On Monday, Trump issued an executive order “prohibiting certain additional transactions” with respect to Venezuela. In part, it bans the U.S. purchase of any debt owed to the government of Venezuela. And Venezuela ordered the expulsion of two top U.S. diplomats in Caracas in retaliation for a new round of sanctions over Venezuela’s widely-condemned election. Sanctions on Venezuela’s oil industry could intensify worries about a drop in global supply. OPEC expects to increase output in June to compensate for shortages from Iran. West Texas Intermediate crude has risen over 50% since August. The SPDR S&P Oil & Gas Exploration & Production is up 48%, compared with 13% for the S&P 500, including dividends. According to AAA, gas prices across the country are the highest they’ve been since Memorial Day weekend four years ago. The average price of regular-grade gasoline in the U.S. jumped 10 cents a gallon over the past two weeks to $3.


If it seems like prices are going up – they are. Dozens of companies in recent weeks have said they already hiked prices or plan to in the coming months to combat inflation. Deere said that it would raise prices for its equipment because of higher material and freight costs. McDonald’s and Chipotle have raised burger and burrito prices. Amazon is increasing Prime memberships by 20%. Netflix made monthly subscription prices 10% higher late last year. Tyson Foods is planning to make Ball Park hot dogs more expensive, while Stanley Black & Decker will hike the prices of their industrial tools. American Airlines is considering raising air fares to cover higher fuel costs, maybe in the next month. Steel and aluminum prices are also going up, a concern for consumers. Campbell Soup said that it expected double-digit increases in the two. Freight costs are climbing. There aren’t enough truck drivers right now to haul all the products manufacturers are churning out around the country. That has sent shipping costs soaring.


Households are feeling more stable, small businesses are making money and many expect to expand and hire in the coming year, signs of continued optimism in two key parts of the economy. Among more than 8,000 small businesses and more than 12,000 households covered in separate surveys late last year by the Fed and its 12 regional banks, the message was similar: economic conditions have been getting better and the expectation is for the good times to continue. Among households, 74 percent of U.S. adults said they were financially comfortable or at least okay in 2017, four percentage points higher than in 2016 and 10 percentage points higher than the first survey year of 2013. The survey of small businesses shows improved business confidence and improved business performance. With profitability and access to finance increasing in 2017, more than 70 percent of firms expecting revenue growth next year, and 48 percent expecting to add employees.


The House of Representatives is expected to pass legislation that would roll back some rules on community banks and regional lenders designed to prevent another financial crisis. Although bankers have complained of excess regulation, a new FDIC report shows that the industry is hardly drowning in regulation. The Dodd-Frank reform law was signed into law in July 2010. Since then, bank profits have increased by 135% as the economy climbed out of the Great Recession. Both Morgan Stanley and Bank of America logged record quarterly earnings, while a critical measure of profitability at Goldman Sachs hit a five-year high. JPMorgan Chase, the largest American bank, made $8.7 billion last quarter. That was the largest quarterly profit by any US bank ever. The FDIC said that 70% of the nation’s 5,606 banks grew their bottom line during the last quarter.


Corporate tax cuts boosted bank profits by about $6.7 billion in the first quarter. However, banks would have still made a record $49.4 billion without the tax cuts. At the urging of regulators, American banks have also built up quite the rainy day fund. The industry is sitting on nearly $2 trillion of capital that can help weather the next storm. You might think that with all that money, banks would be eager to lend. Not exactly. Loan growth has remained anemic, despite the strength of the US economy and healthy bank balance sheets. The FDIC said that commercial and industrial loans increased by 1.9% last quarter, while nonfarm nonresidential loans ticked up by 0.8%. Mortgage lending inched just 0.4% higher.


The percentage of money-losing banks dropped to just 3.9%. The FDIC’s list of problem banks fell to just 92, the lowest level since the first quarter of 2008. Community banks, which many say were unfairly snagged by Dodd-Frank, look healthy as well. The FDIC said that the nation’s 5,168 community banks grew their bottom lines by 18% during the first quarter to $6.1 billion. The agency noted that community lenders grew loans faster than the overall industry. So, the plan is to roll back regulation because…, it works?


Facebook CEO Mark Zuckerberg was questioned on today by political leaders and lawmakers at the European Parliament in Brussels for about 80 minutes. His replies left them mostly frustrated. They used the last few minutes of the meeting to complain and accused him of giving general answers. The setup of the meeting was largely to blame. The lawmakers were given three minutes each to ask their questions one after another. Zuckerberg was allotted time at the end to answer them.


As time ran out, Zuckerberg promised Facebook will respond to each of the lawmakers’ questions in writing in the “next few days.” The group asked Zuckerberg about fake news and extremist content, accused him of “censorship” and suggested Facebook should be broken up into separate companies to increase competition. Zuckerberg apologized for how Facebook handled issues related to fake news, foreign interference in elections and the personal information of its users at the start of the meeting. Multiple members of the European Parliament pressed Zuckerberg on whether Facebook is a monopoly, with one asking whether the CEO could convince him that the company does not need to be broken up. The lawmakers also raised the issue of extremist content on Facebook, pressing Zuckerberg on the need to remove hate speech faster. As was the case when he appeared before Congress, Zuckerberg largely avoided answering questions about Facebook’s data collection practices, including the data it gathers from non-users.


JCPenney’s stock price fell by as much as 8% this morning following news that CEO Marvin Ellison would leave the company to lead the home-improvement retailer Lowe’s. Ellison, who became the CEO of JCPenney in 2015 after a 12-year stint at Home Depot, was tasked with bringing the department store back from the brink of financial disaster. Ellison’s immediate predecessor, Ron Johnson, tried to make the store more upmarket but alienated core customers in the process, leading to a $1.42 billion operating loss in 2013 and nearly $5 billion of debt. With Ellison at the helm, JCPenney has undergone a turnaround, and sales stabilized. The retailer has increased traffic to stores by reintroducing appliances to capitalize on Sears’ declining sales, and expanded its private-label collection.


Sony Corp said it would pay about $2.3 billion to gain control of EMI, becoming the world’s largest music publisher. Global mergers and acquisitions have already reached $2 trillion in 2018, a record for the value of deals in the period, according to data from Thomson Reuters. The last two periods when M&A reached similar levels were in 2007 ($1.8 trillion), a year before the financial crisis and in 2000 ($1.5 trillion), just before the bursting of the bubble of technology and internet related stocks.


SpaceX launched a batch of satellites into space, including two twin satellites for NASA that will observe how water moves around our planet. Those twin satellites, about the size of small cars, will map changes in Earth’s water and ice, such as rising sea levels and melting of the polar ice caps.

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