Financial Review

Not Happening

…..McCain is sick, healthcare legislation is sicker. Blackrock disappoints. Netflix grows subscribers. FAANG leads market but soft on earnings. China’s predictable GDP. Brexit begins. Can’t find the paperwork on student loans. Made in America.

Financial Review by Sinclair Noe for 07-17-2017

 

DOW – 8 = 21,629
SPX – 0.13 = 2459
NAS + 1 = 6314
RUT + 2 = 1431
10 Y – .01 = 2.31%
OIL – .54 = 46.00
GOLD + 5.30 = 1234.70

 

Sen. John McCain revealed over the weekend that he had surgery to remove a blood clot from above his eye. His doctors also said the surgery went “very well,” and the senator is resting at home. As a result, he will not be returning to Washington this week and there is no guarantee he’ll be back after this week, and his absence has suddenly brought consideration of the Senate health care bill to a halt. Here’s what McCain’s absence does to McConnell’s whip count: There were already two Senate Republicans who have said they would vote “no” on motion to proceed on this bill — Sens. Rand Paul and Susan Collins. McCain’s absence means there is not a Republican majority on the healthcare legislation. Leadership was pushing for a first procedural vote on the Senate health care bill for as early as Tuesday. That’s no longer happening. We were expecting an updated score from the Congressional Budget Office on the revised Senate bill today. That is also not happening. No guidance from the CBO on when we’ll see that score. Regardless of the timing, Republicans hope the report will look better than an earlier version, which said the Republican plan would cause 22 million Americans to lose insurance by 2026. It’s not guaranteed, though, that the fresh analysis will show dramatically better effects. Meanwhile, the delay on healthcare legislation is likely to spill over to tax reform. It would be difficult to address taxes without understanding the potential impact of healthcare.

 

Before the opening bell, Blackrock, the world’s largest asset manager reported second-quarter adjusted earnings per share of $5.24 on revenue of $2.96 billion, missing estimates on both the top and bottom lines. The firm’s second-quarter assets under management rose 16 percent year over year to $5.689 trillion, topping analyst expectations. BlackRock also said assets under management for its exchange-traded fund business iShares topped $1.5 trillion, helped by record net inflows of $74 billion.  Blackrock dropped over 3% today.

 

After the closing bell, Netflix reported earnings – although for Netflix the attention is on subscribers, rather than traditional top line, bottom line numbers. Netflix added more than 5 million subscribers in the June quarter, bringing its total subscriber base to about 104 million. The vast majority of new subscribers — more than 4 million — came from its overseas markets. In fact, Netflix’s international subscriber base is now larger than the U.S. for the first time. The strong growth beat Netflix’s own estimates and caused the stock to spike 10% in after-hours trading. Oh yeah, revenue came in at $2.79 billion, a little better than estimates. Earnings were 15 cents per share missing estimates of 16 cents.

 

A moat is a deep, wide ditch surrounding a castle or fort, typically filled with water and intended as a defense against attack. An economic moat refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Blue Apron Holdings does not have a moat. Shares of the meal-kit delivery company sank as low as $6.51, a 35 percent drop since its initial public offering. Amazon filed a July 6 trademark application for “prepared food kits composed of meat, poultry, fish, seafood, fruit and/or vegetables . . . ready for cooking and assembly as a meal.” Blue Apron has been telling investors that its offering is different than basic grocery delivery. Amazon’s interest in meal kits directly undermines that pitch. The barbarians are at the drawbridge.

 

A mix of financial services, entertainment, transportation and technology companies are reporting earnings this week. JPMorgan Chase, Citigroup and Wells Fargo all posted higher-than-expected second-quarter earnings on Friday, even though they had weak trading revenue. That trend is expected to continue this week when Bank of America and Goldman Sachs post results.

 

The FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet-Google) are expected to be an overall drag on second quarter earnings growth despite their stock performance. The FAANG companies’ earnings growth is expected to be 6 percent for the second quarter. But the overall earnings growth for the S&P is expected to be north of 8 percent. The overall earnings growth for FAANG stocks is in contrast to their stock performance. The market cap of the FAANGs increased by $119.85 billion during the second quarter, or about 22.2 percent of the overall increase in market cap of the S&P 500. Each of the FAANG stocks has significantly outperformed the S&P 500 this year.

 

Business activity grew modestly in New York State. The July 2017 Empire State Manufacturing Survey general business conditions index fell ten points to 9.8. The new orders index moved down to 13.3, and the shipments index fell to 10.5, suggesting that orders and shipments continued to grow, though at a somewhat slower pace than in June.
China’s gross domestic product grew 6.9% in the second quarter, according to government data released Monday, the same figure as the previous quarter and marginally higher than most forecasts. The latest numbers position the economy above Beijing’s stated growth target for 2017. But China’s speedy growth – an uptick from the 6.7% it recorded last year –  will be difficult to sustain in the months to come. The Chinese government announced last week it would change the way it calculated economic growth for the first time in 15 years, adding healthcare, tourism and the “new economy” to the overall figure. It was not immediately clear whether those additions had an impact on growth. The latest growth numbers will also likely reinforce skepticism among analysts about the reliability of official statistics. But, there’s a bigger story, which is that emerging-market finances are their best in years, bolstering confidence that they can withstand monetary policy tightening in developed economies. The 12-largest emerging-markets now have foreign-exchange reserves totaling $3 trillion, up from $2.92 trillion in late 2015 and the most since 2014. Emerging-market stocks posted their best performance in a year last week, gaining 4.45 percent as the MSCI Emerging Markets Index rose for five straight days. So, time for a breather, right? Not exactly. The market for developing-nation stocks plowed ahead again on Monday, bringing its year-to-date gain to 21.9 percent.

 

Brexit negotiations between the UK and the EU officially kicked off today. Over the course of the next few years the UK’s entire relationship with the rest of Europe is likely to be totally reshaped. Nowhere is that more true than in British industry, where firms are almost certain to have to adjust to life outside the European Single Market and to an entirely new trading relationship with what is for most industries, their biggest trading partner. The Office for National Statistics dropped a whole heap of data about the British industries that are likely to be most impacted by Brexit, as well as where those industries are clustered. This helps to create a reasonable picture of the parts of the UK where Brexit could have the largest impression. For example, one of the industries likely to suffer most at the hands of Brexit is the UK’s automobile industry. Financial services are another area where the Brexit negotiations could cause trouble, causing problems for London, where the sector is heavily concentrated.

 

Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing. The troubled loans, which total at least $5 billion, are at the center of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments. Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing. A review of court records by The New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation.

 

Some of the problems playing out now in the $108 billion private student loan market are reminiscent of those that arose from the subprime mortgage crisis a decade ago, when billions of dollars in subprime mortgage loans were ruled uncollectable by courts because of missing or fake documentation. And like those troubled mortgages, private student loans — which come with higher interest rates and fewer consumer protections than federal loans — are often targeted at the most vulnerable borrowers, like those attending for-profit schools. One of the nation’s largest owners of private student loans and one of the most aggressive at collecting delinquent loans, the National Collegiate Student Loan Trusts, is struggling to prove in court that it has the legal paperwork showing ownership of its loans, which were originally made by banks and then sold to investors. Judges throughout the county, including recently in cases in New Hampshire, Ohio and Texas, have tossed out lawsuits by National Collegiate, ruling that it did not prove it owned the debt on which it was trying to collect.

 

The White House is highlighting products Made in America. They have compiled a list of products from each state. Some are pretty obvious: wine from California and Stetson cowboy hats from Texas. Other picks were less obvious: North Carolina’s product is Cheerwine soda. I’ve never heard of Cheerwine soda. Meanwhile, Georgia’s product is Chik-fil-a sandwiches, not Coca-Cola.  So, go figure. Arizona’s Made in America product is Ping golf clubs.

 

 

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