Financial Review

On Hold

…China trade war/dispute on hold. EU works a deal with Iran. SCOTUS goes with arbitration for workers. GE/Wabtech. Vote to rollback Dodd Frank. Buyback boom. Fortune 500.

Financial Review by Sinclair Noe for 05-21-2018

DOW + 298 = 25013
SPX + 20 = 2733
NAS + 39 = 7394
RUT + 10 = 1637
10 Y un 3.07%
OIL + 1.31 = 72.59
GOLD + .30 = 1293.20


Treasury Secretary Steven Mnuchin on Sunday declared the trade battle with China “on hold” after the two countries agreed to drop their tariff threats in favor of hashing out a broader deal. Mnuchin went on to clarify that it was a trade dispute, not even a trade war. The US and China put out a joint statement on Saturday after their second round of trade talks. The talks were intended to get China to cease unfair trade practices it uses against the US and to reduce the US-Chinese trade deficit — and to sort out those differences without sliding into a trade war. The joint statement said, among other things, that China would increase its purchase of US energy and agricultural goods and that China would change its intellectual property practices. Both the agreement itself and what it means for forestalling the possibility of a trade war are still a bit vague. There’s a notable absence of specifics on how many more US goods China will now purchase. Although the Trump administration said it expects China to reduce the US-Chinese trade deficit — that is, the amount by which the US’s imports from China exceed its exports to China — by “at least $200 billion,” no such figure is featured in the joint statement. The statement is also remarkably vague about what China will do in response to the US’s accusations that China unfairly forces US companies to transfer their intellectual property to Chinese companies if they want to do business there.


Treasury Secretary Steve Mnuchin said the administration had agree to “put tariffs on hold” and was “putting the trade war on hold.” But the same day, US Trade Representative Robert Lighthizer released a statement implying that the US was in fact still considering tariffs as a pressure tactic against China. When asked if Trump’s tariffs were “off the table”, National Economic Council Director Larry Kudlow said, “I don’t think we’re at that stage yet.” This is not exactly a trade victory, but it isn’t a defeat – and it was good enough for Wall Street to rally. The Dow Industrials topped 25,000 for the first time since March.


Meanwhile, the European Union has redoubled its efforts to salvage the 2015 Iran Nuclear deal in the wake of Trump’s recent withdrawal of the US. After a weekend of negotiations in Tehran, Iran vowed to uphold the pact curbing its nuclear activities if the EU can offset renewed US sanctions. The EU’s plan faces obstacles. The bloc would have to continue oil and gas purchases to keep Iran’s economy afloat, but do so by making payments outside of the US-dominated global financial system and shielding European firms from US sanctions.


In a 5-4 ruling written by its newest justice, Neil Gorsuch, the US Supreme Court declared that employers can force workers into arbitration, and essentially deny employment to anyone who refuses to waive their civil rights to participate publicly in class-action lawsuits. From the employee perspective, this means that if you’re experiencing issues such as poor working conditions or wage inequities, your employer can keep you from taking the matter to court. Coded as the decision may be, it’s a blow to the #MeToo movement, and the fight for gender equality at work. Forced arbitration often comes along with non-disclosure agreements, which can prevent survivors of sexual harassment from publicly ousting their abusers or rallying public support for their cases. Mandatory arbitration clauses also often limit the amount that can be paid to employees who’ve experienced workplace discrimination.


Under Title VII of the 1964 Civil Rights Act, all US employees are protected from sex discrimination in the workplace. Under this federal law, workers have the right to sue their employer for sex discrimination that is so frequent or severe that it creates a hostile or offensive work environment, or results in an adverse employment decision (such as demotion or firing). Many argue that forced arbitration is effectively illegal, as it inhibits victims of sex discrimination—like sexual harassment or unequal pay—from exercising their civil right to a lawsuit. Whereas employees could previously challenge the mandatory arbitration clauses they’d sign, arguing such clauses violate their civil rights under Title VII, today’s Supreme Court ruling acts as a steel wall of sorts, universally upholding employers’ enforcement of private arbitration, even at the employee’s expense. Congress could still pass legislation to protect employees’ right to class action lawsuits, and there is a bipartisan bill working its way through the process right now.


Micron Technology raised its outlook for the quarter. The PHLX Semiconductor Index advanced 0.8%, recovering some of the lost ground on Friday when chip stocks lagged following a tepid outlook from chip-maker materials supplier Applied Materials. Micron makes DRAM, or dynamic random access memory, chips, the type of memory commonly used in PCs and servers, as well as the flash memory chips that are used in USB drives and smaller devices such as digital cameras. Micron shares advanced 2.6% to $54.80.


Back on April 9, General Electric stock hit a 9-year low of $12.83; today, GE hit $15.55, which means it has recovered just more than 20%. GE announced an $11.1 billion deal to merge its struggling transportation business with Wabtec Corp. GE will receive $2.9 billion in cash at closing and the company and its shareholders will receive a 50.1% ownership interest in the combined company.


GE Transportation makes locomotives, electric drives for the mining industry and engines for the marine industry. Westinghouse Air Brake Technologies Corp., also known as Wabtec, serves the freight rail and passenger transit industries. The reason Wall Street may be cheering the deal, is of GE’s seven main business segments, transportation showed the biggest sales decline in the first quarter, with revenue falling 11% to $872 million while overall revenue increased 6.6%. In 2017, transportation revenue dropped 11% year-over-year in 2017 while overall revenue slipped 1.3%. In comparison, Wabtec revenue rose 15% in the first quarter and grew 31% in 2017.


LaSalle Hotel Properties decided to sell itself to private equity firm Blackstone Group for $3.7 billion in cash, rejecting a cash-and-stock offer from rival Pebblebrook Hotel Trust.


Fifth Third Bancorp has agreed to buy smaller rival MB Financial in a stock-and-cash deal valued at about $4.7 billion, as it looks to expand in Chicago.


The House is set to vote – maybe tomorrow –  on a Senate bill that would cut regulations for thousands of community banks and regional lenders. The bill would raise the threshold at which banks are considered “too big to fail.” More than two dozen midsize US banks would be shielded from some Federal Reserve oversight. They would no longer have to hold as much capital to cover losses on their balance sheets. They would not be required to have plans in place to be safely dismantled if they failed. And they would have to take the Fed’s bank health test only periodically, not once a year.


One of the bill’s provisions could make it easier to get a mortgage from a community bank or credit union. In simple terms, the changes would let smaller institutions — those with up to $10 billion in assets — offer mortgages that are not subject to some of the strictest federal underwriting requirements, as long as they meet certain other conditions. The bill also includes two provisions affecting the repayment of private student loans. The first would prohibit a lender from declaring default or accelerating repayment terms when a co-signer of the loan declares bankruptcy or dies. The other provision would make it easier to remove a private student loan default from your credit report.


Corporate America is throwing a record-setting party for shareholders. S&P 500 companies showered Wall Street with at least $178 billion of stock buybacks during the first three months of 2018. That’s a 34% bump from last year and tops the prior record of $172 billion set in 2007, just prior to the start of the Great Recession. Apple rewarded shareholders with $22.8 billion in buybacks — the most of any company in any quarter ever. Total S&P 500 shareholder payouts — buybacks plus dividends — for the past 12 months could top $1 trillion for the first time ever. The buyback bonanza occurred during the first full quarter after a massive corporate tax cut that was supposed to lift business spending on job-creating investments. The tax law reduced the corporate tax rate to 21% from 35% and gave companies a break on taxes owed when returning foreign profits. That one-two punch allowed companies to reap huge profits, a sizable chunk of which have been returned to shareholders. Profits had already been on the rise thanks to the accelerating economy. Buybacks are clearly booming, but business spending — the stated goal of the tax law — has not significantly accelerated, at least not yet. One broad measure of business spending, real nonresidential fixed investment, rose by 6.1% during the first quarter. That’s solid growth signaling a strong economy. However, it was roughly in-line with the past several quarters. It even marked a slight deceleration from the final three months of 2017. That means companies have not significantly boosted spending on equipment, factories and other investments that create jobs and boost wages.


Fortune released its annual Fortune 500 ranking of the US’s largest companies today, and while Walmart made history—it’s the first American company to boast $500 billion in annual sales—Amazon had its own coming-out party, making the top 10 for the first time – ranked eighth this year, up from 12th in 2017. Just three companies have ever topped the Fortune 500: Walmart, Exxon Mobil, and Berkshire Hathaway, which (in that order) make up this year’s top three as ranked by revenue; followed by Apple, United Health, McKesson, CVS, Amazon, AT&T, and GM.

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