Financial Review

Out of the Void

…July was a good month on Wall Street. Apple beats. Facebook does something about bad actors. Home prices up, but construction loses workers. Consumer confidence up. PCE up. Spending up.

Financial Review by Sinclair Noe for 07-31-2018

DOW + 108 = 25,415
SPX + 13 = 2816
NAS + 41 = 7671
RUT + 17 = 1670
10 Y – .01 = 2.96%
OIL – 1.70 = 68.43
GOLD + 2.40 = 1224.40


Today was the last trading day of July, and the major averages posted solid monthly gains. The Dow rose 4.7% and S&P 500 was up 3.6%, their biggest monthly gains since January. The Nasdaq, meanwhile, climbed more than 2% in July and notched its fourth straight monthly gain. About 60 percent of the S&P 500 companies have released quarterly results, with 82 percent of those companies posting better-than-expected earnings. The corporate earnings season continued today with Dow components Procter & Gamble and Pfizer reporting better-than-expected earnings. Shares of Procter were up 0.9 percent, while Pfizer’s stock gained 3.5 percent.


After a few days of sharp declines, especially in the tech sector, the bargain hunters stepped in to fill the void. Since the financial crisis, the Nasdaq has posted three straight losses of 1 percent or more on five occasions. Following those drops, the Nasdaq has risen more than 5 percent over the next month. And we might see another bounce tomorrow, thanks to Apple.


After the closing bell, Apple posted a solid earnings report. Apple beat sales estimates in part by selling fewer but pricier iPhones. The company sold 41.3 million units, below expectations of 41.8 million units. The average iPhone selling price hit $724, beating analyst expectations of $694. Apple posted third-quarter revenue of $53.3 billion and profits of $2.34 per share, compared with analyst estimates of $52.3 billion and $2.18 per share. EPS grew by 40 percent year-over-year, and revenue grew by 17 percent year-over-year.  Arguably the most useful number in Apple’s fiscal third-quarter report was its September-quarter outlook of $60 billion to $62 billion in revenue, which will include early sales of soon-to-be-announced phone models, beating the $59.6 billion analysts expected. Apple shares were up 3.7% in after hours trade.


Apple has so far avoided the fallout of an ongoing trade war with China. But with each country ratcheting up tariffs, Apple’s deep roots in China could start to feel the effects. Much of Apple’s supply chain is in China, and China accounts for the company’s second-largest source of revenue.


And as a point of comparison – In Samsung’s just released Q2 report, the South Korean electronics conglomerate missed the mark on Galaxy S9 sales targets. The smartphone, which was released at the end of last quarter, accounts for a major chunk of Samsung’s 4 percent year on year drop in revenue.


Facebook finally did something. In a series of briefings on Capitol Hill this week and a public post today, Facebook told lawmakers that it had detected and removed 32 pages and accounts connected to the influence campaign on Facebook and Instagram as part of its investigations into election interference. It publicly said it had been unable to tie the accounts to Russia, whose Internet Research Agency was at the center of an indictment earlier this year for interfering in the 2016 election, but company officials told Capitol Hill that Russia was possibly involved. Facebook said that the accounts — eight Facebook pages, 17 Facebook profiles, and seven Instagram accounts — were created between March 2017 and May 2018 and first discovered two weeks ago. Those numbers may sound small, but their influence is spreading: More than 290,000 accounts followed at least one of the suspect pages. Facebook’s head of cybersecurity policy, said that the activity bore some similarities to that of the Internet Research Agency, but that the actors had better disguised their efforts, using VPNs, internet phone services and third parties to purchase ads for them. After being caught flat-footed by the Russian Internet Research Agency’s efforts to use social media to sow division ahead of the 2016 presidential election, Facebook is trying to avoid a repeat disaster in 2018. The company has expanded its security team, hiring counterterrorism experts and recruiting workers with government security clearances. And all it took was a $120 billion hit to market cap to get their attention.


The S&P CoreLogic Case-Shiller 20-city home price index rose 6.5 percent in May from a year earlier. That’s down slightly from April, but is still more than double the increase workers are seeing in their paychecks. Mortgage rates have also increased, pushing up monthly costs for home buyers even further. Sales of existing homes have fallen for three straight months after peaking in November. Pending home sales have also declined over the past year. Still, home prices in some of the hottest real estate markets continue to move higher: Prices rose 13.6 percent in Seattle from a year earlier, 12.6 percent in Las Vegas and 10.9 percent in San Francisco. In Phoenix, existing home prices increased 1.1% in the three-month period ending in May compared to the April report and prices jumped 7.3% for the past 12 months.


A decade after the housing bust, home construction per household remains near the lowest level in 60 years of record-keeping, according to the Federal Reserve Bank of Kansas City. That is a big reason why U.S. home prices are rising much faster than incomes, and why the homeownership rate remains stuck a full percentage point below the 50-year average. The share of workers in the sector who are 24 years old or younger has declined in 48 states since the last housing boom in 2005. Nationally, the share of young construction workers declined nearly 30% from 2005 through 2016. The U.S. had 11.7 million construction workers in 2005, but that peak fell to 10.8 million in. Even as the economy and housing market recovered, the number of workers continued to fall, hitting 10.2 million in 2016. Declining numbers of immigrant construction workers have also sapped builders of unskilled labor. States hit hardest by the housing bust saw on average the greatest decrease in the share of young construction workers between 2005 and 2010. States where cost of living are high have the worst overall shortages of construction workers.


The consumer confidence index rose to 127.4 in July from a revised 127.1 in the prior month. Although just below a recent peak of 130, it’s still one of the highest readings in 18 years. The present situation index, a measure of how the economy is doing right now, rose to 165.9 from 161.7. The expectations index that looks six months into the future declined to 101.7 from 104. So, the economy looks good now but it will probably get worse.


The PCE index, the Federal Reserve’s preferred inflation gauge, rose 0.1% in June. So did the core rate. The rate of inflation over the past 12 months flat-lined at 2.2% in June. Although that matches a six-year high, inflation appears to have crested, at least temporarily, after a prolonged upturn. Similarly, the yearly change in the core rate was unchanged at 1.9%. The core rate strips out food and gas to measure inflation for people who don’t travel or eat.


Consumer spending rose a solid 0.4% in June. Americans spent more at restaurants and hotels as summer got underway. Auto dealers also posted strong sales. The increase in spending was supported by rising incomes. Even though spending rose sharply in the spring and early summer, the U.S. savings rate held steady at 6.8%.


At least 140 people claimed they got sick after eating at a Chipotle restaurant in Powell, Ohio, over the past several days. The restaurant was closed on Monday and is still closed. That’s bad. Today is National Avocado Day, which Chipotle celebrated by offering a free guacamole deal. Guac fans were promised free avocado with any online or in-app purchase of an entree on July 31. However, the app was not working for some, and online, users were met with the disappointing “technical difficulties” notification. Chipotle shares down 8%.




Pandora Media shares jumped more than 9 percent during extended-hours trading after a smaller-than-expected loss for its second quarter earnings.


Cheesecake Factory’s stock fell more than 9 percent in after-hours trading following top and bottom line misses for its second quarter results.


Campbell Soup shares are up about 3 percent during extended-hours trading after Dow Jones reported that activist investor Third Point has built a stake in the soup company of more than $300 million.


Brookfield Asset Management said it would buy Forest City Realty Trust  in a deal valued at $11.4 billion, including debt. Forest City’s portfolio includes office space, life science assets, retail space and multifamily units, as well as large-scale projects in New York, San Francisco and Washington, D.C.


As we move through earnings season, it is also time for some hedge funds to come clean. Greenlight Capital, the fund run by David Einhorn has been struggling and its second quarter letter to investors reflects the mistakes. Einhorn wrote: “We had another difficult quarter and lost an additional (5.4)%,1 bringing the Greenlight Capital funds’ (the “Partnerships”) year-to-date loss to (18.3)%. During the quarter, the S&P 500 index returned 3.4%, bringing its year-to-date return to 2.6%. Over the past three years, our results have been far worse than we could have imagined, and it’s been a bull market to boot.” The letter continued: “Right now the market is telling us we are wrong, wrong, wrong about nearly everything.”

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