Financial Review

Pass the Purell

…Judiciary hearings – not democracy at its finest. Impact on SCOTUS. 2Q GDP at 4.2%. Pending home sales fall. Trade deficit grows. Ford braces for a tariff hit. Volvo has electric trucks. Elon Musk sued by SEC. Medical pot moves forward.

Financial Review by Sinclair Noe for 09-27-2018

DOW + 54 = 26,439
SPX + 8 = 2914
NAS + 51 = 8041
RUT + 0.43 = 1692
10 Y – .01 = 3.06%
OIL + .62 = 72.19
GOLD – 11.70 = 1183.40

 

The S&P 500 rose for the first time in five days. The Dow Jones Industrial Average, meanwhile, ended a three-day slide. Apple rose 2.1 percent after J.P. Morgan initiated the stock with an overweight rating. Amazon, meanwhile, gained 1.9 percent. Facebook, Alphabet and Twitter also closed higher, lifting the broader tech space and the overall equity market. Yesterday, the Federal Reserve FOMC raised rates by 25 basis points, its third rate hike of the year. The Fed also removed the word “accommodative” from its policy statement. Fed chair Jerome Powell followed up with a new message for financial markets: watch the data on jobs, wages and inflation for signals on monetary policy – not the U.S. central bank’s words or forecasts. He noted that he is unsure when the rate increases he and his colleagues expect to deliver in the next year or two will start to bite into economic growth, or whether the economy’s underlying momentum has sped up enough to offset any such drag.

 

A meeting between Trump and Deputy Attorney General Rod Rosenstein scheduled for Thursday was delayed until next week. On Monday, October 1, the Supreme Court will start its 2018-’19 term. Because it’s a new term, there isn’t a backlog of pending cases that have been argued and haven’t been decided yet. Still, the calendar is full. The Court’s hearing six cases next week, five cases the week after, six cases the last week of October, and six cases the first week of November. But that’s it. The rest of the Court’s schedule isn’t set — there are a lot of cases that the Court has agreed to hear at some point, but hasn’t set a date for. And if it looks likely that there won’t be a nine-justice court until after the first week of November, the justices will probably keep declining to schedule the cases that they know they’ll want nine votes on.

 

Since nominee Brett Kavanaugh hasn’t even had a confirmation vote in the Senate Judiciary Committee yet — much less on the full Senate floor — there might be only eight justices on the Court when the term begins. The Supreme Court is perfectly able to function with only eight justices — they did so for over a year after Justice Antonin Scalia died in February 2016. Remember that most Supreme Court cases don’t break down along partisan lines. Under Chief Justice John Roberts, in particular, there are a lot of unanimous decisions. And there’s no difference between an 8-0 vote and a 9-0 vote. But even a 4-4 split isn’t the end of the world; it just means that the lower court’s ruling stays in effect. That can be frustrating when there are conflicting rulings from different lower courts, but it’s generally survivable — and there’s nothing stopping the Court from taking a similar case up once there are nine justices to resolve the same question. If Kavanaugh is not confirmed by Monday, he will surely miss out on certain cases. Meanwhile, today’s testimony before the Senate Judiciary Committee was compelling, even riveting at times. The hearing, the format, and even Rachel Mitchell (the inquisitor imported from Arizona to relieve republican senators of the need for a spine) have probably done very little to get us closer to the truth.  Pass the Purell.

 

Gross domestic product grew in the second quarter at an annualized rate of 4.2%, unrevised from the previous quarter and matching average analyst estimates. The results indicate the fastest pace of growth since late 2014. Real gross domestic product increased 2.2% in the first quarter.

 

Pending home sales fell 1.8 percent in August. According to the National Association of Realtors’ seasonally adjusted index, sales were down 2.3 percent compared with August 2017. That was the fourth monthly decline in the past five months and the slowest sales pace since January. Sales have been hampered all year by a very lean supply of affordable listings. Inventories did rise slightly in August, but there is still precious little supply at the entry level, where most of the demand is.

 

Mortgage rates hit a seven-and-a-half year high. The 30-year fixed-rate mortgage averaged 4.72% in the past week, up from 4.65%. That marked the fifth straight weekly gain for the benchmark product, and took it to its highest point since April 2011.

 

The Commerce Department reports the merchandise-trade deficit unexpectedly grew in August to $75.8 billion, the widest in six months, as exports of food, industrial supplies and autos declined. A separate report from the department showed corporate investment took a breather, with business equipment orders at U.S. factories falling in August following a run of strong gains, while shipments of those items slowed. These reports point to a slowdown that might be related to the trade wars. The trade deficit partly reflected an expected drop in soybean exports following a second-quarter surge ahead of Chinese-imposed tariffs, and economic growth is projected to remain solid, the numbers illustrate how the trade war is spurring volatility in the data. In addition, the widening deficit runs contrary to Trump’s aim of a narrower gap.

 

Meanwhile, orders for durable goods rose 4.5% in August, on the back of orders for commercial aircraft and a surge in defense orders. That’s the biggest increase since February. But the details of the report were softer. Stripping out planes and cars, orders rose 0.1% in August. That’s weaker than many economists expected. Transportation often exaggerates the ups and downs in orders because of lumpy demand from one month to the next; that’s especially true with big dollar aircraft orders.

 

As the Trump administration negotiates new trade pacts with Canada, China and other countries, Ford Motor Executive Chairman Bill Ford said today the automaker wants deals that allow it to plan and invest with “certainty.” The U.S. auto industry has warned against imposing more tariffs on Chinese products, saying that doing so would harm vehicle sales and cost jobs. Ford Chief Executive Jim Hackett said on Wednesday U.S. steel and aluminum tariffs would cost the automaker $1 billion in profits in 2018 and 2019. In July, Ford revised its full-year earnings forecast downward due to slumping sales and trade tariffs on China as well as its struggling business in Europe. The industry is bracing for a possible new round of tariffs. On May 23, Trump ordered a “Section 232” national security investigation into whether to impose a 25 percent tariff on vehicle and auto parts imported from the European Union and other trading partners.

 

Volvo plans to begin selling electric trucks in North America by 2020. Volvo also announced it has signed a partnership with California that will allow it to show-off the vehicles. Under the deal, Sweden’s Volvo will deploy eight multi-configuration battery Class 8 electric demonstration units and 15 pre-commercial and commercial units throughout California’s South Coast Air Basin next year. This year, Volvo began producing its first fully-electric truck for commercial use – the Volvo FL Electric – which is expected to be sold next year for urban distribution operations in Europe.

 

Tesla CEO Elon Musk has been sued by the Securities and Exchange Commission for fraud, according to court documents filed today. Tesla was not named as a defendant in the complaint. Shares of the automaker fell roughly 10 percent in after-hour trading. In August, Musk tweeted that he was considering taking Tesla private, adding “funding secured.” Musk later explained he had been in discussions with the Saudi Arabian sovereign wealth fund and felt confident the funding would come through at his proposed price of $420 per share. Musk said in an interview with The New York Times that he calculated that take-private price by rounding $1 up from what would have been a 20 percent upside at the time.

 

U.S. sanctions against major crude exporter Iran come into force in five weeks. Those sanctions would also apply to companies and countries doing business with Iran. It is widely expected the sanctions will create a shortfall in global oil supplies. Estimates vary widely on how much Iranian crude U.S. sanctions could remove from the market, from 500,000 barrels per day to 2 million bpd. At its 2018 peak in May, Iran exported 2.71 million bpd, nearly 3 percent of daily global crude consumption. Trump this week demanded that the Organization of the Petroleum Exporting Countries raise oil production to prevent further price increases. It doesn’t look like OPEC will increase output.

 

Marijuana stocks moved higher today after the U.S. Drug Enforcement Administration classified a cannabidiol-based drug made by GW Pharmaceuticals in its least restrictive category, setting the stage for commercial launch. Epidiolex, the new GW Pharmaceuticals drug, uses cannabidiol, or CBD, to help with the treatment of seizures stemming from two rare and severe forms of epilepsy. News of the mild DEA classification comes amid growing fascination on Wall Street over a handful of companies engaged in the cultivation and production of cannabis products for either medical or nonmedical purposes. Last week, Tilray received DEA approval to import pot to the United States for medical research.

 

Shares of Bed Bath & Beyond lost almost a quarter of their value in morning trading. Late yesterday, the company reported earnings that fell short of estimates. Same-store sales declined for the sixth straight quarter.

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