Financial Review

Rally Into the Weekend

…Stocks higher. Fed sees full employment, except for people who will never get a job again. #BoycottNRA. Gates flips.

Financial Review by Sinclair Noe for 02-23-2018


DOW + 347 = 25,309
SPX + 43 = 2747
NAS + 127 = 7337
RUT + 19 = 1549
10 Y – .05 = 2.87%
OIL + .80 = 63.57
GOLD – 3.20 = 1329.20

Today, stocks rally into the close; a turnaround from earlier in the week when stocks sold into the close. For the week, the Dow rose 0.37 percent, the S&P advanced 0.56 percent and the Nasdaq gained 1.35 percent.


Next week, Federal Reserve Chair Jerome Powell will go to Capitol Hill to deliver his first semi-annual Humphrey-Hawkins testimony. Today, the Fed’s Washington-based Board of Governors wrote in its semiannual report to Congress on monetary policy: “The economic expansion continues to be supported by steady job gains, rising household wealth, favorable consumer sentiment, strong economic growth abroad, and accommodative financial conditions. Upbeat business sentiment appears to have supported solid growth over the past year.”


The Fed noted that even after the recent sell-off in stocks and bonds, and taking account of the higher corporate profits likely to flow from the recent tax cuts and support higher stock prices, “valuation pressures continue to be elevated across a range of asset classes, including equities and commercial real estate.” The use of leverage “has been increasing in some areas,” the Fed said, noting in particular “the provision of margin credit to equity investors such as hedge funds” and other parts of the “nonbank financial sector.” Household debt has also risen as has business sector leverage “particularly among speculative-grade firms.”


Still, the Fed said, “overall vulnerabilities in the U.S. financial system remain moderate on balance,” with banks better buffeted against any trouble due to their “strong capital position.” Even at their current high level, the Fed noted, stock price-to-earnings ratios were still below those during the exuberant late 1990s. In general, that document portrayed an economy whose households had achieved record levels of wealth – by September 2017 household net worth was 6.7 times disposable income, the highest reading in that series – with no obvious instabilities to risk continued steady progress.


Fiscal policy would provide a modest bump in gross domestic product in 2018, the document said, but there was no concern about an imminent breakout of inflation. That’s despite the fact that the Fed judged labor markets as largely recovered from the 2007-2009 recession. The labor market across almost all dimensions “can be cautiously interpreted as consistent with…full employment.” At the same time, the Fed does not anticipate a meaningful increase in wages – just in case you were wondering where the tax cut savings are going.


In short – look for the Fed to stick with its previously announced forecast of 3 rate hikes in 2018.


The labor force participation rate of prime-age men — those 25 to 54 years old — has steadily decreased in the last half century. As of January, 89 percent of prime-age men were in the labor force, down from around 97 percent following World War II. The Federal Reserve says many of those lost jobs will never return. A new report from the Federal Reserve Bank of Kansas City says a decline in demand for middle-skilled work — a phenomenon dubbed “job polarization,” because more positions are concentrated at the higher and lower ends — has played a role in keeping prime-age men out of the job market. Without job polarization, it is estimated that 1.9 million more prime-age men would have been employed in 2016. Middle-skilled jobs are those that often involve routine tasks and are procedural or rule-based, making them easier to automate. On the other hand, low-skilled jobs are mostly service-oriented and high-skilled jobs involve analytical or managerial skills — both of which involve responsibilities that are more difficult to replace with a machine or computer. Apparently, if you don’t want a robot to replace you, you should study Tolstoy. International trade and weaker unions have also contributed to the departure of men from the labor force, particularly as manufacturing jobs have moved to countries with lower wages.


A call to boycott the National Rifle Association became the top trend on Twitter as users of the global social media platform demanded that a variety of companies sever ties with the lobbying group. It seems to be having an effect. This morning, LifeLock owner Symantec and insurer MetLife announced they would break off from the NRA. The five million-member NRA has partnerships with dozens of businesses, ranging from car rentals to hotels, and even offers a branded credit card. First National Bank of Omaha, which backs the card, said it would not renew its contract. Enterprise Holdings, which operates Alamo and National car rentals as well, said it had ended its participation effective March 26. Wyndham Hotel Group announced it was “no longer affiliated with the NRA.” Names of companies with NRA associations had begun circulating widely Thursday under the hashtag #BoycottNRA. Also today, Florida Governor Rick Scott announced a proposal to increase restrictions on buying guns and to strengthen school safety measures. Scott said he would work with state lawmakers during the next two weeks to raise the minimum age for buying any kind of gun in Florida to 21 years old. Meanwhile, Trump proposed arming teachers in schools. The armed deputy assigned to the campus of a Florida high school during a deadly shooting last week stayed outside the building during the attack and failed to engage the shooter. That deputy has resigned.


A former senior official in Donald Trump’s 2016 presidential campaign, Rick Gates, pleaded guilty on Friday to conspiracy against the United States and lying to investigators, and is cooperating with a federal probe into Russia’s role in the election. Gates is the fifth person to plead guilty in the Trump-Russia investigation and the third former Trump aide to plead guilty and flip. While it was not clear what Gates might be able to reveal to investigators, he was on Trump’s campaign team when his then-boss Manafort attended a meeting in June 2016 at Trump Tower in New York between senior campaign aides and a Russian lawyer.



Less than one year after launching YouTube TV, Google is increasing its pricing to $40 per month from $35 per month as it adds Turner’s channels, which include TNT, CNN and TBS, and soon will be adding MLB Network and NBA TV. The new pricing will take effect for new users who sign up after March 13.


General Mills will buy Blue Buffalo Pet Products for nearly $8 billion. General Mills will pay $40 per Blue Buffalo share, representing a premium of 17 percent to the pet food company’s Thursday closing price.


The chairman of Chinese carmaker Geely has built a 9 percent stake in Mercedes-Benz owner Daimler. The strategic goal seems to be an industrial alliance with Daimler, which is developing electric and self-driving vehicles. Mercedes-Benz already has an industrial alliance with Renault-Nissan, which owns a 3.1 percent stake in Daimler, and has announced plans to build electric cars in China with existing partner BAIC Motor Corporation.


Nordstrom shares gained nearly 5% today after a Reuters report that the retailer is finalizing plans to go private. The Nordstrom family has met with investment banks and could submit the offer next month.


Shares of Hewlett Packard Enterprise jumped nearly 10.5 percent after reporting quarterly earnings and strong forward guidance.


The file-sharing company Dropbox filed its S-1 form with the Securities and Exchange Commission, meaning one of the most anticipated initial public offerings in tech is well on its way.


Dropbox, founded in 2007, posted revenue of about $1.1 billion last year, up 31% from 2016. But the company still isn’t profitable, losing $111 million last year. The bright side is that the company’s losses have also decreased over the past three years.


Citi is refunding $335 million to U.S. credit card customers whose annual percentage rate should have been lower. It plans to have checks in the mail by the second half of the year for 1.75 million affected accounts. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 requires lenders to periodically review accounts whose APR had been raised to see if subsequent good behavior makes them eligible for a rate reduction. From 2011 to 2017, the bank delivered $3 billion in savings through such reviews. That was about 90 percent of what customers should have received. Citi discovered the issue and self-reported to regulators.


The US Centers for Disease Control and Prevention reported today that the agency’s “sentinel” health care providers reported a drop in patients coming in with flu-like symptoms, going from 7.4% for the week ending Feb. 10 to 6.4% for the week ending Feb. 17. That’s the first time this flu season that this number hasn’t risen week over week. It doesn’t necessarily mean the threat of the flu is completely eradicated—there’s always the possibility that this week was an outlier—but it is the first good news in what’s been an awful 2017-18 flu season. Take care.


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