Financial Review

Risk Off

…Nearing a tipping point on market valuations, trade deals, interest rates. Economy remains strong: LEI up, jobless claims down. Earnings: Paypal, Amex, Skechers. Oil prices fall from sudden run-up. Sports Equinox.
Financial Review by Sinclair Noe for 10-18-2018

DOW – 327 = 25,379
SPX – 40 = 2768
NAS – 157 = 7485
RUT – 28 = 1560
10 Y – .01 = 3.17%
OIL – 1.10 = 68.65
GOLD + 3.40 = 1226.30


Stocks were down from the open but selling picked up in the late afternoon and was heavy into the close. Selling accelerated after Treasury Secretary Steven Mnuchin announced that he will not be traveling to Saudi Arabia to attend a summit known as “Davos in the Desert.” Mnuchin’s decision to drop out follows Secretary of State Mike Pompeo’s visit to Saudi Arabia, where he met with top Saudi officials to discuss the disappearance of columnist Jamal Khashoggi, who has not been seen since entering a Saudi consulate in Istanbul on Oct. 2. Trump acknowledged that Khashoggi is dead, and the consequences of his murder should be severe – but we don’t yet know what the consequences, if any, are. Trump administration officials have given the Saudi Crown Prince Mohammed bin Salman a few days to concoct an alibi or find a scapegoat.


Today’s declines added to the market’s steep losses for the month. The Dow and S&P 500 have fallen more than 4 percent each, while the Nasdaq is down nearly 7 percent in October. Tech, the largest S&P 500 sector by market cap, is among the laggards this month, dropping 7.1 percent. Several stocks seen as economic bellwethers fell sharply today, including United Rentals and Textron, which dropped at least 11 percent each. Snap-on and Caterpillar, meanwhile, fell 9.6 percent and 3.9 percent, respectively. Large-cap tech shares like Facebook and Amazon both fell more than 2.5 percent, along with Alphabet and Netflix.


While the stock market has suffered through a nasty October, the broader economy seems to be rolling along. The leading economic index rose 0.5% in September. Most of the areas of the economy covered by the report improved in September, with the most notable exception of permits to build new homes. Workers in manufacturing also put in slightly fewer hours. The leading index is the latest in a slew of economic signposts that show growth remains steady, if perhaps a bit slower than in the spring. With job openings at a record high and unemployment at a 48-year low, Americans feel secure in their jobs and have money to spend. That will keep the economy growing strongly through at least through the end of the year despite rising U.S. interest rates. The 10-year Treasury note yield edged up to 3.21%. Earlier this month the yield reached a seven-year high of 3.23%.


Trump today raged against the governments of Mexico and Central American countries, criticizing their leaders for “doing little” to stop the rapidly growing caravan of migrants to the United States’ southern border. What started out as a group of 160 Hondurans has now swelled to a throng of 4,000 Central Americans currently trekking through Guatemala on foot or piled into the beds of pick-up trucks. Trump threatened to end trade negotiations with Mexico, to end aid to Honduras, and he threatened to close the border – although nobody is quite clear on how that might happen. White House Chief of Staff John Kelly and National Security Adviser John Bolton got into a heated argument outside the Oval Office, according to multiple reports. The obscenity-laced shouting match between the two men was over the recent surge in illegal border crossings


With recent market volatility, the sharp rise in interest rates, and the threat of ongoing trade tensions, many investors are beginning to shift their attention from trying to take advantage of the next opportunity to trying to safeguard their bull market gains and gird themselves for the next bear market.


As a result, stocks just can’t find traction, and the major averages could still drop below last week’s lows. Last week, the Dow Industrials hit a low of 24,899, while the S&P dropped down to 2710. Any moves below those levels and there just isn’t much support. Still, there are a couple of mitigating factors: first, earnings reports are coming in and for now, everything is looking solid; next, as we work through earnings, we will also see some companies move out of a quiet time, and re-start share buyback programs. Best guess is that stocks flounder a bit more but eventually find support – last week’s lows are crucial levels.


The number of Americans losing their jobs and applying for unemployment benefits each week remained near a 49-year low in mid-October. Initial jobless claims dropped by 5,000 to 210,000 in the seven days ended Oct. 13. The number of new applications for unemployment benefits tapered off in the Carolinas and returned to more normal levels as the cleanup from Hurricane Florence hit a peak.


Arizona’s unemployment rate increased to 4.7% in September 2018 from 4.6% in August 2018. Overall, Arizona gained 35,400 nonfarm jobs in September 2018. During that time, Arizona’s seasonally adjusted labor force level increased by 9,709 individuals. The government sector recorded a net gain of 24,100 jobs, which is higher than average for September. The private sector recorded a net gain of 11,300 jobs. Employment in Arizona increased 3.0% year over year. From September 2017 to September 2018, Arizona recorded a net gain of 84,800 nonfarm jobs, with the majority (79,000) in the private sector.


It job market is strong. Openings just hit a record high, the U.S. unemployment rate has fallen to a 48-year low of 3.7% and hiring remains robust. But for some people, the labor market is beyond strong. The average wage for the 1% of income earners hit $719,000 per year in 2017, up 3.7% on the year, exceeding their peak of $716,000 per year just before the Great Recession, according to a report released Thursday by the Economic Policy Institute. The average wage for the top 0.1% reached $2.7 million in 2017, the second-highest level ever, just 4% below their level in 2007. However, wages for the 0.1% rose 8% on the year in 2017. The median household income was $61,372 in 2017, up 1.8% after accounting for inflation. Incomes for most Americans have been stagnant for four decades, despite increases in worker productivity. Despite some ups and downs over the past several decades, today’s real average wage — after accounting for inflation — has about the same purchasing power it did 40 years ago.


PayPal reported third-quarter earnings and revenue that topped Wall Street estimates. Revenue grew 14 percent in the third quarter to $3.68 billion, while earnings were up 26 percent. The company raised its fourth-quarter earnings guidance to a range of between 65 and 67 cents, and increased quarterly revenue guidance.


American Express beat Wall Street’s expectations for third quarter earnings, posting earnings per share of $1.88 on strong gains in spending by consumers and small businesses. Revenue was a record $10.1 billion. Profit of $1.6 billion rose 22 percent. Also today, American Express announced an agreement with mobile payments app firms PayPal and Venmo to enable cardholders to send payments and pay their Amex bills.


Skechers shares jumped as much as 8 percent in after-hours trading.  The shoe company reported earnings of 58 cents per share for the third quarter, higher than the 51 cents analysts had expected. Revenue missed expectations. Skechers also offered strong future guidance for revenue and earnings per share in the fourth quarter.


Following a long string of scandals and controversies, some Facebook investors believe the company would be better off without Mark Zuckerberg as its chairman. Several state and city treasurers joined a proposal asking Facebook’s board of directors to remove Zuckerberg as chairman. They want to make the position independent from the founder and CEO. The treasurers represent New York City, Rhode Island and Pennsylvania, which have public funds invested in Facebook. The effort is being led by Trillium Asset Management. But proposal has very little chance of unseating Zuckerberg due to the way he set up the company to preserve control.


Oil prices rose to nearly four-year highs at the start of October as U.S. sanctions shrank Iranian crude exports, but since then, prices have dropped more than 11%. The oil market has undergone a spectacular reversal, even against a backdrop of looming U.S. sanctions on Iran, OPEC’s third-largest crude producer, and rising tensions between Washington and Saudi Arabia, the world’s biggest oil exporter. the supply of oil held in U.S. storage tanks has risen sharply over the last four weeks. U.S. crude stockpiles are up by 22.3 million barrels through last week. That’s the biggest increase over that four-week period since 2015. Brent crude’s spike above $86 a barrel two weeks ago sparked fears that the high cost of oil would start to erode demand for the commodity. In recent weeks, OPEC and the International Energy Agency have knocked down their forecasts for growth in oil demand in light of a weaker outlook for global economic gains. Last, crude got swept up in a sell-off last week that saw investors dump risk assets. During the two-day stock market rout alone, crude futures fell by more than 5 percent. How will oil shake out? We probably won’t know until early November – that’s when sanctions against Iran go into effect, and we start to see if producers such as Saudi Arabia and Russia will fill the gap left by the loss of roughly 1 million barrels a day of Iranian exports.


Every now and then, the stars align – today is such a day. This is the 18th time that the four major sports leagues (NFL, NHL, NBA and MLB) are in action on the same day. Back in 2001, Phoenix set the record for having all 4 major pro teams playing on the same day – no other city has matched that. Or you could just read a book.



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