Financial Review


…Small caps hit another record. Yields continue march higher. Homebuyers rush for deals. EU angry with Trump. China turns to Russia for soybeans. Mueller probe anniversary. CBS v. Redstones. Kroger-Ocado. Paypal-iZettle. Wells Fargo, again.

Financial Review by Sinclair Noe for 05-17-2018

DOW – 54 = 24,713
SPX – 2 = 2720
NAS – 15 = 7382
RUT + 8 = 1625
10 Y + .01 = 3.11%
OIL + .08 = 71.57
GOLD un 1291.20

Stocks fell, at least the big cap stocks. Small caps continued a rally that has pushed the Russell 2000 to two straight sessions of record highs. Tech stocks were down after a less than satisfying earnings report from Cisco Systems, which dropped 3.8%. Shares of Applied Materials fell 2% in after-hours trade, as the chipmaker materials supplier’s sales outlook came in below the Wall Street consensus. Nordstrom shares fell more than 5% in late trading after the retailer posted first-quarter results above expectations but same-store sales rose less than expected. Walmart posted an earnings and sales beat. The big number for Walmart was a 33% jump in digital sales. The bad news for Walmart is that most of what they sell is food and people don’t buy food online. Walmart shares dropped 2% today.


Investors continue to monitor a rise in bond yields; the yield on the 10-year Treasury note rose near a seven-year high. That pressured the defensive sectors of the market, such as utilities and real estate, both of which offer higher dividend yields than the broader market. The utility sector fell 0.9% while the real-estate sector lost 0.5%.


The average rate for a 30-year fixed mortgage jumped to 4.61 percent, up from 4.55 percent last week and the highest since May 2011. Funny thing: It’s only making homebuyers move faster. Homes that sold last month went into contract after a median of 36 days on the market — a record speed in data going back to 2010. With this week’s jump, the monthly payment on a $300,000, 30-year loan has climbed to $1,540, up from $1,424 in the beginning of the year, when the average rate was 3.95 percent. And buyer’s are moving before prices get out of reach. Also, a skimpy inventory might be a bigger problem than rising mortgage rates.


The European Union is getting angry with Trump. EU leaders presented a united front at a meeting in Bulgaria, laying the groundwork for retaliation if White House trade threats are carried out. EU President Donald Tusk said the EU will continue fighting for the rules-based international system, despite recent U.S. decisions on climate change, tariffs and on Iran. On trade, all agreed to back the European Commission’s insistence that it won’t negotiate unless the U.S. grants a permanent exemption from tariffs on steel and aluminum.


Meanwhile, Trump’s threats of trade war with China may have helped drive that nation into the arms of Russia, at least when it comes to buying tons of soybeans. China has purchased record amounts of soybeans from Russia in recent months, some 850,000 metric tons of soybeans to China between July 2017 and mid-May this year – that’s more than double the previous growing period. China has cancelled multiple U.S. shipments in recent weeks ahead of tariffs, including a 62,690-ton purchase on April 19. China included soybeans on a list of tariffs on U.S. products last month totaling $50 billion, a direct response to the Trump administration’s announcement of $150 billion of tariffs against Chinese imports.


Special counsel Robert Mueller’s investigation into whether the Trump campaign coordinated with Russia to influence the 2016 election turns a year old today. Trump marked the anniversary of Mueller’s appointment with a series of early morning tweets suggesting the FBI spied on his campaign and Mueller had not found what he was looking for. In 365 days, Mueller’s team has charged 19 people, as well as three companies, and secured five guilty pleas.


A Delaware judge has denied CBS’s request for a temporary restraining order against the Redstone family that would have enabled the media company to strip its controlling shareholder of its voting power. The family’s holding National Amusements controls nearly 80% of the voting power at CBS. The court found CBS would not face irreparable harm without a restraining order, because it has other avenues to pursue legal action if the Redstones remove directors improperly or try to force a merger of CBS with Viacom in a way that is detrimental to shareholders.  CBS is holding a special board meeting this evening to consider the approval of a stock dividend that would dilute National Amusements’ voting power to 17%. However, National Amusements amended the company’s bylaws on Wednesday to require 90% of board members to approve such a move, a threshold that effectively gives it veto power.


Kroger has signed an exclusive deal with Ocado, the British online grocer that makes tech savvy supply chain and fulfilment technology – which is another way of saying they use robots to fill orders for groceries. Kroger will pay undisclosed monthly exclusivity and consultancy fees, which will offset the total cost of the deal that has yet to be agreed. Kroger is buying a 5% stake in Ocado for £183 million under the terms of the deal. Kroger will use Ocado’s “Smart Platform” technology to develop three new automated warehouses across the United States this year that will use robots to fulfil orders. The pair is targeting 20 new warehouses across the US over the next 3 years. Ocado shares, which are listed on the FTSE 250 index in London, jumped by almost 50% on news of the deal.


PayPal Holdings is buying Swedish small-business platform iZettle for $2.2 billion to expand in Europe and Latin America and increase its presence in brick and mortar stores. The deal is the biggest ever for PayPal and will help it compete with Square Inc., which made a name for itself by helping small businesses and food-truck vendors conduct credit card and mobile transactions. iZettle also started out with a mobile-phone gadget for accepting credit card payments. It has since expanded into software and financing services to support small businesses.


The Conference Board said its leading economic index advanced 0.4% in April, with March’s gain upwardly revised a tick also to show a 0.4% advance. The index hasn’t declined on a monthly basis in nearly two years. Few expect a slowdown anytime soon, with an already solid economy goosed by new tax cuts. If there are concerns, they include the impact of rising gasoline prices on consumers and a global economy that has lost steam since the end of last year.


The Bureau of Economic Analysis has released data on real personal income growth for states and cities for 2016 – it’s a little dated but still interesting. Overall, real or inflation-adjusted income growth slowed sharply in 2016 to a U.S. average of 1.1% from 4.7% in 2015. The decline stemmed in large part from an increase in inflation. The consumer price index rose 1.3% in 2016 from basically zero in 2015. People living in Utah, Georgia saw their incomes grow 3.3% and Washington state residents saw 3% growth. Arizona did well – with 2.6% real income growth for 2016, while the Greater Phoenix Metropolitan area saw 4% income growth. Incomes in eight states declined in 2016, with all but one heavily involved in the production of oil and natural gas. Incomes fell 3.6% in Wyoming, 2.7% in Oklahoma, 1.9% in Louisiana and 0.8% in Texas. Oil prices tumbled in 2016 and caused many energy producers to scale back. The states with the highest cost of living in 2016 were the usual ones: Hawaii, New York and California and the District of Columbia. They also had the highest rents. Mississippi, Alabama and Arkansas were the cheapest places to live. And Cleveland had the lowest rents of all major U.S. cities.


Initial claims for state unemployment benefits rose 11,000 to a seasonally adjusted 222,000 for the week ended May 12. The labor market is viewed as being close to full employment, with the jobless rate near a 17-1/2-year low of 3.9 percent and within striking distance of the Fed’s forecast of 3.8 percent by the end of this year.


Arizona’s seasonally adjusted unemployment rate remained unchanged at 4.9% in April – that’s a full percentage point higher than the national unemployment rate of 3.9%. Over the month, Arizona’s seasonally adjusted labor force level increased by nearly 6,000 workers. Employment grew by 2.3% (63,100 jobs) over the year in April.


Have you seen the TV ads for Wells Fargo? They say, “established 1852, re-established 2018”. The bank is looking for a fresh start after years of scamming customers. The only problem is that they keep screwing up. The Wall Street Journal reports some employees in a Wells Fargo unit that handles business banking improperly changed information on documents related to corporate customers. The employees in Wells Fargo’s wholesale unit, which is separate from its retail bank, added or altered information without customers’ knowledge. The information added varied from social security numbers to addresses to dates of birth for people associated with business-banking clients. The incidents happened in 2017 and early 2018 as Wells Fargo was trying to meet a deadline to comply with a regulatory consent order related to the bank’s anti-money-laundering controls. The bank has reported the problem to the Office of the Comptroller of the Currency and the agency is probing the problem. So, it appears the bank is asking for forgiveness for cheating, even as they continue to cheat.

To paraphrase scripture” how often will my brother sin against me, and I forgive him? As many as seven times?” And he answered, “I do not say to you seven times, but seventy-seven times.” Now I’m not sure how many times Wells Fargo has screwed up, but I think they are pretty close to their limit.

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